DBRS Confirms Ratings of RFT 2015-FL1 Issuer, Ltd., Stable Trends

DBRS Limited (DBRS) confirmed the ratings of three Floating Rate Notes (the Notes) issued by RFT 2015-FL1 Issuer, Ltd. (the Issuer) as follows:

-- Class A Senior Secured Floating-Rating Rate Notes at AAA (sf)
-- Class B Second Priority Secured Floating-Rate Notes at A (high) (sf)
-- Class C Third Priority Secured Floating-Rate Notes at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the 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 28 interest-only floating-rate loans totaling approximately $428.4 million, secured by 28 transitional commercial and multifamily properties. As of the September 2017 remittance, 18 loans remain in the pool, reporting an outstanding cut-off trust balance of $322 million. Fifteen of the remaining loans, representing 88.1% of the current cut-off trust balance, were structured with pari passu future funding notes, with a total of $33.9 million remaining (ranging from $100,000 to $10.4 million). These funds are to be used for property renovations and future leasing costs to aid in property stabilization. These notes will remain outside of the trust. Additionally, some of the loans in the trust are cash-managed, with reserves also funded upfront and/or on a monthly basis for all loans to fund capital expenditures and leasing costs for the collateral properties. There are no loans in special servicing and only one loan on the servicer’s watchlist, representing 3.6% of the current balance.

Overall, the performance of the underlying loans has been expected, with select loans that continue to perform below their respective stabilization plans. The two largest loans in the pool based on the fully funded balances are discussed below.

The transaction is concentrated, as the largest loan in the pool represents 12.7% of the fully funded pool balance based on the fully funded loan amount. This loan, Public Ledger Building, is secured by a 500,000 square foot (sf) office building located in the central business district of Philadelphia, Pennsylvania. The trust loan of $45.1 million ($84 psf) along with $11.4 million of cash equity financed the borrower’s acquisition of the subject property. Initial funding is supplemented by a future funding commitment of $4.7 million (bringing the fully funded senior loan amount to $49.8 million, or $93 psf), which is to be used to complete capital improvements to the ground-floor and common areas and to fund tenant improvements and leasing costs. As of June 30, 2017, the loan reported a trailing 12-month (T-12) net cash flow (NCF) figure of $1.6 million, which is a decline from the borrower’s budgeted amount and YE2016 figure of $2.4 million. The decline has been mainly driven by low revenue, as occupancy continues to be depressed. As of Q2 2017, the subject was 68.0% occupied, which has remained unchanged since issuance but is expected to further decline to approximately 43.0% by YE2017 with the eventual departure of two tenants: GSA/Medicare (22.6% of NRA) and Treatment Research (3.0% of NRA). GSA/Medicare will be vacating the subject at YE2017, ahead of its April 2018 lease expiration, and is not required to pay a termination fee. Treatment Research had a lease expiration of October 2018 and the sponsor is currently in discussions with the tenant on the termination fee. According to the Q2 2017 servicer update, the borrower continues to work with current tenants to maximize the entire leasable space by relocating or expanding tenant footprints where possible.

A cash flow sweep was triggered in September 2016 when the DSCR fell below the 1.20 times (x) threshold, and as of September 2017 the current balance of the cash management account was $97,360. Although the developments with the GSA and Treatment Research leases are setbacks to the borrower’s business plan, the overall level of activity at the subject, which is in the middle of a significant redevelopment, appears favorable in the long term. According to CoStar, office properties larger than 100,000 sf located in the Independence Hall Philadelphia submarket reported an average rental rate of $28.31 psf, a vacancy rate of 15.2% and an availability rate of 22.9%, compared with the Q2 2016 submarket averages of $25.60 psf, 12.2% and 21.9%, respectively. Given the general stability of the submarket, the borrower’s significant cash equity investment at issuance and the remaining $4.5 million of future funding component to fund leasing costs, DBRS has maintained its outlook on the subject loan.

The second-largest loan, 3 Gateway Center, represents 13.5% of the fully funded pool balance and is secured by a 19-story office building in Newark, New Jersey. The initial subject loan of $34.5 million ($72 psf), along with $10.2 million of borrower equity, funded the acquisition of the property. The future funding commitment (bringing the fully funded senior loan amount to $53.0 million, or $111 psf) is to be used for capital improvements and to fund tenant improvements and leasing costs. At issuance, the property was 68.7% occupied; however, it was known that Prudential was downsizing its space to 40.0% of the NRA in conjunction with a lease extension to October 2025. As a result, the Q2 2017 occupancy rate was 58.2%. Two tenants, PLM Trailer and Hello Fresh (collectively representing 4.8% of the NRA), executed long-term leases in 2016 at a rental rate of $30.00 psf. These tenants were given extensive leasings packages, which consisted of a tenant improvement allowance of $40 to $45 psf with seven to ten months of abated rent. According to the servicer, the property continues to exhibit positive leasing traction as the borrower is currently in discussions with two prospective tenants requiring 2,000 sf to 10,000 sf of space. Additionally, a potential tenant with a requirement for 25,000 sf has expressed its interest at the property and has recently toured the subject. According to CoStar, office properties larger than 100,000 sf located in the Northern New Jersey-Newark submarket reported an average rental rate of $33.98 psf, a vacancy rate of 14.9% and an availability rate of 15.8%, compared with the Q2 2016 submarket averages of $29.22 psf, 14.7% and 15.9%, respectively.

To date, completed capital improvements include the cooling tower replacement, upgraded building management systems, renovations to restrooms and upgrades of the lobby and common areas. The final project is the elevator modernization, which was anticipated to be completed by end of September 2017, exhausting the $4.2 million capital improvement reserve. Considering the renovations’ completion, positive leasing momentum, significant cash equity investment at issuance and the remaining $10.5 million of future funding component to fund leasing costs, DBRS has maintained its outlook on the subject loan.

With respect to the deferrable notes (Class B and Class C), to the extent that interest proceeds are not sufficient on a given payment date to pay accrued interest, interest will not be due and payable on the payment date and will instead be deferred and capitalized. The ratings assigned by DBRS contemplate the timely payments of distributable interest and, in the case of deferred-interest notes, the ultimate recovery of deferred interest (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law).

The rating assigned to Class B materially deviates from the higher ratings implied by the quantitative model. 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 model that is a substantial component of a rating methodology; in this case, the assigned rating reflects the sustainability of loan performance trends not demonstrated in addition to the transaction’s structural features, which constrain the quantitative model output.

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.

The principal methodology is CMBS North American Surveillance.

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

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.

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