DBRS Upgrades Five Classes of RAIT 2015-FL5, Changes Trend to Positive on One and Confirms One

DBRS, Inc. (DBRS) upgraded the ratings of five Floating Rate Notes issued by RAIT 2015-FL5 Trust:

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

In addition, DBRS confirmed the rating of the following note:

-- Class A at AAA (sf)

Furthermore, DBRS changed the trend on Class D to Positive from Stable. Trends on the remaining classes remain Stable. DBRS does not rate the first loss piece or notional class, Class G and Class X, respectively.

The rating upgrades and Positive trend change reflect the increased credit support to the bonds as a result of successful loan repayments and the improved performance outlook for a majority of the remaining loans in the pool.

At issuance, the collateral consisted of 31 floating-rate loans secured by 35 transitional commercial properties. As at the November 2017 remittance, 19 loans remain in the pool, with an aggregate outstanding principal balance of $207.4 million, representing a collateral reduction of 40.3% since issuance because of both scheduled and unscheduled loan repayment. One of the remaining loans (11.4% of the current cut-off trust balance) was structured with a future funding component to be used for property renovations and future leasing costs to aid in properties’ stabilization; the servicer reports that the note has been fully funded. In addition, most of the loans were structured with initial reserves to be used toward similar business plans.

In comparison with DBRS’s expectations at issuance, the majority of properties are progressing with their respective business plans with improved financial outlooks since issuance. Based on the servicer’s most recent annualized net operating income (NOI) figure ended May 31, 2017, the 19 remaining loans displayed a weighted-average (WA) improvement of 8.7% over the issuer’s in-place figure for those loans.

As at the November 2017 remittance, all loans in the pool are current and there are no loans on the servicer’s watchlist. The pool is concentrated by both loan size and property type, as the largest ten loans represent 72.2% of the current cut-off trust balance, while six loans are secured by retail properties, representing 36.8% of the current cut-off trust balance. Only one loan, representing 2.8% of the current cut-off trust balance, is secured by a property located in a tertiary market, as the rest of the pool is secured by properties located in urban or suburban markets. To date, properties secured by the three largest loans, representing 34.8% of the current cut-off trust balance, have experienced WA occupancy growth of 21.0% over in-place figures at issuance and currently have a WA occupancy rate of 92.5%. The second-largest loan, exhibiting the lowest occupancy of the three at 87.9%, is highlighted below.

The Mountain Towers loan (Prospectus ID#5; 11.4% of the current cut-off trust balance) is secured by a 209,817-square-foot (sf) office property located in Glendale, Colorado. Originally constructed in 1984, the 19-storey tower received approximately $2.0 million in capital improvements between 2005 and issuance. Loan proceeds of $23.6 million, along with $4.4 million of sponsor equity, facilitated the borrower’s acquisition of the property; established a $2.6 million future funding component (held outside of the trust) to be used for tenant improvements and leasing commissions (TIs/LCs); funded a $1.4 million capital improvement reserve; and covered closing costs.

According to the August 2017 management report, the planned $1.4 million in capital improvements are complete and, per the loan agreement, the future funding note was force funded into the TI/LC reserve on March 3, 2017. As at November 2017, all reserves have been fully utilized.

At issuance, the collateral was 72.5% occupied with an average rental rate of $21.41 per square foot (psf). The sponsor’s business plan included the renovation of common areas (with a focus on the lobby and corridors) and the improvement of all vacant space to marketable conditions. Thereafter, the sponsor’s hope was to stabilize the property at an occupancy rate of 95.0% by leasing to future tenants with asking rental rates between $23.00 psf and $25.00 psf. As at the August 2017 rent roll, the property had an occupancy and average rental rate of 84.6% and $15.27 psf compared with 80.9% and $21.34 psf in August 2016. However, at this point in time, six tenants (16.7% of the net rentable area (NRA)) were receiving rent-free periods. Factoring in the future rental rates of these six tenants (approximately $24.00 psf), the subject would have had an average rental rate of $22.80 psf.

The three largest tenants at the subject, representing 41.0% of the NRA, include the Department of Veterans Affairs (Department of VA; 27.0% of the NRA, with various lease expirations); EDCare (9.0% of the NRA, through December 2026); and Closetbox, Inc. (Closetbox; 5.0% of the NRA, through July 2019). According to the August 2017 management report, the Department of VA (currently occupying approximately 58,000 sf) was in negotiations for 14,000 sf (6.6% of the NRA) of its space and had vacated 12,600 sf (6.0% of the NRA) of its space since issuance. Per the August 2017 rent roll, the 14,000 sf space that the Department of VA occupied was month to month. The tenant’s largest space represents 21.4% of the NRA and extends through September 2024. The two largest tenants to sign leases since issuance have been EDCare (8.8% of the NRA, through December 2026) and Closetbox (5.5% of the NRA, through July 2019), which took occupancy in December 2016 and August 2016; both received initial rent-free periods. To date, the rent-free periods for EDCare and Closetbox have burned off, and the tenants pay in-place rental rates of $25.00 psf and $20.29 psf, respectively. Closetbox’s lease is structured with contractual rental-rate increases. Per Costar, other comparable office properties in the Glendale submarket reported average vacancy and gross rental rates of 9.1% and $24.69 psf, respectively. Prior to YE2018, only four tenants, representing 5.3% of the NRA, will have lease expirations.

As at Q2 2017, the loan had an annualized NOI of $1,678,741 compared with the DBRS Stabilized NOI of $1,949,248. However, given the recent leasing activity at the subject and limited near-term rollover, DBRS anticipates the loan to stabilize in the near future, which is on target with its 2.5-year goal. DBRS has requested leasing updates and TI allowances for newly signed tenants and will provide an update when more information has been received.

The ratings assigned to Classes C and D 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 structural features (loan or transaction) and/or provisions in other relevant methodologies outweigh the quantitative output of the multi-borrower parameters. Specifically, advancing is limited to Classes A and B of the transaction.

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 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.

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 rated entity or its related entities did participate initially in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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