DBRS Upgrades One Class and Confirms Eight Classes of COMM 2004-LNB2

DBRS Inc. (DBRS) has today upgraded the rating of one class of COMM 2004-LNB2 as follows:

-- Class J to AAA (sf) from BBB (sf)

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

-- Class C at AAA (sf)
-- Class D at AAA (sf)
-- Class E at AAA (sf)
-- Class F at AAA (sf)
-- Class G at AAA (sf)
-- Class H at AAA (sf)
-- Class X-1 at AAA (sf)
-- Class K at CCC (sf)

All trends are Stable, except for Class K, which carries no trend.

The rating upgrade reflects the current composition of the remaining collateral in the transaction. Three loans, representing 94.4% of the current pool balance, are fully defeased, and the Walgreen’s College Station loan, representing 2.4% of the current pool balance, is fully occupied by Walgreen’s Co. (Walgreen’s), an investment-grade-rated tenant. The loan is fully amortizing, and Walgreen’s original lease expires at loan maturity in April 2028. The loan had a YE2015 debt service coverage ratio (DSCR) of 1.16 times (x), which has remained stable over the years. Walgreen’s has five ten-year extension options. The remaining loan, Alta Mesa, representing 3.2% of the current pool balance, is in special servicing and is discussed in greater detail below.

Since issuance, the transaction has experienced collateral reduction of 92.0% as a result of successful loan repayment, scheduled amortization, realized losses from liquidated loans and principal recoveries from liquidated loans. Only five loans remain out of the original 90 as of the July 2016 remittance.

The Alta Mesa loan (Prospectus ID#54) is secured by a strip retail center in Fort Worth, Texas, that was built in 1982. This loan transferred to special servicing in January 2014 because of a maturity default, and it became real estate owned in February 2016. The property was formerly shadow-anchored by a Sack N Save grocery store; however, that space has been vacant since 2010. Performance of the loan has declined since YE2013 after four tenants, representing approximately 28.0% of the net rentable area (NRA), vacated the property, including the former largest tenant, Sam’s One Dollar Store (14.9% of NRA). According to the most recent OSAR provided (T-12 ending August 31, 2014), the DSCR was 1.03x, a decrease from the YE2013 DSCR of 1.32x. As of the May 2016 rent roll, the collateral was 60.3% occupied, down from 65.4% at April 2015, 73.0% at YE2013 and 100.0% at YE2012. According to the servicer, the property manager is in preliminary discussions with prospective tenants, including a beauty school, a day care, a personal trainer, and a restaurant; however, no leases have yet been executed.

According to the most recent appraisal completed in April 2016, the property was valued at $3.1 million ($51.72 psf) down from $4.0 million ($66.24 psf) in May 2014 and $5.1 million ($84.26 psf) at issuance. Six comparable sales highlighted in the appraisal in the Fort Worth and Dallas area ranged from $48.31 psf to $159.39 psf. The property that sold for $48.31 psf appears to be similar to the subject, as it is a strip retail property that was 47.0% occupied at the time of sale. According to Real Capital Analytics, sales for comparable properties within the past three years within 15 miles of the subject ranged from $61 psf to $199 psf. While DBRS expects the Trust to experience a loss with the resolution of the loan, the loss is currently expected to be contained to the defaulted Class L. If this scenario comes to fruition, it can be expected to have positive rating implications to Class K.

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

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

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.