DBRS Confirms Ratings on Morgan Stanley Bank of America Merrill Lynch Trust 2015-C21

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-C21 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2015-C21 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class X-E at AAA (sf)
-- Class X-FG at AAA (sf)
-- Class B at AA (high) (sf)
-- Class PST at A (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since closing. At issuance, the collateral consisted of 64 fixed-rate loans secured by 99 commercial properties. The transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.80 times (x) and 9.4%, respectively. As of the February 2016 remittance, loans representing 79.6% of the current pool balance are reporting 2015 partial-year financials (most loans reporting a Q3 2015 figure). Based on those annualized figures, the top 15 loans reported a WA amortizing DSCR of 1.90x, with WA net cash flow growth over the respective DBRS underwritten figures of 0.4%. All loans remain in the pool, with collateral reduction of 0.6% since issuance as a result of scheduled loan amortization.

As of the February 2016 remittance, there are no loans in special servicing and seven loans are on the servicer’s watchlist, representing 11.3% of the current pool balance, including the largest loan in the pool. The bulk of the watchlisted loans are flagged for non-performance issues relating to deferred maintenance or near-term tenant rollover risk. The loans flagged for upcoming tenant lease expirations have either successfully extended their leases or are in negotiations with the respective tenants, according to the servicer.

The Westfield Palm Desert Mall loan (Prospectus ID#1, 7.2% of the current pool balance) is secured by a 572,724 square feet (sf) portion of a 977,888 sf regional mall in Palm Desert, California. The property is anchored by Macy’s, Sears and JCPenney, all of which are non-collateral. Other notable tenants include Macy’s Swim and Junior, Dick’s Sporting Goods and Barnes & Noble. This loan was recently placed on the servicer’s watchlist because of a discrepancy between the borrower’s obligations and actual deposits to the real estate tax escrow established at closing. DBRS has confirmed that the property is current with all its tax payments and expects the servicer will resolve the escrow discrepancy in the near term. According to the September 2015 rent roll, the property was 97.1% occupied, which is slightly above the in-place occupancy of 95.9% at issuance. Tenants occupying 19.0% of net rentable area (NRA) have leases scheduled to expire within the next 12 months, including the third-largest tenant, Palme d’Or Cinema (5.7% of NRA with a lease expiring in June 2016). The increase in occupancy is a result of new tenants signed during 2015, including Charlotte Russe (1.0% of NRA) and Forever 21 Red (3.9% of NRA). The mall also benefits from relatively healthy sales for the anchor tenants. The tenant sales report for the trailing 12-month (T-12) period ending June 2015 showed consistent overall in line sales for the property from the YE2014 amounts, with Sears reporting flat sales from YE2014 of $156 psf at the T-12, Macy’s reporting T-12 sales of $304 psf, a 1.1% decrease from YE2014 and JCPenney reporting T-12 sales of $182 psf, a 7.9% increase from YE2014. According to CoStar, retail properties larger than 150,000 sf in the Coachella Valley submarket reported an average vacancy rate of 12.3% and average availability rate of 14.2%. These figures are stable from this time last year and are in line with historical figures from the previous five years of reporting.

According to the Q3 2015 financials, the servicer’s annualized net cash flow figure represents a decline of 25.4% from the DBRS underwritten net cash flow figure. The annualized Q3 2015 DSCR was at 1.80x, which is a decrease from the DBRS underwritten DSCR of 2.39x. The cash flow decline is a result of a 15.8% decrease in effective gross income (EGI).The annualized base rental rate decreased 10.9% from the DBRS underwritten figure driven largely by free rent periods for five tenants that were in place for the reporting period. Other factors included a decrease in percentage rent and expense reimbursements reported by the borrower. As the full year of operations are reflected in the YE2015 reporting, DBRS expects those revenue figures will normalize back to the underwritten levels.

The 555 11th Street NW loan (Prospectus ID#2, 6.9% of the current pool balance) is secured by a 414,205 sf Class A office building in Washington, D.C. The property consists of a 13-story building with ground-floor retail and restaurant space, as well as a three-level subterranean parking garage. At issuance, DBRS noted the sponsor’s plans to invest $4.2 million in upgrades to the property that would include improvements for the elevators, lobby and fitness center. According to the September 2015 rent roll, the property was 88.9% occupied with an average rental rate of $52 psf, compared to the in-place occupancy of 85.2% and average rental rate of $53 psf at issuance. The largest tenant, Latham & Watkins, occupies 56.9% of NRA and, at issuance, had recently taken additional space and extended their lease to January 2031. As part of the lease renewal, the sponsor provided $21.3 million for tenant improvements (TI) and $7.4 million in free rent. Although a reserve associated with these expenses was not set up at closing, the borrower has been making monthly deposits to a TI/leasing cost reserve for the vacant space with a balance of approximately $4.0 million as of February 2016.

According to CoStar, Class A office properties larger than 350,000 sf located in the subject’s East End submarket of Washington D.C. reported an average rental rate of $57 psf, an average vacancy rate of 10.0% and an average availability rate of 17.2%. In comparison, the subject reported an average rental rate of $52 psf and vacancy rate of 11.1%. As per the Q3 2015 financials, the servicer’s annualized net cash flow represents a 21.5% decrease from the DBRS underwritten levels as a result of an 18.9% decrease in EGI and a 2.5% increase in operating expenses. The Q3 2015 annualized DSCR was at 1.50x, which is a decrease from DBRS underwritten DSCR of 1.90x. The decline in EGI is a result of a 9.5% decrease in base rental revenue, driven by a 31.0% decrease in expense reimbursement and 60.4% decrease in other income. Base rent has declined because of the rent abatement in place for Latham & Watkins through February 2016 and other income is down because of a decline in the reported parking income for the property, on an annualized basis. There is a contract in place with Colonial Parking at an annual rate of $1.1 million, but the Q3 2015 financials show only $461,000 of that had been collected to date. DBRS has requested confirmation that the agreement remains in place at the issuance rate and expects that the full year-end reporting will reflect the levels returning to underwritten expectations. Also contributing to the NCF decline from the DBRS underwritten figure is an increase in the reported repairs and maintenance (R&M) figure, which annualizes to a $200,000 increase over the underwritten amount. DBRS believes this figure likely includes capital improvements made as part of the planned upgrades for the property and expects the figure will stabilize in the coming year as those projects are completed.

The Fontainebleau Park Plaza loan (Prospectus ID#5, 5.7% of the current pool balance) is secured by a 233,334 sf anchored retail center in Miami, Florida. At September 2015, the property was fully occupied, with the largest three tenants being Walmart (48.2% of NRA with a lease expiring in July 2034), LA Fitness (23.6% of NRA with a lease expiring in September 2029) and Discovery Clothing (6.4% of NRA with a lease expiring in February 2025). According to the Q3 2015 financials, the servicer’s annualized net cash flow was down 32.4% from the DBRS underwritten net cash flow because of a 39.6% decrease in EGI. This decline is due to a combination of rental abatements in place for the reporting period and a decline in the borrower’s reported expense reimbursement figure on an annualized basis. DBRS expects the reimbursement figure will normalize with the YE2015 reporting and, expects the base rental revenue will return to the underwritten levels in 2016 as the contractual rates for previously abated tenants will initiate.

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 (December 2015), which can be found on our website under Methodologies.