DBRS Upgrades Two, Confirms Three and Discontinues Two Classes of PFP III 2014-1, Ltd.

DBRS Limited (DBRS) has today upgraded the ratings of the following Floating Rate Notes (the Notes) issued by PFP III 2014-1, Ltd.:

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

In addition, DBRS has confirmed the ratings of the following Notes:

-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

All trends are Stable.

In addition to the rating actions above, DBRS has discontinued Class A and Class A-S following the repayment of their outstanding class balances with the April 2016 remittance. Classes E and F are non-offered classes.

The rating upgrades to Class B and Class C reflect the increased credit support to the bonds as a result of successful loan repayment. At issuance, the collateral consisted of 24 floating-rate mortgage loans secured by 25 transitional commercial and multifamily properties. As of the April 2016 remittance, nine loans remain with a total outstanding trust balance of $178.8 million. Since issuance, 15 loans have repaid from the trust, contributing to a collateral reduction of 66.1%, including the largest three loans at origination. Five 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. All outstanding loans in the pool are structured with two to three one-year extension options. As of the April 2016 remittance, there is one loan in special servicing, representing 12.1% of the pool balance, and three loans on the servicer’s watchlist, representing 31.4% of the pool balance, based on the fully funded amount. The loan in special servicing and the two largest loans on the servicer’s watchlist are detailed below.

The Charlotte East loan (Prospectus ID#5, representing 12.1% of the pool balance) is secured by a Class B office complex in Charlotte, North Carolina, and is supplemented by additional mezzanine debt. The loan transferred to special servicing in April 2016 for maturity default as the borrower was unable to exercise their extension option due to not meeting the required debt yield threshold. As a result, the mezzanine lender has exercised its right to take control of the collateral through foreclosure, which occurred in April 2016. According to the September 2015 rent roll, the property was 82.7% occupied, a decline compared to the issuance occupancy rate of 86.9%. The largest three tenants consist of government agencies representing 37.0% of the net rentable area (NRA), of which 13.6% is scheduled to expire throughout 2016. According to CoStar, the subject is located within the East Charlotte submarket and comparable Class B office properties within a two-mile radius of the subject reported a vacancy rate of 22.0%, an availability rate of 24.1% and a gross rental rate of $12.89 per square foot (psf), which is below the subject’s average rental rate of $15.37 psf. An extension with the mezzanine lender is currently being negotiated while the property is being marketed for sale, which is expected to occur at the end of 2016 or early 2017, according to the servicer. Despite the downward trend in performance and the corresponding decline in Q3 2015 debt service coverage ratio (DSCR) of 1.14 times (x) compared with YE2014 DSCR of 1.30x, the loan benefits from a rollover reserve balance of $164,184 as of April 2016. At issuance, the subject was valued at $37.0 million and DBRS is currently awaiting an updated opinion of value for the collateral property.

The Doramar Plaza loan (Prospectus ID#6, representing 12.3% of the pool balance) is secured by a retail shopping centre in Dorado, Puerto Rico. The loan was added to the servicer’s watchlist due to a decline in performance, as the Q3 2015 DSCR was reported at 0.96x, as a result of significantly decreased percentage rents in 2015. The collateral is anchored by a Capri Discount Store (30.0% of NRA) on a lease scheduled to expire in 2021 and Walgreens (13.1% of NRA) on a ground lease through 2089, whose outparcel was constructed at issuance. In addition, interior build-outs for Yogen Früz, Papa John’s and La Parrilla Argentina were ongoing at issuance and, as of April 2016, all three tenants have taken occupancy. As a result, the property has expanded from 85,000 sf at issuance to almost 120,000 sf as of April 2016. The property is 98.5% occupied (including two pre-leased units), as of January 2016, with minimum rollover of 3.5% of the NRA throughout 2016. According to the February 2016 trailing 12-month tenant sales report, overall tenant sales at the property (excluding non-reporting Walgreens) have declined by 5.0%; however, several tenants that contributed heavily toward the previous percentage rent income have experienced sales declines, resulting in a negative percentage rents balance at year-end 2015. According to the February 2016 Tenant Sales Report, the most notable tenants that pay percentage rent include Krispy Kreme, Wendy’s and Church’s Chicken. All three tenants are reporting year over year (YOY) sales declines of 19.0%, 8.4% and 2.9%, respectively, according to the most recent year-end reporting available for tenants the individual. Despite the decline in performance, the property was noted to be in above-average condition with no deferred maintenance items noted, according to the June 2015 site inspection.

The Redbury South Beach loan (Prospectus ID#9, representing 9.8% of the pool balance), is secured by a 69-key boutique hotel located in Miami Beach, Florida. The loan has been placed on the watchlist for a decline in performance, with a reported Q3 2015 DSCR of 0.42x. The decline in performance since issuance is associated with a decrease in the hotel’s revenue stream from Food & Beverage operations, which represented 47.7% of DBRS underwritten revenues at issuance. The hotel’s previous restaurant tenant, Lorenzo, a borrower-affiliate, was noted to have been struggling and closed down in September 2014 after operating for less than a year at the subject. The tenant was subsequently replaced with another restaurant, Cleo, only two months later, which is operating under a sublease until January 2024. According to September 2015 Smith Travel Research report, the property was underperforming its competitive set based on the occupancy, average daily rate and revenue per available room (Rev PAR) performance metrics, which were reported at 74.7%, $234 and $175, respectively for the subject, compared to the competitive set’s figures of 84.2%, $256 and $216, respectively. Recent performance is improving as RevPAR increased 5.5% YOY while the competitive set reported a 2.5% decline on the same performance metric. Although the DSCR remains below threshold, the loan benefits from a furniture, fixtures and equipment reserve balance of $260,184 and its location on Collins Avenue near the Miami Beach Convention Center.

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.

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.

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

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