Fitch Downgrades One Distressed Class of MSCI 2005-HQ5; Revises Outlook
KEY RATING DRIVERS
The downgrade reflects a greater certainty of loss from the specially serviced assets. Fitch modeled losses of 48% of the remaining pool; expected losses on the original pool balance total 5.7%, including $57.7 million (3.8% of the original pool balance) in realized losses to date.
As of the September 2015 distribution date, the pool's aggregate principal balance has been reduced by 96% to $61 million from $1.52 billion at issuance. Of the original 89 loans, the pool is concentrated with seven loans remaining. As of the September 2015 remittance report, with the exception of the largest loan, the GPT Portfolio, the remaining loans in the pool were in special servicing (71.5% of pool). Cumulative interest shortfalls totaling $3 million are currently impacting classes H through Q.
The largest loan in the pool, the GPT Portfolio, is secured by three office properties totaling 100,300 sf located in Baton Rouge, LA, Charleston, SC, and Bakersfield, CA. These properties are fully occupied by GSA with leases expiring in June and July 2019 and March 2021. The loan matures in March 2020.
The largest contributor to Fitch-modeled losses is the Richmond Square Mall asset (19.5% of pool), which is comprised of 307,697 square feet of a 392,572 square foot (sf) regional mall located in Richmond, IN. The loan was transferred to special servicing in February 2014 for imminent default. Collateral occupancy continues to decline year-over-year since issuance. As of the June 2015 rent roll, collateral occupancy was 59.9% compared to 64% at Fitch's last rating action as of the October 2014 rent roll, 68% at year-end (YE) 2013, 98% at YE 2012, and 95% at issuance. The decline in collateral occupancy between 2012 and 2013 was primarily due to Sears (23% of the collateral sf) vacating one of the anchor boxes at the property in August 2013. The existing mall anchors include Dillard's, which owns its own pad, and JCPenney (26% of collateral sf; lease expiration in May 2016). Other large tenants include Office Max (7.4%) and MCL Cafeteria (3.7%). Near- to immediate-term lease rollover includes 2% in 2015, 31% in 2016, and 13% in 2017. There has been limited leasing momentum with re-tenanting of the former Sears space or any other spaces at the property. The property is located in a tertiary market with limited appeal to mall retailers. Foreclosure occurred in July 2015. The special servicer expects to market the asset for sale. Recent appraisal valuations indicate significant losses upon liquidation.
The next largest contributor to Fitch-modeled losses is the Corporate Center loan (8.1%). The loan is secured by a 109,065 sf office property located in Phoenix, AZ. The loan has been transferred to special servicing twice; first in November 2012 and most recently in August 2014, both times due to imminent default. The property was 100% occupied until April 2013 when the largest tenant, Humana Health Plan (58% of total sf), vacated at its lease expiration. The loan was modified in May 2013, whereby the loan was bifurcated into a $6 million A-note and $4.1 million B-note and the maturity date was extended to March 2016. At the time of the modification, the borrower also funded $2.5 million of new equity, the majority of which was allocated for tenant improvement and leasing commission. In May 2015, property occupancy dropped further to a mere 5.4% when another large tenant, Corinthian College (37% of total sf), filed bankruptcy and vacated. The special servicer indicated occupancy has recently increased to approximately 60% with the signing of a new 10-year lease with Avesis. The loan was returned to the master servicer on Sept. 17, 2015.
Fitch revised the Rating Outlook on class E to Stable from Negative due to the senior payment priority in the capital structure and expected continued paydown. Upgrades were not considered due to pool concentration and adverse selection. The Negative Outlook on class F reflects the uncertainty surrounding the timing and ultimate resolution of the specially serviced assets in the pool. A downgrade is possible if there is a lack of progress on working out and liquidating the specially serviced assets. In addition, the master servicer has made an indication it will likely reimburse outstanding advances as payoff funds are received, which may impact principal distributions. Distressed classes (those rated below 'Bsf') may be subject to downgrades as losses are realized or if realized losses exceed Fitch's expectations.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.
Fitch has downgraded the following class:
--$13.3 million class H to 'Csf' from 'CCsf'; RE 0%.
In addition, Fitch has affirmed the following classes and revised Rating Outlooks as indicated:
--$8.2 million class E at 'BBBsf'; Outlook to Stable from Negative;
--$15.2 million class F at 'Bsf'; Outlook Negative;
--$15.2 million class G at 'CCCsf'; RE 55%;
--$9 million class J at 'Dsf'; RE 0%;
--$0 class K at 'Dsf'; RE 0%;
--$0 class L at 'Dsf'; RE 0%;
--$0 class M at 'Dsf'; RE 0%;
--$0 class N at 'Dsf'; RE 0%;
--$0 class O at 'Dsf'; RE 0%;
--$0 class P at 'Dsf'; RE 0%.
The class A-1, A-2, A-3, A-AB, A-4, A-J, B, C, and D certificates have paid in full. Fitch does not rate the class Q certificates. Fitch has previously withdrawn the ratings on the interest-only class X-1 and X-2 certificates.