DBRS Downgrades Two Classes of DBRR 2012-EZ1 Trust, CMBS Re-REMIC Certificates

DBRS, Inc. (DBRS) has today downgraded the ratings on the following classes of the CMBS Re-REMIC Certificates (the Certificates) issued by DBRR 2012-EZ1Trust (the Trust):

-- Class C to BBB (low) (sf) from A (high) (sf)
-- Class X-5 to BBB (low) (sf) from AAA (sf)

DBRS has also withdrawn the rating of the Class X-2 bond as the class is no longer due any payments and has surpassed its final rated distribution date.

Additionally, the trends on Class C and Class X-5 have been changed to Negative from Stable.

This transaction is a resecuritization, originally collateralized by the beneficial interests in 32 senior CMBS pass-through certificates from underlying transactions that were issued in 2004. As of the September 2016 remittance report, the DBRR 2012-EZ1 capital structure has amortized 99.8% since issuance in September 2013. The transaction is currently collateralized by one of the original 32 CMBS certificates, the Class A-4 bond in the LBUBS 2004-C1 transaction. As of the September 2016 remittance, the Class A-4 bond had a remaining balance of $39.7 million, with the Re-REMIC trust owning a 5.1% piece of the underlying bond. There are only four loans remaining in the underlying CMBS transaction, with the largest two highlighted below.

The rating downgrades and trend changes are reflective of the negative outlook on the largest loan in the underlying CMBS deal, UBS Center – Stamford (Prospectus ID#1), which represents 74.6% of the transaction. The loan is secured by a 682,327 square foot (sf) Class A office property in Stamford, Connecticut, that formerly served as the North American headquarters for UBS AG (UBS). The subject is within walking distance of the train station and also has a data center and approximately 100,000 sf of obsolete trading floor space with 40-foot clear heights. The loan transferred to special servicing in January 2016 for imminent non-monetary default after UBS formally informed the borrower that it would not renew its lease past December 2017. UBS began moving staff from the subject back to Manhattan in early 2015, with only minimal back office functions currently remaining at the subject. The loan remains current with a current balance of $150.9 million; however, UBS will make its last rental payment in October 2016 as the lease was structured with a back-end free rent period. After October 2016, the loan will become a non-performing matured balloon as the loan also matures in October 2016. While UBS will no longer be responsible for rental payments post-October 2016, it will be responsible for all operating expenses incurred at the property through its lease expiration in December 2017.

According to the servicer comments in the CREFC IRP, the property has been marketed for lease for over a year; however, there has been no serious interest by prospective tenants as the Stamford office market has collapsed for large-space users in recent years. According to Reis as of Q2 2016, the Stamford Central Business District submarket reported an average vacancy of 29.6%; however, the vacancy rate for comparable properties is likely higher. The property was reappraised at $44.4 million ($65 psf) in May 2016, down significantly from the issuance value of $262.0 million ($384 psf). The updated value is supported by the sale of the former 550,000 sf Pitney Bowes headquarters, which sold for approximately $70 psf to a local developer; however, DBRS believes the eventual sale price will likely be lower. DBRS is also concerned at the potential for interest shortfalls to rise up the capital stack as the master servicer is not expected to fully advance the full debt service obligation given the updated appraised value. Currently interest shortfalls have risen up the capital stack to Class K in the underlying CMBS deal. Given the severe value decline, the lack of potential replacement tenants, the lack of liquidity in the local market and the elongated foreclosure process in Connecticut, DBRS expects the resolution timeline of the loan to be lengthy and as a result the loan is expected to realize significant loss.

The Passaic Street Industrial Park loan (Prospectus ID#6, 17.8% of the transaction) is secured by nine industrial properties, totaling approximately 2.1 million sf in Wood-Ridge, New Jersey. The loan currently consists of a $19.8 million A-note and a $16.1 million B-note, as the loan was modified in February 2012 after it had previously transferred to special servicing in March 2010 for imminent default. The loan was also extended to December 2018; however, the loan transferred back to special servicing in March 2016 as the borrower intended to enter into a capital event, likely a discounted payoff, according to servicer commentary. Loan performance has improved markedly since the modification, and the YE2015 debt service coverage ratio was 2.01 times (x), up from 1.0x at YE2014 as occupancy increased to 94% from 78%. In conjunction with the improvement in performance, the property was reappraised in March 2016 at $35.1 million ($16.60 psf) up from $20 million ($9.48 psf) in May 2011. According to CREFC IRP servicer commentary, the capital event is likely to occur in the next few months. Based on the updated valuation of the property, it appears the entire A-note and a portion of the B-note will be repaid, which would be viewed positively by DBRS.

The rating assigned to Class C differs from the lower rating implied by the liquidation scenario and the quantitative model. DBRS considers this difference to be a material deviation and, in this case, the rating reflects uncertain loan-level event risk of both the Passaic B-Note recovery and loss severity variation on the UBS Center - Stamford.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. The Class X-5 balance is notional. DBRS ratings on interest-only certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the interest-only certificate’s position within the transaction payment waterfall when determining the appropriate rating, in this instance Class X-5’s notional amount has become specifically tied to the Class C. The rating on Class X-2 has been withdrawn as the class is no longer receiving interest payments as the Final Rated Distribution Date as defined in the DBRR 2012-EZ1 Private Placement Memorandum has since passed.

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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info@dbrs.com.