DBRS Confirms Ratings of PFP 2015-2, Ltd.

DBRS Limited (DBRS) has today confirmed the Floating Rate Notes (the Notes) issued by PFP 2015-2, 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

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

The rating confirmations reflect the stable overall performance of the pool and the increased credit support to the bonds as a result of successful loan repayment. At issuance, the collateral consisted of 29 floating-rate mortgage loans secured by 31 transitional commercial, multifamily and hospitality properties with a trust balance of $624.1 million. According to the July 2017 remittance, there has been collateral reduction of 25.7% since issuance, as 11 loans have left the trust, contributing to a principal paydown of $160.6 million. In the last 12 months, ten loans have repaid from the trust. Fifteen of the remaining loans in the pool are pari passu companion participations with future funding components that are to be used for property renovations and future leasing costs to aid in property stabilization.

According to the most recent reporting, a portion of the collateral assets in the subject pool have reached stabilization; however, others continue to perform below their respective stabilization plans. As of the July 2017 remittance, there are no loans in special servicing and 11 loans on the servicer’s watchlist, representing 64.9% of the fully funded pool balance. Three of the loans, representing 21.0% of the fully funded pool balance, are flagged for upcoming loan maturity, with the servicer noting that two of the borrowers are expected to exercise extension options. The remaining loans on the watchlist have been flagged for performance-related reasons, as the borrowers continue to work toward achieving their respective stabilization plans. Two of the loans on the servicer’s watchlist are discussed below.

The Outlets at the Border loan (Prospectus ID#3, representing 10.8% of the pool balance) is secured by a 135,135-square foot (sf) outlet mall in San Ysidro, California, strategically located near the world’s busiest international border crossing between the United States and Mexico. The loan was added to the servicer’s watchlist because of poor performance, as the Q1 2017 annualized debt service coverage ratio (DSCR) was reported at 0.60 times (x). The loan is structured with a $5.0 million future funding component, of which $3.4 million is allocated as a future earn-out, with the remaining allocated for future leasing costs. As of June 2017, the $1.6 million in future funding for leasing costs has been advanced. The deadline for the borrower to achieve the earn-out passed in August 2016, and as the property did not achieve the performance metrics necessary, the earn-out will not be funded.

At issuance, it was noted that the U.S. side of the border was undergoing a $741 million project to create a new northbound pedestrian crossing, which was expected to significantly increase foot traffic to the subject from Mexican shoppers and aid in property stabilization. The northbound portion of the new border crossing opened in July 2016, and the southbound entrance opened in the latter part of 2016. As of March 2017, the Mexico-U.S. border crossing station adjacent to the property was fully operational, according to the servicer.

The subject’s occupancy rate of 84.1% as of March 2017 has improved over the June 2016 occupancy rate of 81.7% and issuance occupancy rate of 80.6%. The largest three tenants collectively represent 38.5% of the net rentable area (NRA) with leases that are scheduled to expire between October 2024 and August 2025. The largest tenant, H&M, represents 19.3% of the NRA with a lease expiring in October 2024. H&M’s lease commenced in October 2014, and the tenant is paying a contractual rent of 7.0% of gross sales. As of June 2017, the servicer noted that two new leases collectively representing 1.7% of the NRA had been signed at the subject, which are scheduled to expire in March 2018 and February 2022, respectively. The property reported a Q1 2017 DSCR of 0.60x; however, income from percentage rents paid by tenants, including H&M, was excluded. Despite the fully operational pedestrian bridge, performance remains below stabilization levels. The leasing reserve had an ending balance of $1.4 million as of July 2017, which should facilitate further leasing activity at the property.

The Mark Apartments loan (Prospectus ID#6, representing 4.9% of the pool balance) is secured by a 227-unit multifamily complex in Alexandria, Virginia. Originally completed in 1965, the property was operated as an extended-stay hotel until 2013 when a project to convert the subject to an apartment building began. At issuance, the property was 46.1% occupied, as tenants were being rolled off in order to complete unit renovations. The loan was originally structured with a $9.5 million future funding component, of which $8.9 million was reserved to facilitate the sponsor’s plans to complete the full renovation of the property. As of March 2017, the renovations were near completion with only eight units remaining, and with the future funding component advanced in full to the borrower as of June 2016. The occupancy rate has increased to 70.0% from 46.1% at issuance because of strong leasing momentum as a result of renovated units coming online. According to the March 2017 rent roll, the average rental rate at the property was $1,659 per unit, which is an increase of 40.4% over the average rate at issuance. In addition, in-place rental rates at the subject have surpassed the sponsor’s expectations at issuance, which were anticipated to increase to $1,626 per unit. The subject’s target rental rates are above the current average asking rent for comparable properties in the submarket of $1,536 per unit, according to CoStar. The Q1 2017 reported annualized DSCR is negative at -0.22x, which is attributed to the fluctuating occupancy levels and subsequent decline in rental revenue as a result of the ongoing renovations. DBRS anticipates that property performance will improve given the increased rental rates and as the vacant units are leased up.

The ratings assigned to Class B and Class C Notes materially deviate 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 deviations are warranted given the undemonstrated sustainability of loan performance trends.

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 principal methodology is CMBS North American Surveillance (March 2017), which can be found on dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.