DBRS Changes Trend to Positive on FREMF 2011-K11 Mortgage Trust, Series 2011-K11, Class B

DBRS Limited (DBRS) has today confirmed Class B of the Multifamily Mortgage Pass-Through Certificates Series 2011-K11 (the Certificates), issued by FREMF 2011-K11 Mortgage Trust, Series 2011-K11 (the Trust) at A (high) (sf). DBRS has also changed the trend to Positive from Stable.

The rating confirmation and the Positive trend change on Class B reflects the increased performance of the transaction since issuance, with cash flows improving compared over the DBRS underwritten (UW) levels. The collateral consists of 76 fixed-rate loans secured by 128 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.37 times (x) and 8.5%, respectively. As of the February 2016 remittance, 50 loans (71.3% of the pool) reported partial year 2015 cash flows (most being Q3 2015), while 12 loans (15.5% of the pool) reported year-end 2015 cash flows. Based on the 2015 cash flows (both annualized and year-end 2015 cash flows) for the top 15 loans, the WA amortizing DSCR was 1.74x, with a WA net cash flow (NCF) growth over the respective DBRS UW figures of approximately 31.8%. Thirteen loans (12.1% of the pool) are secured by defeased collateral. As of the February 2016 remittance, the pool had an aggregate balance of $1.0 billion, representing a collateral reduction of approximately 8.1% due to the repayment of one loan (Prospectus ID#28) and scheduled loan amortization.

There is one loan in the top 15, Excelsior I Apartments (Prospectus ID#4, 3.8% of the pool), exhibiting a YE2015 NCF indicative of a 22.2% cash flow decline when compared with the DBRS UW figure. The loan is secured by an 18-storey apartment building located in Hackensack, New Jersey; approximately ten miles northwest of midtown Manhattan. The property was originally constructed in 1988 and is comprised of 267 units. The loan has historically underperformed DBRS UW expectations due to greater-than-anticipated expenses. The loan was formerly on the servicer’s watchlist in September 2013 as a result of a low Q2 2013 DSCR of 1.10x. The loan remained on the watchlist through August 2014, at which point it was removed as the DSCR improved above a 1.15x coverage. As of YE2015, the loan had a DSCR of 1.18x, compared with 1.23x at YE2014 and the DBRS UW figure of 1.52x. The increase in operating expenses is reflective of a 54.0% operating expense ratio, compared with 41.0% at issuance, and can primarily be attributed to increases in repairs and maintenance (16.0%), management fees (40.7%), payroll and benefits (17.6%) and general and administration (G&A; 63.2%). According to the borrower, the increase is a result of both the maintenance of current amenities offered, as well as upgrades to the amenities. Amenities include an indoor pool, day care centre, parking garage, valet, 24-hour concierge and fitness centre. As of YE2015, operating expenses had increased by 18.6% since issuance; however, when compared to the YE2014 figure, expenses had decreased by 6.3%.

According to the September 2015 rent roll, the property was 89.0% occupied with an average rental rate of $2,090 per unit, compared with 91.5% occupied with an average rental rate of $2,040 per unit at YE2014. The subject property continues to perform with higher rental rates than its local submarket and general market overall. As of YE2015, Reis reported that multifamily properties built between 1980 and 1989 in the Bergen County submarket, reported an average rental rate $1,755 per unit with a vacancy rate of 1.8%, while the Northern New Jersey metro reported an average rental rate $1,858 per unit with a vacancy rate of 3.8%. Reis’ Observer indicated that 4,344 units came on line in the metro area during 2015, and predicted that another 4,800 units would be added to the metro area in 2016.

As of the February 2016 remittance, there are no loans in special servicing and one loan on the servicer’s watchlist, representing 2.4% of the pool balance. DBRS has highlighted this loan below.

The Campus Crossing at Sherwood loan (Prospectus ID#11, 2.4% of the pool) is secured by a 790-bed student housing community located in Greensboro, North Carolina, serving the University of North Carolina Greensboro (UNCG). The property was originally constructed in phases between 1972 and 1986 as conventional apartment buildings, and later renovated by the borrower in 2007 into a garden-style student housing complex. The loan was added to the servicer’s watchlist in September 2013 as a result of a declining cash flow caused by both increased operating expenses and vacancy. As of Q3 2015, the loan had an annualized DSCR of 1.05x, compared with 0.83x at YE2014, and the DBRS UW figure of 1.36x. The increase in operating expenses is reflective of a 58.0% operating expense ratio compared with 43.0% at issuance, and can primarily be attributed to payroll and benefits (53.8%), advertising and marketing (114.4%), G&A (124.6%), property insurance (28.5%) and real estate taxes (26.8%). According to the borrower, the declining performance is a result of increasing competition from both on and off-campus student housing operations around UNCG and staffing changes that took place during the YE2013 lease-up. As of September 8, 2015, UNCG announced that undergraduate enrollment for the fall 2015 semester had increased by 4.8% over the previous year’s enrollment rate, continuing a historically positive trend. In order to facilitate the ongoing growth, UNCG has recently undertaken a development project, which as of January 2014 added 800 new beds to the on-campus housing supply, with an additional 600 beds expected to be added by the end of 2017. To stay competitive, the borrower has increased spending to market the property and further reduced rental rates to increase occupancy and remain competitive. As of Q3 2015, the property was 96.2% occupied with a rental rate of $476 per bed, up from 90.5% occupied with a rental rate of $478 per bed at Q3 2014 and 86.4% occupied with a rental rate of $491 per bed at YE2013. Although the property’s performance appears to be improving, DBRS has modelled this loan with an elevated probability of default to capture the subject’s current financial performance.

At issuance, DBRS shadow-rated four loans, Regency Park Apartments (Prospectus ID#12, 2.0%), Oasis at Springtree (Prospectus ID#27, 1.3%), The Woodlands of Odessa (Prospectus ID#48, 0.8%) and Lake Park Village Apartments (Prospectus ID#74, 0.2%) as investment-grade-rated loans. DBRS confirms that the performance of all four loans remain consistent with investment-grade loan characteristics.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.