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

All trends are Stable.

The transaction performance remains generally in line with DBRS Morningstar’s expectations at last review, when Classes E, F, X-A, and X-B were upgraded. The pool has paid down significantly over the last few years, supporting upgrades to multiple classes as part of surveillance reviews between 2021 and 2022. In addition to the significant paydown, the transaction also benefits from the overall healthy performance of the remaining loans. In addition, the pool’s second-largest loan, with approximately 35.0% of the transaction balance, is collateralized by a hotel that is reporting significant cash flow growth over the issuance figures. That loan’s repayment at the 2025 maturity would nearly cover the current balance of the three most senior rated classes. These factors support the rating confirmations and Stable trends with this review. DBRS Morningstar does note that there are challenges for the transaction’s largest loan, 101 Redwood Shores (Prospectus ID #1; 36.9% of the pool), as well as the largest watchlisted loan, as further outlined, below. The unrated first loss piece in this transaction (Class G) has a balance of $20.0 million, a significant amount to absorb potential losses if the challenged loans ultimately default at or before maturity and are liquidated from the pool.

As of the July 2023 remittance, eight of the original 62 loans remain in the pool, with a trust balance of $100.2 million, representing a collateral reduction of 64.4% since issuance. The five largest remaining loans are scheduled to mature in 2024 and 2025, with the three smallest loans scheduled to mature in 2035 and 2036. Two loans, representing 23.5% of the pool, are on the servicer’s watchlist. There are no loans in special servicing, nor are any loans delinquent on debt service payments.

The 101 Redwood Shores loan is secured by a 100,328-square foot (sf) office property in Redwood City, California. Per the May 2023 rent roll, the property was solely occupied by Zuora with lease expiration in January 2030. At issuance, Perfect World Entertainment was the sole tenant of the property, occupying half of its space and subleasing the remainder to seven other tenants. However, after Perfect World's lease expired in February 2019 and all subtenants vacated, the space was subsequently re-leased to Zuora in January 2020 at a rental rate of $58.35 per square foot (psf). An online listing by Jones Lang La Salle located in August 2023 for the property showed the full 100,328 sf space is being marketed for sublease. The space was showing “immediately” available, suggesting Zuora, a software company that went public in 2018, has gone dark. DBRS Morningstar has requested an update from the servicer, and as of the date of this press release, the servicer’s response is pending. The tenant’s lease doesn’t expire for another seven years and according to a Forbes article from April 2023, the company’s Q4 2022 results indicated improved performance, but still reported an operating loss overall.

Per Reis, the South San Mateo submarket reported a Q1 2023 vacancy rate of 14.6%, with an effective rental rate of $53.28 psf; the reported vacancy rate is down when compared with the Q1 2022 vacancy rate of 17.3% and the Q1 2021 vacancy rate of 19.0%. As of the YE2022 financials, the subject property reported YE2022 net cash flow (NCF) of $4.9 million, compared with the YE2021 NCF of $5.3 million. Although cash flows declined slightly year over year, the in-place figure remains well above the DBRS Morningstar NCF of $2.9 million derived at issuance. Although Zuora’s lease runs for another seven years, the loan’s 2024 maturity date could be further complicated if the tenant’s space is dark or largely underutilized. The loan-to-value ratio (LTV) based on the issuance appraisal of $61.0 million is low, at 60.7%, but the as-is value has likely fallen significantly over the last few years given the general challenges for office properties, particularly those in and around the San Francisco area, such as the subject.

The second-largest loan in the pool, InterContinental Hotel Monterey (Prospectus ID #2; 34.4% of the pool), is secured by a 208-key full-service hotel in Monterey, California. According to the March 2023 STR report, the trailing twelve months (T-12), ended May 31, 2023, occupancy rate, average daily revenue (ADR), and revenue per room (RevPAR) were reported at 71.4%, $423.45, and $302.25, respectively, compared with the T-12 ended May 31, 2022, figures of 75.7%, $418.30, and $316.4. According to the YE2022 financials, the property reported NCF of $8.2 million, compared with the YE2021 NCF of $7.4 million and the DBRS Morningstar NCF derived at issuance of $5.4 million. The property is in a unique setting along Monterey Bay with high barriers to entry, a likely contributor to the strong performance in recent years. The loan is scheduled to mature in 2025. The LTV on the issuance appraised value of $108.2 million is low, at 63.8%, but DBRS Morningstar expects the value has likely significantly increased since that time based on the cash flow growth, suggesting a refinance at maturity is likely.

The fourth-largest loan and the second-largest loan on servicer’s watchlist, Hudson River Commons (Prospectus ID #10; 9.2% of the pool balance), is secured by a 129,190-sf retail property in Troy, New York. The loan was added to the servicer’s watchlist after the property’s second-largest tenant, Save A Lot, went dark in January 2022. The tenant represents 11.0% of the net rentable area (NRA) and has a lease that runs through December 2027. The tenant continues to pay rent, according to the servicer, and the loan remains in cash management. The property’s March 2023 rent roll showed a lease rate of 94.4%, with a physical occupancy rate of 83.3%. Occupancy is down from 88.0% at YE2021 and 100% at issuance. The property is anchored by Big Lots (28.8% of NRA; lease expiry in January 2025), and there is minimal tenant rollover risk through the next year. The in-place cash flows are generally just enough to cover the debt service, with the servicer reporting a YE2022 debt service coverage ratio (DSCR) of 1.14 times (x). Comparatively, the YE2021 DSCR was 1.31x.

The loan’s maturity is essentially coterminous with the Big Lots lease expiration in January 2025. DBRS Morningstar has requested a leasing update on Big Lots, and the servicer’s response is pending. The LTV implied by the issuance appraisal is reasonable, at 68.0%, but the dark grocery tenant and the decline in in-place cash flows from issuance suggest the as-is value has likely declined since the loan closing. If Big Lots does not renew, that would obviously present an additional factor to depress the value on an as-is basis. The property does benefit from its central location within Troy, a suburb of Albany. Other national tenants include Family Dollar, Rainbow, Starbucks, and Enterprise Rent-A-Car.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, and X-C are 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only 8 loans, remaining loans. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model Version 1.1.0.0 (March 16, 2023) https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022) https://www.dbrsmorningstar.com/research/407577

Legal Criteria for U.S. Structured Finance (December 7, 2022) https://www.dbrsmorningstar.com/research/407008

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022) https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023) https://www.dbrsmorningstar.com/research/415687

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/417279.

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