DBRS Upgrades Two Classes of DBUBS 2011-LC2

DBRS, Inc. (DBRS) has today upgraded the ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2011-LC2 issued by DBUBS 2011-LC2 Mortgage Trust:

-- Class B to AAA (sf) from AA (high) (sf)
-- Class C to AA (low) (sf) from A (high) (sf)

In addition, the following ratings were confirmed:

-- Classes A-1, A-1FL, A-1C, A-2, A-3FL, A-3C, A-4, X-A and X-B at AAA (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Classes F and FX at B (low) (sf)

All trends are Stable.

These rating actions are a reflection of the continued healthy performance of the transaction, as well as the paydown since issuance and the defeasance of six loans, which represent 6.0% of the transaction balance. As of the March 2016 remittance, there has been collateral reduction of 16.3%, with nine loans fully repaid and an additional nine loans, representing 15.6% of the pool, scheduled to mature within the next six months. Those nine loans are have a weighted-average (WA) debt service coverage ratio (DSCR) of 1.69 times (x) and a WA debt yield of 12.1%, indicating a healthy refinance profile overall.

The pool has performed as expected since issuance, with a WA DSCR of 1.60x and WA debt yield of 11.6% as compared with the issuance figures of 1.60x and 10.6%, respectively. The largest 14 non-defeased loans in the pool represent 69.1% of the pool balance and have shown WA net cash flow (NCF) growth over the DBRS underwritten figures of +14.5%, with a WA DSCR of 1.53x. The largest three loans in the pool represent 33.4% of the transaction balance with a WA DSCR of 1.57x and a WA NCF growth of +18.9% over the DBRS underwritten figures. As of the March 2016 remittance, there are 11 loans on the servicer’s watchlist (14.9% of the pool balance) and one loan, Prospectus ID #43, Montgomery Village (0.50% of the pool balance), in special servicing. The bulk of the loans on the watchlist are being monitored for upcoming maturity. The specially serviced loan is detailed below.

The Montgomery Village loan is secured by a medical office complex containing eight two-story buildings constructed between 1971 and 1980, located in Gaithersburg, Maryland, approximately 15 miles northwest of Bethesda. The loan resulted in a relatively sizable cash out to the borrower, who had owned the property since 1991, of $2.8 million at closing. At issuance, the issuer noted 87.0% of the leased net rentable area (NRA) had been the property for over ten years, with an average lease term including renewals of 19.5 years and only one new tenant at the property since 2003. Property cash flows dropped sharply in 2013 following an occupancy decline to 48% from 90% at issuance. As a result, the YE2013, YE2014 and Q2 2015 DSCR figures were 0.71x, 0.42x and 0.05x, respectively, with the February 2016 rent roll showing a physical occupancy rate of 24.0% (one dark tenant with 2.5% of the NRA on a lease through February 29, 2016). Near-term rollover is high, with nearly all remaining tenants scheduled to roll within the next 18 months.

The loan transferred to the special servicer in May 2014 when the borrower stopped making payments on the loan. Initial workout options included the borrower’s request for a modification, but those talks fell through and the property was foreclosed in March 2015 and became REO as of April 2015. The first appraisal ordered by the special servicer was dated June 2014 and valued the property at $7.0 million ($97 psf), and the most recent appraisal, dated November 2015, valued the property at $7.5 million ($104 psf). According to the February 2015 and November 2015 site inspection reports, the property is in deteriorating condition, rated a “4” on the MBA scale at both visits, with significant exterior deferred maintenance noted. The biggest concern is the structural deterioration in the elevated walkways, for which an engineer was engaged to assess and determine necessary repairs. The November visit found the affected areas appropriately sealed off, with repairs underway and temporary walkways safely in place for use during the repair project. The estimated cost for the work to address all issues is north of $1.0 million. Given the deteriorating physical condition and financial position of the property over the past year, DBRS assumed a loss based on a significant haircut to the most recent appraised value, resulting in a modeled loss severity in excess of 65.0%.

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

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.

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