DBRS Morningstar Confirms All Classes of LSTAR Commercial Mortgage Trust 2015-3

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-3 issued by LSTAR Commercial Mortgage Trust 2015-3 as follows:

-- Class A-3 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-C at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class X-A at B (high) (sf)
-- Class X-B at B (high) (sf)
-- Class F at B (sf)

DBRS Morningstar also changed the trends on Classes F, X-A, and X-B to Negative from Stable. The trend remains Stable for the remaining classes

The rating confirmations reflect the overall performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. At closing, this transaction consisted of 62 loans for a total trust balance of approximately $282 million. As of the February 2020 remittance report, the trust balance was $158.2 million, representing a collateral reduction of 43.8% resulting from scheduled amortization and loan repayments leaving 19 of the original 62 loans remaining in the pool. The remaining loans in the pool have a weighted average (WA) balloon loan to value (LTV) of 56.8%. The loans in the top 15 that reported YE2018 financials, collectively representing 99.0% of the pool balance, had a WA debt service coverage ratio (DSCR) of 1.54 times (x) compared with the YE2017 WA DSCR of 1.49x.

The pool also benefits from the strong credit metrics for many of the largest loans, including the largest loan, 101 Redwood Shores, representing 23.4% of the current pool balance. This loan is secured by a 100,328 square foot office property in Redwood City, California. The property was 100% vacant at issuance after the loss of the former single tenant, which continued to pay rent through the February 2019 lease expiry; however, the servicer has confirmed that the building now is 100% leased to a single tenant, Zuora, on a lease term that stretches to 2030, at a favourable rental rate compared with market. The issuance LTV of 61.0% and strong in-place coverage metrics are indicative of a healthy leverage point for the loan, which matures in October 2024.

DBRS Morningstar notes that the second-largest loan in the pool is secured by the Intercontinental Hotel Monterey (Prospectus ID #2; a hotel property representing 23.0% of the pool). This pari passu loan was split into two $36.2 million pieces: one contributed to the subject transaction and the other contributed to the LSTAR Commercial Mortgage Trust 2016-4 transation, also rated by DBRS Morningstar. The collateral is a 208-key full-service hotel in Monterey, California. The loan had an initial IO period of five years and will begin amortizing on a 30-year schedule in April 2020. Based on the amortizing debt service figure, the in-place DSCR at YE2018 was 1.29x with the trailing 12-months ending March 2019 cash flow reported by the servicer suggesting performance was improved over YE2018, largely as a result of reduced expenses. The in-place coverage is in line with the issuer’s underwritten DSCR of 1.28x, but slightly above the DBRS Morningstar DSCR of 1.17x.

Because the ongoing Coronavirus Disease (COVID-19) outbreak has affected hotel traffic in the United States and around the world, the subject hotel has been affected by booking cancellations and overall declines in traffic and room revenues. The property is a newer hotel, constructed in 2008, and benefits from a superior location along the Monterey coastline with spectacular views of the Pacific Ocean. At issuance, DBRS Morningstar noted that the property opened at the start of the financial crisis and was quickly established as one of the dominant hotels in the Monterey market. However, as the coronavirus pandemic has had a swift and widespread negative impact on the hospitality industry, the subject loan’s relatively low DSCR could exacerbate any effect on the subject property’s cash flow over the near to moderate term, supporting the Negative trends . The loan will be closely monitored for developments and, for the purposes of this review, an elevated probability of default scenario was applied.

As of the February 2020 remittance report, eight loans, representing 40.0% of the pool, are on the servicer’s watchlist with two loans, representing 6.9% of the pool, in special servicing. The largest loan in special servicing, Dawson Village (Prospectus ID #9; 6.5% of the pool), was transferred to the special servicer following the loss of the collateral property’s anchor tenant; however, that space has since largely been backfilled and performance is expected to stabilize. Despite these improvements, there are significantly increased risks since issuance for this loan, which was liquidated from the pool in the DBRS Morningstar analysis for this review, resulting in a loss severity of 45.7%.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A, X-B, and X-C are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – 101 Redwood Shores (23.4% of the pool)
-- Prospectus ID#2 – InterContinental Hotel Monterey (23.0% of the pool)
-- Prospectus ID#9 – Dawson Village (6.5% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

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 under Related Documents or by contacting us at [email protected].

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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