DBRS Confirms All Classes of Resource Capital Corp. 2015-CRE3, Ltd.

DBRS Limited (DBRS) has today confirmed the Floating Rate Notes (the Notes) issued by Resource Capital Corp. 2015-CRE3, Ltd. as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable. Classes E and F are non-offered classes.

The rating confirmations reflect the healthy overall performance of the transaction, which remains in line with DBRS’s expectations at issuance. At issuance, the collateral consisted of 20 floating-rate mortgage loans secured by 20 transitional commercial, multifamily and hospitality properties. As of the February 2016 remittance, 19 loans remain, with a recent payoff of the 100 North LaSalle Street loan, which had an outstanding principal balance of $13.4 million. The principal received from the loan was not used to pay down the notes, but was instead directed to the Companion Participation Acquisition Account, which must be used within 120 days to acquire funded participations. Twelve of the remaining loans are pari passu participations that have future funding components, which are to be used for property renovations and future leasing costs to aid in property stabilization. According to the servicer’s updates, most of the respective borrowers’ stabilization plans are on track with the timelines provided at issuance, with a few loans experiencing delays that largely seem manageable with mitigants in place. As of the February 2016 remittance, there are no loans in special servicing and five loans on the servicer’s watchlist, representing 27.8% of the current pool balance. The largest loan on the servicer’s watchlist and the two largest loans in the pool are detailed below.

The Chateaux Dijon Apartments loan (Pros ID#1, 9.8% of the current pool balance) is secured by a 426-unit, garden-style multifamily complex located in Houston, Texas, originally built in 1961. At issuance, the sponsor planned to add value and increase rents by completing a $10.0 million ($23,492/unit) capital improvement plan that was expected to be completed over a 36-month period. Planned interior renovations included updating appliance packages, installing new carpet, and painting and exterior renovations included roof repairs, signage upgrades and updates for the pool area. As of February 2016, the balance of the capital improvement reserve established for these projects was $1.1 million. As of January 2016, the borrower has advised the servicer that approximately 36% of the units have been completely remodeled with the remaining units expected to be completed on a rolling basis through the end of 2017. The exterior renovations have been 53% completed and are expected to be finished by Q3 2016. Although the January 2016 occupancy rate of 89% has declined from 96.5% at issuance, the decline in occupancy can be attributed to the ongoing unit renovations, which require units to be taken off line.

The borrower reports that the renovated units garner an additional $193 per month in contract rents, with vintage units renting at $55 per month over the rates in place at issuance. According to Reis, the subject property falls within the Montrose/River Oak submarket of Houston, which reported an average vacancy rate of 10.7%, with properties of similar vintage averaging rents of $1,296 per unit as of Q4 2015. As of the September 2015 rent roll, the subject reported an average rental rate of $1,114 per unit. Despite the decline in occupancy, the Q3 2015 debt service coverage ratio (DSCR) was reported at 1.74 times (x). DBRS expects cash flows to improve as the renovations are completed with units coming online and made available for rent.

The Betsy Hotel loan (Pros ID#2, 8.5% of the current pool balance) is secured by two hotels, the 61-key Betsy Hotel (the Betsy) and the 67-key Carlton Hotel South Beach (the Carlton) located in South Beach’s Art Deco District in Miami, Florida. At issuance, the sponsor planned to take the Carlton Hotel off line for renovations beginning in March 2015 as part of the overall strategy to remodel and renovate the interiors and common areas to match the existing Betsy Hotel. The sponsor also noted that approximately $16.0 million of the $22.8 million renovation budget would be dedicated for the planned improvements to the Carlton Hotel. According to the servicer’s January 2016 update, the Carlton Hotel was taken off line in June 2015 and the renovation is approximately 12.0% complete, with a grand reopening targeted for Q4 2016. In addition to the work completed thus far at the Carlton Hotel, the borrower has also completed construction of an elevator system that will bring guests to a sky bridge connecting the two hotels. Despite the operational disruptions with the ongoing renovations, the subject is reporting a Q2 2015 DSCR of 1.19x and the loan benefits from a debt service reserve of $2.3 million as of February 2016, which is being used to fund shortfalls throughout the renovations.

The largest loan on the servicer’s watchlist is the Stanford Corporate Center loan (Pros ID#5, 8.1% of the current pool balance), which is secured by a class B office property located in Farmer's Branch, Texas. The loan is on the watchlist for the low Q3 2015 DSCR of -0.37x, which compares with the DBRS UW DSCR of 0.91x. At issuance, it was noted that the largest tenant, Softlayer (37.3% of the net rentable area (NRA) was not physically in place, with a scheduled lease commencement in March 2015. Per the terms of the lease, which runs through September 2022, the tenant received seven months of free rent, as well as a tenant improvement (TI) allowance of $30 psf, both of which were reserved at closing with an initial deposit of $7.1 million. As of December 2015, the reserve had an outstanding balance of $47,000, allocated to the remaining tenant improvements. According to the September 2015 rent roll, the property was 87.1% occupied with an average rental rate of $17.10 psf compared to the occupancy rate of 85.9% at issuance. As of February 2016, the subject is performing in line with the Farmer’s Branch submarket which is reporting an average rental rate of $18.24 psf and a vacancy rate of 15.1% for comparable office properties, according to CoStar. Other major tenants in addition to Softlayer include Telos (18.9% of NRA) and AMFM Operating Inc. (12.4% of NRA) with leases expiring in July 2023 and August 2023, respectively. DBRS expects the property’s cash flows will stabilize in the coming year and notes that the loan benefits from experienced and well-capitalized sponsorship in Transcontinental Realty Investors.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.