DBRS Confirms All Classes of Resource Capital Corp. 2015-CRE3, Ltd.

DBRS Limited (DBRS) has today confirmed the Floating Rate Notes (the Notes) issued by Resource Capital Corp. 2015-CRE3, 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

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

The rating confirmations reflect the overall stable performance of the transaction, which has experienced a collateral reduction of 22.0% as of the September 2016 remittance. At issuance, the collateral consisted of 20 floating-rate mortgage loans secured by 20 transitional commercial, multifamily and hospitality properties. As of the September 2016 remittance, four loans have repaid, including the recent payoff of The Avenues Apartments loan, which had an outstanding principal balance of $15.7 million. Based on recently reported financials and occupancy rates, many of the remaining collateral properties are approaching or have reached stabilization, as the respective borrowers have successfully executed their respective business plans. Ten of the remaining loans are pari passu participations that have future funding components to be allocated for property renovations and/or leasing costs to aid in property stabilization. As of the September 2016 remittance, there are no loans in special servicing and four loans on the servicer’s watchlist, representing 33.4% of the current pool balance. The two most pivotal loans on the servicer’s watchlist are detailed below.

The Betsy Hotel loan (Pros ID#2, 17.3% of the current pool balance) is secured by two hotels, the 61-key Betsy Hotel (the Betsy) and the 67-key Carlton Hotel South Beach (the Carlton), both located in South Beach’s Art Deco District in Miami, Florida. The loan was added to the watchlist as a result of the ongoing renovations at the property, which have contributed to a decline in cash flow. At issuance, the sponsor’s business plan included plans to take the Carlton property off-line for renovations beginning in March 2015 to renovate the interiors and common areas to match the Betsy. Following the renovation, the two hotels will operate as one 136-room property that will be named “The Betsy.”

According to the servicer’s August 2016 update, the Carlton renovation is now deemed ahead of schedule at approximately 63.0% complete, and construction of a sky bridge connecting the two hotels is underway. The grand reopening is targeted for November 2016. Despite the operational disruptions from the ongoing renovations, the Betsy continues to perform above its competitive set, with occupancy, average daily rate and revenue per available room metrics of 79.9%, $386.62 and $294.69, respectively, according to the June 2016 Smith Travel Research (STR) report. Although the loan reported a Q2 2016 debt service coverage ratio DSCR of -1.49 times (x), which has further declined from the YE2015 DSCR of -0.43x, given the stable performance of the operational portion of the collateral, DBRS expects cash flows to improve as renovations are completed, with units coming online and available for booking later this year. In addition, the loan benefits from a debt service reserve with a current balance of $1.1 million as of September 2016, which is being used to fund shortfalls through the renovations.

The Parkway Square Shopping Center loan (Pros ID#7, 3.9% of the current pool balance) is secured by a community shopping center located in College Station, Texas, approximately two miles south of Texas A&M University. The sponsor has owned the property since 2004 and contributed $1.28 million in cash to close for the subject loan. The property is situated along an established retail corridor and was formerly anchored by Kroger (29.5% of the net rentable area), but the tenant vacated ahead of its lease expiration of September 2016. As such, occupancy is estimated to have declined to 59.8%. Kroger was paying a low gross rental rate of $4.00 per square foot (psf), with no common area maintenance charges billed; at issuance, the appraiser had estimated a base rental rate of approximately $6.50 psf for the space, indicating potential upside if Kroger were to vacate. According to CoStar, properties within a five-mile radius of the subject reported an average rental rate of $11.65 triple net, a vacancy rate of 19.9% and an availability rate of 23.8% compared with the subject’s average rental rate of $7.20 psf and vacancy rate of 40.2%.

The departure of Kroger and its historically low sales (the most recent reporting provided at issuance showed sales of $347 psf in 2014) was likely the result of high competition in the market that included H-E-B, a popular grocery chain in Texas that is located less than one mile north of the subject. The borrower has advised that the space is being marketed for lease, but no solid prospects have emerged thus far. This loan was structured with an initial future funding commitment of $2.3 million, with approximately $1.2 million remaining as of September 2016. Those remaining funds may only be drawn for tenant improvements and leasing commissions related to re-tenanting Kroger’s space. The terms of release require that the loan is able to achieve a loan-to-value ratio no higher than 70.0% based on a new appraised value at the time of the draw. Given the soft market and stiff grocery competition in the area, DBRS expects there will be difficulty re-leasing the entire space any time soon and, as such, has modeled the loan with a significantly increased probability of default for the purposes of this review.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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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