DBRS Upgrades Two Classes and Confirms Four Classes of Colony Mortgage Capital Series 2015-FL3, Ltd., Stable Trends

DBRS Limited (DBRS) upgraded two classes of the Floating Rate Notes (the Notes) issued by Colony Mortgage Capital Series 2015-FL3, Ltd., as follows:

-- Class B to AA (sf) from AA (low) (sf)
-- Class C to A (sf) from A (low) (sf)

DBRS has also confirmed the following classes:

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

All trends are Stable. Classes E and F are part of the Non-Offered Notes that were retained by an affiliate of the Issuer.

The rating upgrades 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 20 interest-only floating-rate loans, totaling approximately $477.6 million, secured by 35 transitional commercial and multifamily properties. Three of these loans, representing 31.2% of the issuance cut-off trust balance, were structured with pari passu future funding notes totaling $18.7 million (ranging from $1.4 million to $12.3 million) to be used for renovations and future leasing costs to aid in property stabilization; these notes were structured to remain outside of the trust, held by a loan seller affiliate. Reserves were also established for most loans to fund improvements and/or leasing costs over the life of loans in accordance with their respective stabilization plans.

As of the August 2017 remittance, the transaction consisted of ten loans, with an aggregate principal balance of approximately $267.3 million, secured by 11 commercial and multifamily properties. To date, ten loans have been fully repaid and one loan has been partially repaid (Prospectus ID#10, 3.6% of the pool), contributing to the $154.2 million paydown since issuance, representing a collateral reduction of 44.0%. Two of the remaining loans, representing 30.2% of the current cut-off trust balance, have pari passu future finding notes totaling $13.7 million, of which $11.1 million has been funded to date, leaving $2.6 million to be drawn upon as needed.

The pool is concentrated by loan size, as the largest two and largest five loans represent 45.5% and 80.6% of the current cutoff trust balance, respectively. The pool is also concentrated by property type, as 45.4% of the pool is secured by office properties, whereas 27.1% and 23.5% of the pool is secured by multifamily and retail properties, respectively. All loans, excluding two, which represent 16.0% of the pool, have initial maturity dates scheduled for between April 2018 and August 2018. These loans are all structured with two one-year extension options. The Village at Nellie Gail Ranch (Prospectus ID#5, 12.4% of the pool) and the Woodfield Office Portfolio (Prospectus ID#10, 3.8% of the pool) loans have initial maturity dates scheduled for August 2017 and January 2018, respectively; however, the servicer has confirmed that the Village at Nellie Gail Ranch will extend its current loan by one year through August 2018, leaving both loans with two one-year extension options available.

As of the August 2017 remittance, there are four loans, representing 30.8% of the pool, on the servicer’s watchlist. The largest on the servicer’s watchlist, Village at Nellie Gail Ranch, was flagged due to near-term maturity, which is no longer applicable given the pending loan extension. The remaining three loans, representing 18.4% of the pool, were flagged due to performance-related reasons. These three loans are current; however, the properties are still in the process of stabilization. Overall, the performance of the remaining underlying loans has been stable, with select loans exhibiting performance improvement in excess of DBRS expectations at issuance.

The largest loan in the pool, the Cleveland Office Portfolio (Prospectus ID#1, 26.8% of the pool), is secured by two Class A office buildings, One Cleveland Center (OCC) and the AECOM Center (AECOM; formerly known as the Penton Media Building), located in downtown Cleveland, Ohio. The buildings were originally constructed in 1983 and 1972, respectively, and total 1.15 million square feet (sf). The trust loan of $71.7 million ($63 per square foot (psf)) refinanced existing debt on the properties for the borrower, with $3.5 million of equity contributed at close. The future funding commitment for this loan is a $12.3 million pari passu note held outside of the trust, bringing the fully-funded senior loan amount to $84.0 million ($73 psf). The future funding serves primarily to aid in new and renewal leasing costs. As of August 2017, the total amount drawn on the future funding commitment was $9.7 million, with $2.6 million remaining in addition to $1.3 million in reserves.

At issuance, the portfolio had an occupancy rate of 62.6%, as the borrower was beginning to implement a stabilization plan focused on leasing the properties up to market levels of approximately 80.0%. According to the June 2017 rent rolls, the portfolio was 75.3% occupied with an average rental rate of $17.26 psf, above the issuance rate of $16.67 psf. At this time, OCC and AECOM were 84.6% and 64.8% occupied, respectively, compared with 71.2% and 67.5% at issuance, respectively. According to CoStar, however, the properties are currently 80.5% occupied, combined with asking rental rates ranging between $18.00 psf and $22.00 psf, compared with Class A properties within the Cleveland CBD submarket, which reported an average vacancy and rental rate of 19.3% and $18.85 psf as of Q2 2017, respectively. CoStar currently displays OCC and AECOM as 88.6% and 75.3% occupied, respectively.

Within the last 12 months, a number of tenants have either renewed, extended or signed new leases, totaling 124,799 sf (10.9% of the portfolio’s net rentable area (NRA)). The three largest lease renewals include Baker & Hostetler (3.5% of the portfolio’s NRA, through November 2026), PR Newswire Association, LLC (2.5% of the portfolio’s NRA) and Buckingham Doolittle (2.4% of the portfolio’s NRA, through October 2028). Buckingham also expanded its space by 8,434 sf. The three largest tenants to sign new leases include Meaden & Moore, LLP (1.7% of the portfolio’s NRA, through March 2019), American Heart Association (1.0% of the portfolio’s NRA, through August 2027) and Hickman & Lowder Co., LPA (0.9 % of the portfolio’s NRA, through October 2021). Most tenants that renewed, extended or signed new leases typically received between four and 12 months of rental abatements and tenant improvement allowances ranging from $30.00 psf to $55.00 psf. Within the next 12 months, 21 tenants, combining to occupy 14.5% of the portfolio’s NRA, will have lease expirations. The largest of these tenants is HWH Architects Engineering Planners (2.4% of the portfolio’s NRA, through October 2017), which has confirmed it will vacate at lease expiration.

The loan most recently reported a T-12 net cash flow (NCF) of $5.0 million ending in December 2016, down from the T-12 NCF of $5.2 million ending in June 2016 and below the DBRS stabilized figure of $6.3 million; however, DBRS expects that this figure is depressed, as the reporting period does not recognize many of the newly signed tenants and revenue is depressed, given the rental abatements in place.

The ratings assigned to Class D materially deviate from the higher rating 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 uncertain loan level vent risk.

For more information on these rating actions, please contact us at 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 principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies.

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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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