DBRS Upgrades Ratings on FREMF 2011 K-702 Mortgage Trust, Series 2011-K-702

DBRS, Inc. (DBRS) has today upgraded the rating for the Class B certificates of FREMF 2011-K702 Mortgage Trust, Series 2011-K702 as follows:

-- Upgrade to A (high) (sf) from A (low) (sf), with a Stable trend.

The rating upgrade reflects the current performance of the pool, which is strong from issuance, with cash flows remaining generally in line with or higher than the DBRS underwritten (UW) levels, with isolated exceptions as further discussed, below. The pool has experienced a collateral reduction of 13.2% since issuance, with 68 of the original 72 loans remaining as of the April 2016 remittance. The transaction also benefits from a high concentration of defeasance, as 19 loans, representing 25.8% of the pool, have defeased, with ten of those loans defeased in the last 12 months. The weighted-average (WA) debt service coverage ratio (DSCR) for the pool has increased from 1.30 times (x) to 1.60x, with a WA debt yield of 11.1%, up from 8.5% at issuance.

On average, cash flow growth for the 11 non-defeased loans in the Top 15 has been healthy, with WA net cash flow (NCF) growth over the DBRS UW levels of 7.6% as of the respective 2015 figures for each loan. There are five loans, however, that have shown negative NCF growth from the DBRS UW figures in 2015, with three loans showing significant declines between -22.1% and -34.9%. All three loans reporting the largest variances are secured by student housing properties that were modeled with an increased probability of default at issuance and for this review. Three loans in the Top 15 are reporting growth in excess of 20.0% over the DBRS UW figures in 2015, including the largest loan in the pool, Seven Springs Village Apartments (Prospectus ID #1, 7.6% of the pool), which reported NCF growth of 29.3% as of the YE2015 figure.

There are seven loans on the servicer’s watchlist as of the April 2016 remittance, comprising 15.8% of the pool balance, with no loans in special servicing.

The largest loan on the watchlist is Prospectus ID #2, Seminole Grand (4.1% of the pool). This loan is secured by a 486-unit (1,554-bed) student housing property located in Tallahassee, Florida, serving the students of Florida State University (FSU). The property was constructed in 1995 (renovated in 2008) and has suffered in the face of newer competition with closer proximity to the FSU campus. Student housing development in Tallahassee has been robust over the past several years, causing occupancy declines for older properties like the subject. The Q3 2015 DSCR was reported at 0.92x, down from 1.09x at YE2014 and 1.32x at DBRS underwriting. Occupancy was at 94.3% as of the Q3 2015 rent roll, up from 91.1% at YE2014, but rental rates continue to fall at the property, with the Q3 2015 average of $365 per bed down from the issuance average of $419 per bed. DBRS has requested pre-leasing figures for the Fall 2017 semester, but that information has not been received to date. The property has a history of performance issues dating prior to the trust loan’s origination, with the sponsors acquiring the property through a distressed sale in 2007. The trust loan refinanced the property for the sponsors, who retained $12.0 million in cash equity at closing. Given the historical issues and the most recent trends of cash flow decline, the loan has been modeled with an increased probability of default. DBRS will continue to monitor the loan for developments.

The Palms on University loan (Prospectus ID #7, 3.0% of the pool) was previously in special servicing between November 2015 and March 2016 before transferring back to the master servicer and being added to the watchlist for continued monitoring. The loan transferred to special servicing for payment default, with the September and October 2015 payments being outstanding before the loan was brought current in November 2015. The loan is secured by a 152-unit (528-bed) student housing property in Riverside, California, serving the students of the University of California Riverside (UCR). The property has shown cash flow declines for the past several years, with the DSCR falling below 1.0x for YE2013 and YE2014, the Q3 2015 DSCR at 0.83x and occupancy falling to 57.0%. The borrower reports the cash flow difficulties are the result of mismanagement by the previous management company and increased competition for student housing in the area around the UCR campus. The loan is sponsored by three individuals and two real estate firms, with the trust loan financing the acquisition of the property and cash equity of $11.1 million remaining at closing. The existing management company was replaced in Q4 2015 with Peak Properties, a company with a portfolio of seven student properties located throughout southern California under management. Given the property’s history of declining cash flows and the payment default in Q4 2015, DBRS modeled this loan with an increased probability of default and will continue to monitor for developments.

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.

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