DBRS Confirms Ratings of PFP 2015-2, Ltd.

DBRS Limited (DBRS) has today confirmed the Floating Rate Notes (the Notes) issued by PFP 2015-2, Ltd. as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable. Classes F and G are non-offered classes.

The rating confirmations reflect the stable overall performance of the transaction, which remains in line with DBRS’s expectations at issuance. At issuance, the collateral consisted of 29 floating-rate mortgage loans secured by 31 transitional commercial, multifamily and hospitality properties with a trust balance of $624.1 million. As of the July 2016 remittance, 28 loans remain, as the 1250 George Street loan, which had an outstanding principal balance of $8.5 million, was prepaid in May 2016. The principal repayment from the loan was not used to pay down the notes but was instead deposited to a permitted funding account to acquire future funding participations for four loans in the transaction. Twenty-three of the remaining loans in the pool are pari passu companion participations with future funding components that are to be used for property renovations and future leasing costs to aid in property stabilization. According to the servicer’s updates, most of the respective borrowers’ stabilization plans are on track with the timelines provided at issuance, with a few loans experiencing delays that largely seem manageable with mitigants in place. As of the July 2016 remittance, there are no loans in special servicing or on the servicer’s watchlist. Three of the loans in the top ten, collectively representing 19.5% of the fully funded pool balance, are detailed below.

The Outlets at the Border loan (Prospectus ID#3, representing 7.7% of the pool balance) is secured by a 135,135-square foot (sf) outlet mall in San Ysidro, California, strategically located near the world’s busiest international border crossing. The loan is structured with a $5.0 million future funding component, of which $3.4 million is allocated as a future earn-out. At issuance, it was noted that the U.S. side of the border was undergoing a $741 million project led by the U.S. administration to create a new northbound pedestrian crossing, which is expected to significantly increase foot traffic to the subject from Mexican shoppers and aid in property stabilization. As of June 2016, the borrower noted that the northbound portion of the new border crossing was scheduled to open on July 15, and that completion of the southbound portion was planned for a late 2016. The subject’s occupancy rate of 81.7% as of June 2016 has remained relatively in line with issuance and has increased from the March 2016 rent roll occupancy rate of 78.0%. The largest three tenants collectively represent 38.5% of the net rentable area (NRA) with leases that are scheduled to expire between October 2024 and August 2025. The largest tenant, H&M, represents 19.3% of the NRA with a lease expiring in October 2024. H&M’s lease contains a co-tenancy clause whereby the tenant pays reduced rents in the amount of 3.5% of gross sales instead of the contractual 7.0% of gross sales rent until the mall is at least 75.0% occupied, excluding the tenant’s own space. As the property was 81.7% occupied, according to the June 2016 servicer commentary, the subject effectively satisfies the co-tenancy clause, and H&M’s rental rate has increased to 7.0% of gross sales. The $3.4 million earn-out is to be released once Express is open for business, H&M’s co-tenancy clause is met and the property achieves a net operating income debt yield of 8.5% (including earn-out proceeds) for three consecutive months. As of June 2016, the property has yet to meet the required debt yield threshold, with no future funding being advanced to the borrower. The property reported a Q1 2016 annualized debt service coverage ratio (DSCR) of 0.64 times (x); however, income from percentage rents to be paid by tenants, including H&M, was excluded. DBRS anticipates property performance will stabilize once cash flow growth from increased pedestrian traffic has been realized following the opening of the northbound and southbound pedestrian crossings.

The Bank of America Plaza loan (Prospectus ID#4, representing 7.0% of the pool balance) is secured by a 269,625-sf office building in downtown Las Vegas, Nevada. The loan is structured with a $6.7 million future funding component, of which $5.0 million is allocated for leasing costs associated with re-tenanting the vacant space at the property. The remaining $1.7 million is held as a future earn-out to be distributed to the borrower within the first six months of the loan term once the property achieves a debt yield of 6.8%. As of June 2016, $1.25 million of the leasing reserve has been advanced to the borrower. The loan is currently not meeting the required debt yield threshold for the $1.7 million earn-out. As of the March 2016 rent roll, the property was 71.8% occupied, an improvement over the occupancy rate of 60.4% at issuance, with the largest three tenants representing 25.9% of the NRA on leases expiring between July 2016 and October 2025. The second-largest tenant, Koeller Nebeker Carlson & Haluck LLP (6.1% of NRA), vacated its space upon lease maturity in July 2016, with occupancy decreasing to 63.0% following its departure. The property reported a Q1 2016 annualized DSCR of 0.97x, below the DBRS underwritten stabilized DSCR of 1.19x, which assumes a stabilized occupancy level of 85.0%. Despite the anticipated decline in occupancy following the second-largest tenant’s departure, the property is considered to be in average condition, according to the February 2016 site inspection, and the remaining future funding for leasing costs should enable property stabilization going forward.

The Mark Apartments loan (Prospectus ID#6, representing 4.9% of the pool balance) is secured by a 227-unit multifamily complex in Alexandria, Virginia. Originally completed in 1965, the property was operated as an extended-stay hotel until 2013 when a project to convert the subject to an apartment building began. At issuance, the property was 46.1% occupied, as tenants were being rolled off in order to complete unit renovations. The loan was originally structured with a $9.5 million future funding component, of which $8.9 million was reserved to facilitate the sponsor’s plans to complete the full renovation of the property. As of June 2016, the future funding component had been advanced in full to the borrower, with the servicer noting that the renovations were 96.0% complete. The occupancy rate has increased to 46.6% from 26.0% at Q1 2016, as a result of strong leasing momentum since April 2016. According to the April 2016 rent roll, the average rental rate at the property was $1,286 per unit, an increase of 8.8% over the average rate at issuance, with the sponsor targeting an average rental rate of $1,626 per unit once the property is stabilized and all renovated units are leased. The subject’s target rental rates are above the current average asking rent for comparable properties in the submarket of $1,556 per unit, according to CoStar. The Q1 2016 reported annualized DSCR is negative at -0.61x, which is attributed to the low occupancy levels and subsequent decline in rental revenue during the first quarter as a result of the ongoing renovations. DBRS anticipates that property performance will improve toward the end of the year as the vacant units are leased up and the occupancy rate stabilizes.

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

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.