DBRS Confirms Ratings on RAIT 2016-FL6 Trust

DBRS Limited (DBRS) confirmed the ratings on the following classes of Floating Rate Notes issued by RAIT 2016-FL6 Trust:

-- 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 (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

All trends are Stable.

The rating confirmations reflect that the performance of the transaction remains in line with DBRS’s expectations since issuance. At closing, the collateral consisted of 23 floating-rate loans secured by 33 transitional commercial properties. As of the November 2017 remittance, 15 loans remain in the pool, representing a collateral reduction of 37.4% since issuance. Two of the remaining loans, representing 29.0% of the current cut-off trust balance, were structured with pari passu future funding notes. These funds are to be used for property renovations and future leasing costs to aid in property stabilization.

Overall, the performance for the underlying loans has been as expected, with select loans showing improvement over DBRS’s expectations at issuance. Based on the most recent financial reporting for the remaining loans, the pool has a weighted-average debt yield of 7.5%, which is relatively healthy for a pool of loans secured by stabilizing properties. There are currently no loans on the servicer’s watchlist or any delinquent or specially serviced loans. The first- and third-largest loans in the transaction are highlighted below.

The Montague Business Center loan (19.0% of the current pool balance) is secured by a 146,000 square foot (sf) mixed-use property located in San Jose, California, consisting of the 55,100 sf Plumeria office building and the 91,000 sf Junction industrial building. The $30.7 million whole loan consists of a $24.1 million initial mortgage loan and $6.6 million of future funding for tenant improvements and leasing commissions (TI/LC), which have been force funded by the lender in July 2017. Loan proceeds, along with sponsor equity of $11.5 million, facilitated the acquisition of the property and, in addition to the $6.6 million of future funding, funded a $2.8 million capital expediture (capex) reserve, a $621,000 debt service reserve and covered closing costs. Additionally, there is a $542,000 property-assessed clean energy loan that covered HVAC and roof improvements on the Plumeria building.

At issuance, the collateral was 62.0% occupied by the County of Santa Clara (the County), which fully leases the Junction building through December 2020, at a rental rate of $14.40 triple net (NNN). The Plumeria building was vacant at issuance as the sponsor planned to utilize the $2.8 million capex reserve to renovate the interior and exterior of the building. At issuance, $600,000 of the $2.8 million was unfunded; however, according to the servicer, the upgrades were completed in March 2017, and since then the sponsor has been marketing the space for lease.

According to the October 2017 asset summary report, the borrower signed a lease to a single tenant at the Plumeria building with a lease commencement date of February 2018; however, rental payments will not commence until September 2018. The report does not provide the name of the tenant, the lease terms or the TI package provided to the tenant; however, it does note that the contractual rental rate is above the issuer’s assumed rental rate for the space at issuance of approximately $18 per square foot (psf). According to the most recent monthly reporting, the $6.5 million TI/LC reserve has yet to be drawn upon by the borrower; however, it is likely funds will be utilized in conjunction with the new lease. DBRS has requested the new tenant’s lease terms, TI package provided and the balance of the leasing reserve once all costs to the new tenant are considered.

In addition to the renovation of the Plumeria building, the sponsor’s business plan also consisted of two strategies at issuance. The first option would entail negotiating with the County to terminate its lease early and assist in the relocation to a more suitable industrial building in the area. The sponsor agreed to cover moving costs of up to roughly $125,000 if the tenant obliges. Once successful, future funding would allow the sponsor to convert the Junction building to modern office/research and development (R&D) space. Prior to a termination of the County’s lease, a new approved lease for a replacement tenant would need to be in place. The second option involved the County moving into the renovated Plumeria building as the tenant had expressed interest in moving some of its operations to the building as it was in need of more space. As the borrower has signed a lease with a new tenant at the renovated building, this option is no longer viable. DBRS has requested an updated business plan from the servicer regarding the current strategy for the Junction building.

According to CoStar as of November 2017, flex R&D properties in the Plumeria Drive submarket reported an average rental rate of $24.51 psf, vacancy rate of 21.2% and availability rate of 20.1%, while office properties in the submarket reported an average rental rate of $27.63 psf, vacancy rate of 31.3% and availability rate of 28.3%. The subject compares favorably in terms of occupancy as the subject is now 100% leased.

The Lakeshore Business Center loan (10.0% of the current pool balance) is secured by a four-building office complex in Fort Lauderdale, Florida, encompassing a total of approximately 235,000 sf. Loan proceeds of $14.4 million, along with $6.2 million of sponsor equity and $1.8 million of future funding, were used to facilitate the sponsor’s acquisition of the property, fund a $1.8 million TI/LC reserve, fund a $800,000 capex reserve and cover closing costs.

At issuance, the collateral was 57.2% occupied as the sponsor’s business plan was to lease up the vacant space over the three-year loan term and to increase the desirability of the asset by renovating the common areas, the exterior and vacant suites. According to the October 2017 rent roll, the subject was 65.2% occupied with the majority of the new leases executed at rental rates ranging from $13.50 psf to $15.50 psf. One new tenant, On Rite Company, Inc., executed a lease starting in February 2018 and will occupy 14.7% of the net rentable area (NRA) and pay a below-market rental rate of $8.72 NNN, becoming the largest tenant at the subject and bringing occupancy up to 79.9%. It is uncertain if the tenant was granted an abatement period and the amount of TI allowance given. As such, DBRS has requested the details of any leasing package provided and contractual rent steps. At issuance, DBRS had expected the On Rite Company, Inc.’s space to be leased at the market rental rate of $13.25 psf. The second-largest tenant, ECI Telecom, Inc., increased its footprint to 10.3% of NRA, from 5.8% of the NRA at issuance and is currently paying a rental rate of $17.80 psf, an increase from issuance of $16.80 psf.

According to CoStar, office properties in the Cypress Creek submarket reported an average vacancy rate of 13.2% and an availability rate of 17.6%. As the subject still trails the submarket in terms of occupancy, there is potential leasing upside. Per the October 2017 asset summary report, approximately $311,000 out of the $800,000 capex reserve has been spent to date on the installation of new restrooms and upgrades to existing restrooms. DBRS has also requested an updated balance of the leasing reserve after any funds earmarked for all new leasing activity has been considered.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate initially, 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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