DBRS Downgrades Four Classes of ML-CFC Commercial Mortgage Trust, Series 2006-1

DBRS Limited (DBRS) has today downgraded the ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2006-1 (the Certificates) issued by ML-CFC Commercial Mortgage Trust, Series 2006-1 (ML-CFC 2006-1 or the Trust):

-- Class C to C (sf) from CCC (sf)
-- Class D to D (sf) from CCC (sf)
-- Class E to D (sf) from C (sf)
-- Class F to D (sf) from C (sf)

In addition, DBRS has confirmed the remaining classes in the transaction, as listed below:

-- Class B at BB (high) (sf)
-- Class X at AAA (sf)

All trends are Stable, with the exception of Class C through Class F, which have ratings that do not carry trends. In addition, the Interest in Arrears designation was added to Class C and DBRS has discontinued and withdrawn the rating for Class G, as this class previously defaulted.

The rating downgrades are the result of the most recent realized losses to the Trust, which occurred after 13 loans were liquidated from the Trust for a combined loss of $74.1 million, with the June 2016 remittance. The realized losses wiped out the remaining balance on Class G, all of Class F and Class E, and reduced the principal balance on Class D by 93.8%. The Prince Georges Center II loan (Prospectus ID #10) incurred the largest realized loss of the 13 liquidated loans at $26.0 million. The loan transferred to special servicing in November 2015 for imminent monetary default and is discussed in further detail below. As of the July 2016 remittance, two of the remaining seven loans are in special servicing, with a cumulative outstanding principal balance of $16.0 million. The Pueblo Crossing loan (Prospectus ID#45, 23.1% of the current pool balance) is anticipated to be resolved and returned to the Master Servicer in August 2016, following a loan modification that closed in June 2016. Reportedly, the loan will be extended to February 2017. The remaining loan in special servicing, Junction Shoppes (Prospectus ID#85, 11.9% of the current pool balance), transferred in October 2012 for payment in arrears and is also discussed in more detail below. DBRS anticipates the loss for this loan upon disposition to be contained to the Class C certificates. To date, 37 loans have been liquidated from the Trust at a combined realized loss of $168.8 million.

Since issuance, the transaction has experienced collateral reduction of 97.9% from loan amortization, successful loan repayment, principal recovered from liquidated loans and realized losses from defaulted loans. As of the July 2016 remittance report, seven loans remain out of the original loan count of 152, three of which are on the servicer’s watchlist, representing 57.7% of the current pool balance. The largest loan in the pool, Army Corp Engineer building (Prospectus ID#33, 31.7% of the current pool balance), is on the watchlist and was flagged as a result of the single GSA tenant having a lease expiration in July 2016. According to the servicer, the borrower has negotiated a lease renewal and plans to sell the property and pay off the existing loan, which is expected to occur during a forbearance period lasting up to 120 days. The remaining two loans on the servicer’s watchlist include 135 West 27th Street Commercial Corp (Prospectus ID#93, 7.8% of the current pool balance), which has historically underperformed since issuance, and Tidewater Estates (Prospectus ID#58, 18.2% of the current pool balance), which underwent a loan modification and is highlighted below.

The Prince Georges Center II loan (Prospectus ID #10) was secured by an office property in Hyattsville, Maryland, totaling 394,578 square feet (sf). The loan transferred to special servicing in November 2015, when the sponsor notified the Master Servicer that the loan would not be paid off at maturity in December 2015. The lender dual-tracked foreclosure, along with alternative workout strategies that included a possible loan modification and note sale. The sole GSA tenant paid a rental rate of $26.20 psf and initially expressed its intention to vacate and relocate to a nearby property upon its lease expiration in April 2016; however, the tenant subsequently executed a 17-month lease extension to September 2017 and downsized its respective space to 295,000 sf (74.8% of the NRA), as of May 2016. According to Reis, the Hyattsville/Riverdale submarket is reporting average asking rents of $26.14 psf and a vacancy rate of 19.7% for office properties, as of Q1 2016. Market fundamentals appear to have weakened as the Q1 2016 vacancy rate for the submarket was higher than the five-year vacancy rate average of 16.7%, according to Q1 2016 REIS data. The December 2015 appraisal valued the asset at $5.0 million, reflective of a 92.4% value decline from the issuance value of $66.0 million. According to Real Capital Analytics, comparable office properties within three to four miles of the subject were sold between $62 psf and $94 psf, compared with the subject sales price of $13 psf, based on the December 2015 appraisal value. As a result of the decline in market performance and the significantly impaired asset value, the loan was ultimately resolved with the June 2016 remittance at a realized loss of $26.0 million, representing a loss severity of 84.1% at disposition. DBRS has requested the final disposition report from the special servicer to better understand the steep value decline and the state of the local market.

The Junction Shoppes loan (Prospectus ID#85) is secured by a retail property in Apache Junction, Arizona, totaling 31,681 sf and has been in special servicing since October 2012. As of July 2016, the servicer advised that a Trustee Sale is scheduled to occur in August 2016, with an anticipated disposition of the asset to possibly take place toward the end of 2016. According to the May 2016 rent roll, the property is 89.1% occupied with an average rental rate of $19.61 psf. Occupancy dropped from 85.0% to 70.0% at the beginning of 2015, and subsequently recovered to 89.1% in September 2015. The largest three tenants at the property collectively represent 35.4% of the NRA, with leases scheduled to expire between April 2017 and August 2021. Two tenants are scheduled to expire by November 2016, representing 8.3% of the NRA collectively, with tenants occupying an additional 32.0% of the NRA scheduled to roll through 2017. The servicer noted that the shadow anchor, Fry's Electronics, is reportedly relocating across the street at the beginning of 2017, which may negatively impact property cash flow. According to CoStar, the subject’s asking rents of $14.00 psf are above the average of comparable properties within a one-mile radius that are under 50,000 sf, which report an average rental rate of $10.65 psf and an average vacancy rate of 13.6%. Real Capital Analytics reports that comparable retail properties within close proximity of the subject were sold at prices ranging between $29.00 psf and $98.00 psf. According to the March 2016 appraised value of $3.6 million ($114.00 psf), the subject compares favorably; however, the value has declined by $4.4 million since the issuance. Given the sharp value decline since issuance and the current outstanding advances of $703,136, DBRS anticipates the Trust to experience a loss upon loan disposition.

The Tidewater Estates (Prospectus ID#58) loan is secured by a senior MHC property in Deerfield Beach, Florida, totaling 124 units. The loan is currently on the servicer’s watchlist as the YE2015 DSCR remains below threshold at 0.78x, down slightly from the YE2014 DSCR of 0.83x. The loan has historically had performance issues as it previously transferred to the special servicing in July 2009 due to monetary default and was returned to the master servicer in April 2015 as a corrected loan, remaining current on monthly debt service payments since then. The loan was modified in July 2012, resulting in a loan maturity extension to June 2020 from the original maturity date in October 2015. The borrower is required to make IO payments for 60 months, with principal and interest payments beginning on July 2017. The October 2014 appraisal valued the asset at $8.1 million, a $3.4 million decrease from the issuance value of $11.5 million, though above the March 2012 appraised value of $5.0 million and the June 2013 appraised value of $7.4 million. Despite the decline in cash flow, property occupancy has remained strong at 97.0% as of YE2015, with an average rental rate of $518 per unit, remaining in line with metrics in place at YE2014.

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.