DBRS Finalizes Provisional Ratings on Rosslyn Portfolio Trust 2017-ROSS

DBRS, Inc. (DBRS) has today finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-ROSS (the Certificates) issued by Rosslyn Portfolio Trust 2017-ROSS:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class X-CP at BB (sf)
-- Class F at BB (low) (sf)
-- Class HRR at BB (low) (sf)

All trends are Stable. All classes have been privately placed.

The Class X-CP balance is a notional amount and equals the aggregate balances of the loan components as follows: the A-2 Portion, the B-2 Portion, the C-2 Portion, the D-2 Portion, the E-2 Portion, the F-2 Portion and the HRR-2 Portion. Class HRR represents the Eligible Horizontal Residual Interest and will be retained by the Retaining Sponsor in accordance with the credit risk retention rules applicable to this securitization transaction. Distributions in respect of principal and interest on each class of Certificates will be made in sequential order, but for a Voluntary Principal Prepayment, the amount will be allocated on a pro rata basis.

The collateral for the transaction consists of a portfolio of seven office properties totaling 2.0 million square feet (sf) located in Arlington, Virginia, just over the Potomac River from Washington, D.C. Three of the assets are considered to be Class A buildings and some of the best in the market with unobstructed views of national monuments and landmarks throughout D.C. Sponsorship for the loan is a joint venture between US Real Estate Opportunities I, L.P. (USREO; 89.0%) and an affiliate of Monday Properties (11.0%). Monday Properties has managed the portfolio since 2005 and acquired the assets in 2007, while USREO acquired an equity interest in the portfolio in 2011. USREO is a $1.3 billion fund formed by the Goldman Sachs Group, Inc. and two sovereign wealth funds. Monday Properties has substantial experience and is the largest real estate owner in the Rosslyn market with 35.0% of the total office space. As of October 2011, the sponsors have invested $503.8 million of cash equity in the portfolio, which includes the $16.4 million of cash equity contribution at origination for the subject loan.

The Rosslyn submarket has been greatly affected by the Department of Defense’s Base Realignment and Closure Act (BRAC) as well as the federal budget sequestration and budget crisis over the past several years, which caused office demand to plummet and vacancy rates to spike. These initiatives have driven the office market vacancy rate to an elevated 26.5%, which has been persistent as evidenced by the five-year average vacancy rate of over 25.0%. The collateral was not immune to the government initiates, as overall portfolio vacancy reached as high as 33.7% in 2015 and has averaged 26.7% since 2011. As of May, 1, 2017, the portfolio was 67.5% occupied with occupancies for the individual buildings ranging between 38.1% and 91.3%. Prior to the implementation of BRAC, the portfolio benefited from an average occupancy of 94.5% between 2005 and 2010. To restore to a stabilized occupancy level, the sponsors engaged in a leasing initiative with a budget cost of $118.3 million expected to be spent over the initial three-year loan term, $110.6 million of which will be in the form of future mezzanine debt funded by the junior mezzanine lender with the remaining $7.7 million to be funded by borrower equity. Of the total improvement plan, $65.3 million will be expected to go toward speculative leasing costs, which include tenant improvements/leasing commissions and landlord work, and $22.9 million will be reserved for base building capital expenditures to upgrade building systems, such as mechanical, plumbing, fire and safety as well as elevator modernizations. Also included in the budget is $30.1 million of committed leasing costs for which the junior mezzanine lender has provided a letter of credit to backstop its future funding obligations. Since 2016, the property has gained leasing momentum by executing 39 new and renewal leases, representing 29.1% of the net rentable area.

Initial loan proceeds of $500.0 million, along with $142.1 million of mezzanine loans and a $16.4 million equity infusion from the sponsor, were used to refinance $635.2 million of debt (comprising prior CMBS debt securitized in the LBCMT 2007-C3 transaction for three of the office buildings, mezzanine debt and a balance sheet mortgage loan), fund an upfront reserve of $6.8 million and cover closing costs of $16.4 million. The mezzanine lender is Blackstone Mortgage Trust, Inc. (BXMT) through its affiliate, Husky Finco, LLC (Husky Finco). BXMT, through Husky Finco, will be obligated to make the future funding advances. In aggregate, the $752.6 million fully funded total debt amount will consist of a $500.0 million mortgage loan, $71.0 million senior mezzanine loan and $181.9 million junior mezzanine loan. The first mortgage is a 37-month term floating-rate (one-month LIBOR plus 2.20% per annum) interest-only loan with three 12-month extension options.

Cushman & Wakefield has determined the stabilized value of the portfolio to be $1,277,200,000 ($625.60 per square foot (psf)) based on a weighted-average cap rate of 6.1%. The DBRS stabilized value of $599.4 million ($274.00 psf), using an 8.5% cap rate, equates to a 46.2% discount to the appraiser’s stabilized value. DBRS research has found that issuance cap rates (Issuer net cash flow (NCF) divided by appraised value) for Arlington office properties securitized in CMBS transactions, regardless of location or quality, have not exceeded 8.5% since 1998, with the highest year in 2000 (8.4%). Assuming a refinance constant of 8.75%, 555 basis points above the current assumed mortgage loan rate, the DBRS Refinance Debt Service Coverage Ratio (DSCR) is moderately strong at 1.09 times (x), indicating lower refinance risk. Furthermore, term default risk is considered relatively low per the DBRS Debt Yield and DBRS Term DSCR of 8.5% and 1.64x, respectively, based on the DBRS In-Place NCF.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.