DBRS Upgrades Four Classes and Confirms Three Classes of Resource Capital Corp. 2015-CRE3, Ltd.

DBRS Limited (DBRS) upgraded the rating of four Floating Rate Notes (the Notes) issued by Resource Capital Corp. 2015-CRE3, Ltd. as follows:

-- Class B to AA (sf) from AA (low) (sf)
-- Class C to AA (low) (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (low) (sf)
-- Class E to BB (sf) from BB (low) (sf)

In addition, DBRS has confirmed the ratings of the following Notes:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class F at B (low) (sf)

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

The rating upgrades reflect the increased credit support to the bonds as a result of successful loan repayment and the improved performance outlook for a portion of remaining loans in the pool. At issuance, the collateral consisted of 20 floating-rate mortgage loans secured by 20 transitional commercial, multifamily and hospitality properties. As of the September 2017 remittance, ten loans have repaid, including the recent payoff of the Addison Park Apartments loan, which had an outstanding principal balance of $8.2 million. Based on recently reported financials and occupancy rates, many of the remaining collateral properties have reached stabilization, as the borrowers have successfully executed their respective business plans. Six of the remaining loans are pari passu participations that have future funding components to be allocated for property renovations and/or leasing costs to aid in property stabilization. As of the September 2017 remittance, there are no loans in special servicing and eight loans on the servicer’s watchlist, representing 81.4% of the fully funded pool balance. The two most pivotal loans on the servicer’s watchlist are detailed below.

The Betsy Hotel loan (Pros ID#2, 23.3% of the fully funded pool balance) is secured by a 136-key hotel located in South Beach’s Art Deco District in Miami, Florida. The loan was originally secured by two hotels, the 61-key Betsy Hotel (the Betsy) and the 67-key Carlton Hotel South Beach (the Carlton). Following the completion of an extensive $16.0 million renovation to the Carlton in December 2016 which began in March 2015, the two hotels were conjoined to operate as one property named “The Betsy.” At issuance, the sponsor’s business plan included plans to take the Carlton property offline for renovations to renew the interiors and common areas to match the Betsy. The loan was added to the watchlist as a result of the ongoing renovations at the property throughout 2015 and 2016, which contributed to a decline in cash flow. In addition, the loan is on the watchlist due to its upcoming maturity in November 2017; however, according to the servicer, the borrower has stated its intention to extend the loan for an additional year.

According to the sponsor, the property has received a uniformly positive reception since its grand reopening in December 2016, as the property was selected by Condé Nast Traveler as one of only three gold list hotels in Florida as of January 2017. In addition, the hotel has hosted several large events for hundreds of attendees, such as the CREFC conference and Auction.com/TEN-X events. The sponsor has anticipated strong performance throughout 2017, with top-line revenue budgeted at $31.7 million, a two-fold increase compared to the revenue figure for 2015, when the subject operated as two distinct properties. According to the July 2017 Smith Travel Research (STR) report, the Betsy continues to perform above or in line with its competitive set, with occupancy, average daily rate and revenue per available room metrics of 78.3%, $319.72 and $250.29, respectively. Although the loan reported a YE2016 debt service coverage ratio (DSCR) of -1.25 times (x), which was a further decline from the YE2015 DSCR of -0.43x, DBRS expects cash flows to improve as the renovations have been completed, with all 136 units online and available for booking. According to the June 2017 borrower update, the property was on the market and received a number sales offers in the range of $1.0 million per key, reflective of a 208% increase compared with the issuance value of $65.4 million. The loan remained current during the renovation period, as there was a debt service reserve to fund shortfalls throughout the renovations, which has been exhausted as of September 2017.

The Parkway Square Shopping Center loan (Pros ID#17, 5.3% of the fully funded pool balance) is secured by a community shopping center located in College Station, Texas, approximately two miles south of Texas A&M University. The sponsor has owned the property since 2004 and contributed $1.28 million in cash to close the subject loan. The property is situated along an established retail corridor and was formerly anchored by Kroger (29.5% of the net rentable area); however, the tenant vacated ahead of its lease expiration of September 2016. As such, the June 2017 rent roll shows that occupancy has declined to 67.4% compared with 87.1% at issuance. Kroger was paying a low gross rental rate of $4.00 per square foot (psf), with no common area maintenance charges billed. At issuance, the appraiser had estimated a base rental rate of approximately $6.50 psf for the space, indicating potential upside if Kroger were to vacate. According to CoStar, properties within a five-mile radius of the subject reported an average rental rate of $9.70 triple net, a vacancy rate of 12.7% and an availability rate of 16.5% compared with the subject’s average rental rate of $8.27 psf and vacancy rate of 32.6% as of June 2017.

The borrower has advised that a lease has been executed with Cornerstone Fitness for the formerly occupied Kroger space; however, DBRS was unable to confirm this with the servicer. Reportedly, as of August 2017, the borrower is completing the build-out, as the tenant will be paying an above-market rental rate of $12.25 psf once it is in possession of the space. DBRS has reached out to the servicer to confirm a lease commencement date for the tenant. As a result of Kroger’s departure from the subject, the loan reported a Q2 2017 DSCR of 0.76x, which has further declined from the YE2016 DSCR of 1.05x and the YE2015 DSCR of 1.23x. The loan was structured with an initial future funding commitment of $2.3 million, with approximately $1.2 million remaining as of September 2017. Those remaining funds may only be drawn for tenant improvements and leasing commissions related to re-tenanting Kroger’s space. The terms of release require that the loan is able to achieve a loan-to-value ratio no higher than 70.0% based on a new appraised value at the time of the draw. DBRS will continue to monitor the loan for developments surrounding the Cornerstone Fitness space.

The rating assigned to Class F materially deviates 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 sustainability of loan performance trends is not demonstrated.

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, which can be found on dbrs.com under Methodologies.

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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