Fitch to Rate Lone Star Portfolio Trust 2015-LSP; Presale Issued
Fitch expects to rate the transaction and assign Rating Outlooks as follows:
--\\$100,000,000 class A-1A1 'AAAsf'; Outlook Stable;
--\\$234,000,000 class A-1A2 'AAAsf'; Outlook Stable;
--\\$440,262,880a class X-CP 'BBB-sf'; Outlook Stable;
--\\$516,000,000a class X-EXT 'BBB-sf'; Outlook Stable;
--\\$69,000,000 class B 'AA-sf'; Outlook Stable;
--\\$47,000,000 class C 'A-sf'; Outlook Stable;
--\\$66,000,000 class D 'BBB-sf'; Outlook Stable;
--\\$114,000,000 class E 'BB-sf'; Outlook Stable;
--\\$75,325,872 class F 'B-sf'; Outlook Stable.
a - Notional amount and interest-only.
The expected ratings are based upon information provided as of Oct. 26, 2015.
The certificates represent the beneficial interest in a trust that holds a three-year, floating-rate, interest-only initial term loan in the original amount of \\$708 million and an outstanding balance of \\$705 million. The mortgage loan is secured by the fee and leasehold interests in 92 office and 11 industrial properties totaling 10.4 million square feet (sf) located in 18 states in primarily suburban locations.
The loan is sponsored by Lone Star Real Estate Fund IV (U.S.), L.P. (Lone Star).
KEY RATING DRIVERS
High Fitch Leverage: The \\$705 million loan has a Fitch debt service coverage ratio (DSCR) and loan-to-value (LTV) of 1.01x and 91.8%, respectively, totaling \\$68 per sf (psf). The portfolio was recently acquired for a total cost of \\$1.056 billion (\\$102 psf), implying a loan-to-cost ratio of 66.8%.
Below-Market Occupancy: The portfolio's weighted average (WA) occupancy is 79.6%, including six vacant properties, compared with the WA market occupancy of 88.3% (CoStar). Lone Star intends to perform certain capital improvements and lease up the portfolio to market occupancy prior to a property-by-property disposition strategy.
Geographically Diverse and Granular Pool: The loan is secured by 92 office and 11 industrial assets located in 18 states in generally suburban locations. The three states with the greatest concentration are Illinois (19.9% of allocated loan amount [ALA]), Massachusetts (18.8%) and Minnesota (18.1%); no other state represents more than 10.7% by ALA.
Fitch found that the property could withstand a 68.9% decline in value and an approximate 67.1% decline in Fitch's implied net cash flow prior to experiencing \\$1 of loss to the 'AAAsf' rated class. Fitch performed several stress scenarios in which the Fitch net cash flow (NCF) was stressed. Fitch determined that a 63.1% reduction in Fitch's implied NCF would cause the notes to break even at a 1.0x DSCR, based on the actual debt service.
Fitch evaluated the sensitivity of the ratings for classes A-1A1 and A-1A2 and found that a 7% decline in Fitch's implied NCF would result in a one-category downgrade, while a 36% decline would result in a downgrade to below investment grade.
The Rating Sensitivity section in the presale report includes a detailed explanation of additional stresses and sensitivities. Key Rating Drivers and Rating Sensitivities are further described in the accompanying presale report. The presale report is available to all investors on Fitch's web site 'www.fitchratings.com'.
DUE DILIGENCE USAGE
Fitch was provided with third-party due diligence information from Ernst & Young LLP. The third-party due diligence information was provided on Form ABS Due Diligence-15E and focused on a comparison and re-computation of certain characteristics with respect to the mortgage loan and related mortgaged properties in the data file. Fitch considered this information in its analysis and the findings did not have an impact on our analysis. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary (RAC).