DBRS Confirms Ratings of RFT 2015-FL1 Issuer, Ltd., Stable Trends

DBRS, Inc. (DBRS) has today confirmed the ratings of three Floating Rate Notes (the Notes) issued by RFT 2015-FL1 Issuer, Ltd. (the Issuer) as follows:

-- Class A Senior Secured Floating-Rating Rate Notes at AAA (sf)
-- Class B Second Priority Secured Floating-Rate Notes at A (high) (sf)
-- Class C Third Priority Secured Floating-Rate Notes at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect that the performance of the transaction remains in line with DBRS’s expectations since issuance. At closing, the collateral consisted of 28 interest-only floating-rate loans totaling approximately $428.42 million secured by 28 transitional commercial and multifamily properties. As of the September 2016 remittance, all loans remained in the pool. A total of 24 loans, representing 87.8% of the current cut-off trust balance, were structured with pari passu future funding notes totaling $95.1 million (ranging from $0.50 million to $18.46 million). These funds are to be used for property renovations and future leasing costs to aid in property stabilization. These notes will remain outside of the trust and held by a loan seller affiliate. Additionally, some of the loans in the trust are cash managed, with reserves also funded up front and/or on a monthly basis for all loans to fund capital expenditures and leasing costs for the collateral properties.

Overall, the performance for the underlying loans has been as expected, with select loans showing improvement over DBRS expectations at issuance. The largest loan, Public Ledger Building (10.7% of the pool), is secured by a 535,924-square foot (sf) building located in the central business district of Philadelphia, Pennsylvania. As of June 30, 2016, the loan reported a trailing 12-month (T-12) net cash flow (NCF) figure of $2.98 million. The trust loan of $45.10 million ($84 psf) along with $11.4 million of cash equity financed the borrower’s acquisition of the subject property. Initial funding is supplemented by a future funding commitment of $4.65 million (bringing the fully funded senior loan amount to $49.75 million, or $93 psf) to be used to complete capital improvements for the ground floor and common areas, and to fund tenant improvements and leasing commissions.

The subject is situated in the East Market District, one block south of Market Street, with close proximity to City Hall, Independence Mall and Washington Square. According to CoStar, there are 18 office buildings in the Independence Hall submarket over 100,000 sf, which exhibit average rental rates of $25.48 psf gross, vacancy of 11.0% and availability of 18.5%. As of June 2016, the subject was 65.9% occupied with an average rental rate of $22.82 psf gross compared with 66.4% occupied with an average rental rate of $21.65 psf gross in February 2015. Occupancy and rental rates have remained relatively static since issuance; however, prior to year-end 2017, seven tenants, representing 9.0% of the net rentable area (NRA), will have lease expirations, the largest of which is Blackney Hayes Architects (3.0% of the NRA). Additionally, the largest tenant, the Government Service Administration (GSA) branch of Medicare/Medicaid (23.0% of the NRA), has announced a lease signing at 801 Market Street (0.3 miles northwest of the subject property). The tenant has a May 2018 lease expiration, with 90-day termination options available, which will allow the tenant to vacate the space gradually if it chooses to do so. A cash flow sweep will trigger when the tenant gives notice that it will not renew its lease within 12 months of its lease expiration date. Given that the tenant is vacating the property, DBRS has asked the servicer if it will trap cash in advance of 12 months prior to the May 2018 lease expiration date. If the tenant does elect to vacate upon lease expiration, vacancy could potentially rise above 65.0% if no other leasing activity were to occur. Although the developments with the GSA lease are an obvious setback to the borrower’s business plan, the overall level of activity in this area, which is in the middle of a significant redevelopment, appears positive. It is estimated that approximately $1.0 billion will be invested in property acquisitions and redevelopment projects over the next several years; ongoing projects include PREIT’s redevelopment of The Gallery at East Market (0.4 miles northwest of the subject property) and multiple residential projects ongoing in all directions, including two developments on the same block as the subject property. Given the generally positive activity surrounding the subject property, the borrower’s significant cash equity investment at issuance and the remaining future funding component that will combine with all swept cash to fund leasing costs to get the property to a market occupancy level, DBRS has maintained its outlook on the subject loan.

As of the September 2016 remittance, there are no loans in special servicing and five loans on the servicer’s watchlist, representing 11.2% of the current pool balance. Two of these loans, representing 5.2% of the pool, were flagged for performance-related reasons. DBRS has highlighted the largest loan on the servicer’s watchlist in detail below.

The Village at Stratford Apartments (Prospectus ID#13, 3.0% of the pool) is secured by a 356-unit garden-style apartment complex located in Oklahoma City, Oklahoma. The 39 two-story apartment buildings were originally constructed in 1984 and comprise 167 one-bedroom units, 164 two-bedroom units and 25 three-bedroom units. The loan was flagged because of a decline in performance, which appears to be a result of mismanagement. As of June 30, 2016, the loan reported a trailing T-12 NCF figure of $0.52 million. The $13.2 million loan ($37,135 per unit) along with $3.6 million of cash equity provided acquisition financing for the borrower, which is a joint venture between Cohen Esrey Apartment Investors (Cohen) and Massandra Capital (Massandra). There is a $2.1 million future funding component (bringing the fully funded senior loan amount to $14.99 million or $42,107 per unit) to be held pari passu outside of the trust to be used for interior and exterior renovations.

The borrower’s stabilization plan for the property included an active management role (as a result of historically passive management styles) in addition to renovating the properties exterior, updating unit interiors and correcting items of deferred maintenance. The property was originally managed by an affiliate of Cohen (the borrower); however, in February 2016, LBK Management Services (LBK) became the new property manager. LBK currently manages five additional multifamily complexes in Oklahoma City, Tulsa and Shawnee, including other properties owned by Massandra. According to the servicer, LBK has taken a much more methodical approach to management, construction and renovations. New resident qualification guidelines have been implemented, and collection efforts have increased, reducing delinquencies.

As of June 2016, the property was 72.3% occupied with an average rental rate of $622 per unit compared with 86.0% occupied with an average rental rate of $611 per unit in March 2015. As of Q2 2016, REIS reported that properties built between 1980 and 1989 in the Northeast Oklahoma City submarket were achieving average rental rates of $660 per unit, with an average vacancy of 3.4%. Although the subject’s rental rates and occupancy rates are well below comparable properties of a similar vintage, the servicer has noted that 56 units of the planned 126 units have been renovated to date, with rental rates for one-bedroom units increasing from $540 to $626 (growth of $87 per unit), two-bedroom units increasing from $825 to $900 (growth of $75 per unit) and three-bedroom units increasing from $866 to $954 (growth of $88 per unit). As of August 2016, a number of exterior repairs and renovations had been completed, including work on the tennis courts, swimming pools, fitness center, clubhouse and general landscaping. To date, approximately $1.3 million of future funding has been advanced, leaving approximately $822,000 remaining. According to the Reis Observer, in spite of the recent economic downturn, multifamily market fundamentals remain strong, with low unemployment, a diverse economic base and recent positive absorption trends. Although recent performance has declined, DBRS anticipates that the change in property management and the ongoing renovations will contribute favorably toward the property’s stabilization.

With respect to the deferrable notes (Class B and Class C), to the extent that interest proceeds are not sufficient on a given payment date to pay accrued interest, interest will not be due and payable on the payment date and will instead be deferred and capitalized. The ratings assigned by DBRS contemplate the timely payments of distributable interest and, in the case of deferred-interest notes, the ultimate recovery of deferred interest (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law).

The rating assigned to Class B materially deviates from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the assigned rating reflects the sustainability of loan performance trends not demonstrated in addition to the transaction’s structural features, which constrain the quantitative model output.

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 (October 2016), which can be found on our website under Methodologies.

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