DBRS Upgrades Two Classes of A10 Securitization 2013-1, LLC

DBRS, Inc. (DBRS) has today upgraded the following Fixed Rate Notes issued by A10 Securitization 2013-1, LLC.

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

Additionally, DBRS has confirmed the remaining classes in the transaction as follows:

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

All trends are Stable.

The rating upgrades reflect the increased credit enhancement to the transaction as a result of successful loan repayment. The transaction’s collateral consists of two loans secured by two traditional commercial real estate assets, including office and retail property types. According to the July 2016 remittance, the pool had an outstanding principal balance of approximately $18.9 million, representing a collateral reduction of 80.7% since issuance, as 19 of the original 21 loans have fully repaid, three of which were repaid in the last 12 months, contributing approximately $17.0 million (16.5% collateral reduction) in principal repayment. The transaction is concentrated, as the largest loan, City Centre Square (Prospectus ID#1), represents 94.6% of the pool based on the current loan amounts.

All loans were originated by A10 Capital, LLC (A10). A10 specializes in mini-perm loans, which typically have two- to five-year terms and are used to finance properties until they are fully stabilized. The borrowers are typically new equity sponsors of fairly well-positioned assets within their respective markets. A10’s initial advance is the senior debt component, typically for the purchase of a real estate-owned acquisition or discounted payoff loans. Most loans are structured with three-year terms and include built-in extensions and future funding facilities meant to aid in property stabilization, both of which are at the lender’s sole discretion. According to the most recent reporting, the two remaining assets in the subject pool have not yet reached stabilization, with one loan extended past the initial maturity and the other under evaluation for extension. As such, DBRS has modeled both loans on an as-is scenario based on the current loan balances and in-place cash flows, giving no credit to future funding and/or lease-up.

The City Center Square loan is secured by a 650,070 square foot (sf) located in Kansas City, Missouri. The building was constructed in 1977 and acquired by the sponsor in 2013. The property had been in default with the previous lender after a major tenant vacated in 2010. The subject is well-situated within the downtown Kansas City business district, but suffers from a low parking ratio (0.5 spaces per 1,000 sf) and a dated design. The property was 51.2% occupied as of the Q1 2016 rent roll, with vacancy improving after hovering near 60% between late 2013 and late 2015. The occupancy improvement is largely attributable to the signing of new tenant Synergy in Q3 2015. Synergy has taken occupancy of approximately two-thirds of its leased space, with full occupancy to take place in early 2017 for a total of 10.9% of the NRA on a lease through 2025. The submarket has remained relatively soft since issuance, with CoStar reporting an overall vacancy rate of 12.7% for Class B properties in the Kansas City CBD, with an availability rate of 19.0% as of August 2016.

At issuance, the appraiser’s estimated as-is value was $27.5 million ($42 psf), but an updated appraisal dated February 2016 obtained by A10 shows an as-is value improvement to $37.5 million ($57 psf). The value improvement is driven by the occupancy increase with the Synergy lease signing and improving rental rates at the property over the past several years. The implied LTV of 50.1% and trust exposure at $29 psf is healthy, with debt yield of approximately 10.6%, as based on the current loan balance and an updated as-is DBRS UW NCF figure. The initial maturity date is scheduled for September 2016 and A10 reports the borrower’s request to exercise the first of two available one-year extension options is under review.

The rating assigned to Class D differs from the higher rating implied by the quantitative model. DBRS considers this difference to be a material deviation, and in this case, the ratings reflect the uncertain loan level event risk.

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 and CMBS North American Surveillance, which can be found on our website under Methodologies.