DBRS Changes Trend to Positive on Two Classes of RAIT 2014-FL3, Upgrades One, Confirms Nine

DBRS Limited (DBRS) has today upgraded the rating of one Floating Rate Note (Note) issued by RAIT 2014-FL3:

-- Class B to AA (high) (sf) from AA (low) (sf)

In addition, DBRS has confirmed the ratings of the following Notes:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class X-1 at BB (low) (sf)
-- Class X-2 at BB (low) (sf)

Furthermore, DBRS has changed the trends on Classes B and C to Positive from Stable. Trends on the remaining classes remain Stable. DBRS does not rate the first loss piece, Class G.

The rating upgrade and positive trend changes reflect the increased credit support to the bonds as a result of successful loan repayments and the improved performance outlook for a portion of remaining loans in the pool.

At issuance, the transaction consisted of 21 interest-only, floating-rate loans secured by 22 transitional properties. As of the October 2016 remittance report, 11 loans remain in the pool with a total outstanding trust balance of $115.8 million, as ten loans have repaid from the trust, resulting in a collateral reduction of 46.1%. Three of the remaining loans (Prospectus ID#2, North Orange; Prospectus ID#3, Carolinas Distribution Center; and Prospectus ID#7, Foster City Medical Pavilion), representing 52.3% of the pool, have future funding commitments in junior participation interests that are held outside of the trust and cumulatively represent 11.6% of the fully funded amounts for those loans. The servicer reports that those interests have been fully funded for each loan.

As of the October 2016 remittance report, all loans in the pool are current and there are no loans on the servicer’s watchlist. The servicer’s calculated T-12 NOI figure ending June 30, 2016, for the 11 remaining loans shows a weighted-average (WA) improvement of 30.3% over the DBRS underwritten initial in-place figures for those loans at issuance. Occupancy as of the most recent rent rolls show levels up or flat from issuance for all but two loans, with a WA improvement of 4.2% for the pool. The two loans showing occupancy declines represent 26.2% of the pool balance and show a range of decline between -2.5% and -7.7% from the levels at issuance. DBRS will highlight the larger of the two loans, the Carolinas Distribution Center loan (20.6% of the pool), in detail further below. The second loan displaying an occupancy decline since issuance, the Maritime Square loan (Prospectus ID#12, 5.6% of the pool), is secured by a 137,340 square foot (sf) Class B office building located in Newport News, Virginia. Prior ownership undertook a $1.5 million renovation from 2011 to 2012, and was able to increase occupancy from roughly 50.0% to 70.0%; however, occupancy fell to 60.9% as of November 2015 following Huntington Ingalls’ choice to downsize by 14,000 sf (10.2% of the net rentable area (NRA). As part of the borrower’s stabilization plan, $1.8 million was funded into a tenant improvement/leasing commission (TI/LC) reserve to lease the property to submarket occupancy. As of Q3 2016, CoStar reported that Class B office properties in the Downtown Newport News submarket were achieving an average rental rate of $14.06 per square foot (psf) gross and an average vacancy rate of 9.5%, compared to the subject properties’ rates of $10.48 psf gross and 35.9%, respectively, as of September 2016. As of October 10, 2016, approximately $1.7 million remained in the borrower’s TI/LC reserve.

The largest loan in the pool, 20 North Orange (23.3% of the pool) is secured by a 270,000 sf Class B office property located in downtown Orlando, Florida. The trust loan financed the sponsor’s acquisition of the property for a purchase price of $34.8 million. Including reserves, the sponsor contributed $11.7 million in cash equity to close with a stabilization plan that included investment in capital improvements and enhanced marketing for the property to boost leasing. At issuance, the property was approximately 25.5% vacant, as compared with a submarket vacancy rate of 21.0% for Class B properties in downtown Orlando, as reported by CoStar. The September 2016 rent roll shows occupancy has increased slightly to 78.9%; however, according to CoStar, the property is 85.2% leased. CoStar further reports a vacancy rate of 15.4% for Class B office properties in the submarket as of Q3 2016. The servicer reports that the property is behind in its timeline for completing property improvements, which include an elevator modernization project, exterior painting, roof-related repairs/replacements, HVAC upgrades and bus duct repairs/replacements; however, the subject remains on track to achieve a stabilized occupancy rate of 85.0% by year three. The servicer’s reported NOI as of the T-12 ending June 2016 represents an improvement of 2.5% over the initial DBRS underwritten NCF figure. The junior participation interest in the amount of approximately $5.8 million has been fully funded, according to the servicer as of November 2016.

The second-largest loan in the pool, Carolinas Distribution Center, is secured by a 784,936 sf Class A distribution center located in Clayton, North Carolina. Whole loan proceeds of $24.5 million were used to refinance existing debt, return $120,600 of equity to the borrower, cover closing costs and fund the $650,000 junior participation interest, which is to be used exclusively for TI/LC costs. The borrower currently retains $10.6 million cash equity behind the transaction. At issuance, the property was approximately 37.5% vacant, as compared with the market vacancy rate of 15.1% for industrial properties in the Johnston County market, as reported by CoStar. The September 2016 rent roll shows occupancy has decreased slightly to 60.6%, following the expected departure of Spacenet Inc. (1.9% of the NRA) in June 2016. As of Q3 2016, Costar showed an improved vacancy rate for industrial properties within the Johnston County market of 5.0%. The three remaining tenants at the property include Coca-Cola Bottling Company (29.7% of the NRA), LB&B Associates (26.0% of the NRA) and Forward Air (4.8% of the NRA), with lease expirations in April 2026, June 2021 and August 2017, respectively. The servicer’s reported NOI as of the T-12 ending June 2016 represents an improvement of 11.4% over the DBRS underwritten NCF figure at issuance. The junior participation interest in the amount of approximately $650,000 has been fully funded, according to the servicer as of November 2016. DBRS is awaiting information from the servicer regarding leasing challenges and opportunities in the submarket, and whether the subject competes favorably or unfavorably to its competition.

DBRS will continue to communicate with the servicer regarding the performance of the underlying loans and will closely monitor the transaction for developments. For more information on this rating action, please contact us info@dbrs.com.

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 CMBS North American Surveillance (October 2016) and North American CMBS Rating Methodology (March 2016), which can be found on our website under Methodologies.