DBRS Confirms All Classes of A10 Term Asset Financing 2016-1, LLC

DBRS, Inc. (DBRS) has today confirmed the following Commercial Mortgage Pass-Through Certificates, Series 2016-1 issued by A10 Term Asset Financing 2016-1, LLC:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the pool. The transaction consists of 23 loans secured by 27 transitional commercial real estate assets, including office, retail, industrial and multifamily properties. A total of nine underlying loans are cross-collateralized and cross-defaulted into four separate portfolios. According to the May 2017 remittance, there has been a collateral reduction of 12.6% since issuance, as five loans have been repaid in full, and one property out of an original six-property portfolio loan has been re-leased, with proceeds paying down the portfolio loan. The remaining loans benefit from low leverage on a per-unit basis, with the weighted-average debt yield based on the most recently reported net operating income and outstanding trust balance at 8.5%, which is moderately stable given that the pool consists of stabilizing assets.

Most loans were originally structured with two- to four-year terms and include built-in extensions and future funding facilities meant to aid in property stabilization, both of which are at the lender’s sole discretion. The reserve account has a current balance of $29.4 million against total potential future funding obligations of $42.3 million. According to the most recent reporting, the collateral assets have stable debt yields; however, the majority of the properties continue to perform below their respective stabilization plans.

The largest loan in the transaction, the Troy and First Center/Southfield Portfolio, represents 16.8% of the current pool balance. This loan is secured by five flex-industrial properties in Troy, Michigan, and a 638,000-square foot (sf) Class B office property in Southfield, Michigan, a suburb of Detroit. The borrower’s business plan is to lease the vacancy across the portfolio and to sell individual buildings as they stabilize. To aid in portfolio stabilization, the loan is structured with a $10.4 million future funding facility to fund leasing costs and capital renovation projects. As of May 2017, the balance of the facility is $8.0 million.

The First Center office property remains 44% occupied as of May 2017, which is the same as at issuance. The largest tenants are Secure 24 (83,000 sf) and United Healthcare (65,000 sf) on leases expiring in July 2018 and August 2019, respectively. The borrower has successfully renewed American Axle’s lease (32,000 sf) for three years at $17.00 psf and signed new tenant, Jack Cooper CT Services (15,000 sf) for eight years at $15.50 psf. The tenants received tenant improvement allowances of $12.50 psf and $25.00 psf, respectively. According to the servicer, the borrower is negotiating with a medical office user for a significant portion of space. The loan had an original leasing facility of $4.86 million to fund leasing costs. According to Reis, the submarket vacancy rate remains elevated at 32.1%, which compares similarly with the 31.5% vacancy rate for the submarket at issuance. Capital projects completed to date include updates to the central atrium and common areas, the resurfacing of the parking lot and exterior painting of the building.

The five remaining flex-industrial properties have occupancy rates ranging from 53.0% to 100.0%. The least occupied property, Research Drive, is predominantly finished as office space among the six individual buildings, and according to the servicer, the borrower is in the process of negotiating a lease for approximately 125,000 sf, which would significantly improve the occupancy rate. The remaining industrial properties are well occupied and considered to be stabilized. The loan formerly securing the Big Beaver Warehouse property has been paid in full, and three additional properties have experienced partial prepayment as a result of individual building releases. Total prepayments across the portfolio are $9.2 million.

The ratings assigned by DBRS contemplate timely payments of distributable interest and, in the case of the offered notes other than the Class A-1 and Class A-2 Senior Fixed Rate Notes, ultimate recovery of deferred collateralized note interest amounts (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law). The transaction is a standard sequential-pay waterfall.

The rating assigned to the Class B notes materially deviates from the higher ratings implied by the quantitative results. 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 results that is a substantial component of a rating methodology. The deviation is warranted given the undemonstrated sustainability of loan performance trends.

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 principal methodologies are North American CMBS Rating Methodology (January 2017) and CMBS North American Surveillance (December 2016), which can be found on dbrs.com under Methodologies.

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