DBRS Upgrades One and Confirms Two Ratings of Morgan Stanley Capital I Trust 2005-HQ6

DBRS Limited (DBRS) has today upgraded the rating on the following class of Commercial Mortgage Pass-Through Certificates, Series 2005-HQ6 (the Certificates) issued by Morgan Stanley Capital I Trust 2005-HQ6:

-- Class H upgraded to BB (sf) from CCC (sf)

DBRS has also confirmed the ratings on the following classes:

-- Class X-1 at AAA (sf)
-- Class J at C (sf)

All trends are Stable, with the exception of Class J, which has a rating that does not carry a trend.

The rating upgrade reflects the increased credit enhancement to the bonds as a result of loan repayment and scheduled amortization. Since issuance, the transaction has experienced collateral reduction of 97.3%, with eight of the original 177 loans outstanding as of the March 2016 remittance report. In the last 12 months, 36 loans have been fully repaid from the trust, contributing approximately $251 million in principal repayment, while seven loans liquidated from the trust with a combined realized loss of $63,420 that was contained to Class K, rated D (sf) by DBRS. To date, 37 loans have liquidated from the trust, representing an aggregate realized loss to the trust of $134.4 million.

As of the March 2016 remittance, three loans (40.7% of the pool) reported partial-year 2015 (generally Q3 2015) cash flows, while five loans (59.3% of the pool) reported YE2015 cash flows. Based on the 2015 cash flows (both annualized partial-year cash flows and YE2015 cash flows), the pool had a weighted-average (WA) debt service coverage ratio (DSCR) of 0.92 times (x) and a WA debt yield of 7.6%. Of the eight loans remaining in the pool, five loans are currently in special servicing, representing 60.0% of the pool. Three of these loans, Town Centre Office and Executive Suites (Prospectus ID#89, 7.0% of the pool), Tinley Crossings Corporate Center (Prospectus ID#92, 6.9% of the pool) and Shops at Lakeline Village (Prospectus ID#112, 5.3% of the pool) are reportedly scheduled for upcoming auctions that will occur within the next 30 days, according to the servicer. The two largest loans in special servicing are discussed in detail below. The remaining three performing loans in the trust have scheduled maturities in April 2018 (33.8% of the pool) and March 2020 (6.2% of the pool). These three loans have a WA DSCR and exit debt yield of 1.43x and 10.2%, respectively.

The County Line Commerce Center loan (Prospectus ID#23, 28.8% of the pool) is secured by a multi-tenant office/industrial complex located in Warminster, Pennsylvania, approximately 50 miles northeast of Philadelphia. The property consists of two Class A office buildings, two office/warehouse structures and one industrial building totalling 426,384 square feet (sf). The earliest structures date back to 1941, with major renovations/expansions occurring in 1988 and 2003. The loan was transferred to special servicing in March 2009 because of imminent default and has been real estate owned (REO) since September 2010. The property has been under environmental monitoring by the Environmental Protection Agency (EPA) since the 1980s because of past ground water contamination by a former industrial tenant. Numerous groundwater tests have come back showing contamination levels well below legal limits, yet the EPA continues monitoring the subject because of a remaining plume of contaminated groundwater, which reportedly migrated onto the site many years ago from an unknown source. The EPA was asked to further investigate the outstanding issues, but the agency has indicated that there are not sufficient resources in place to undertake the operation in the near term. As such, the site will continue to be a designated hazard pending further investigation.

As of January 2016, the complex was 63.4% occupied with an average rental rate of $10.85 per square foot (psf) compared with 58.5% occupied with an average rental rate of $12.29 psf as of January 2015. The largest tenant, Asea Brown Boveri Inc. (27.1% of the net rentable area (NRA)), recently expanded its space by 20,670 sf and signed a ten-year triple net lease through March 2025 at a reduced rate of $4.79 psf compared with its previous rate of $7.40 psf. Other sizable tenants include Aon Service Corporation (22.0% of NRA through October 2020), Infologix (9.4% of the NRA through February 2017) and Advanced Coating Processors, LLC (3.8% of the NRA through February 2017). An August 2015 appraisal valued the property at $9.6 million (275.0% loan-to-value (LTV)), an increase from $9.0 million (293.0% LTV) in September 2014 but a decrease of $27.9 million when compared with the issuance value of $37.5 million (94.0% LTV). According to the appraisal report, the decrease in value can be attributed to a lack of positive leasing activity over the past four years, the odd configuration of the property, as well as the amount of capital needed to upgrade and lease the collateral. Furthermore, the property has been under environmental monitoring by the EPA for several years, as mentioned above. The servicer states that the loan is expected to be resolved or disposed of as of June 2016; however, no offers have been received to date through marketing efforts. Although the servicer contends the testing will not affect the value of the property, DBRS believes this issue may be contributing to the property’s inability to attract buyers and expects the trust to experience a significant loss with the resolution of this loan.

Park Techne Center (Prospectus ID#60, 12.0% of the current pool balance) is secured by three mixed-use buildings located in Milford, Ohio, approximately 17 miles northeast of Cincinnati. The structures were constructed in three phases from 1985 through 1989 and consist of 237,961 sf comprising 30% office space and 70% flex space. The loan was transferred to special servicing in March 2015, as it became delinquent and has been REO since March 2016. As of YE2015 financials, the loan had a DSCR of 0.67x, down from 0.76x at YE2014 and 0.82x at YE2013. According to the February 2016 rent roll, the property was 71.0% occupied with an average rental rate of $7.80 psf compared with 71.0% with an average rental rate of $8.85 psf as of December 2014. The largest tenants include Stationary Works (12.6% of the NRA through August 2018), Option Care Enterprise (7.6% of NRA through August 2017) and Interplex Medical (5.3% of the NRA through August 2016). Six tenants (12.0% of the NRA) have lease expirations within the next 12 months; however, three of these tenants are currently in ongoing lease negotiations. Additionally, Healthcare Ventures (4.0% of the NRA), which is currently on a month-to-month contract, is negotiating a ten-year lease. Furthermore, four new prospective tenants are interested in occupying approximately 16,900 sf collectively. An April 2015 appraisal valued the properties at $8.7 million (125.0% LTV), a decline of $5.3 million compared with the issuance value of $14.0 million (57.0% LTV).

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