Fitch Downgrades Four Classes of CGCMT 2006-C5
KEY RATING DRIVERS
The downgrades reflect an increase in Fitch-modeled losses, primarily associated with the assets in special servicing, since the last rating action, as well as the risk of escalating interest shortfalls. Fitch modeled losses of 13.6% of the remaining pool; expected losses on the original pool balance total 14.7%, including \$94 million (4.4% of the original pool balance) in realized losses to date. Fitch has designated 56 loans (32.2% of the current pool) as Fitch Loans of Concern, which includes 16 specially serviced assets (19.3%). Of the assets in special servicing, 13 (10.6%) are classified as real-estate owned (REO) where Fitch modeled high loss severities ranging from 46% to 100%.
As of the January 2015 distribution date, the pool's aggregate principal balance has been reduced by 28.9% to \$1.59 billion from \$2.24 billion at issuance. The second largest loan (7.5%) has been defeased. Cumulative interest shortfalls totaling \$18.5 million are currently affecting classes A-J through K and classes M through P.
The largest contributor to Fitch-modeled losses, which remains the same since the last rating action, is the IRET Portfolio (7.7% of pool). The loan is secured by a portfolio of nine suburban office properties totaling 936,720 square feet (sf) located in the Omaha, NE MSA (four properties); the greater Minneapolis, MN MSA (two), the St. Louis, MO MSA (two), and Leawood, KS (one). The loan was transferred to special servicing in July 2014 for imminent default as the borrower stated it would not be able to pay off the loan at the October 2016 maturity date. As of the January 2015 remittance report, the loan remains current.
Portfolio occupancy was above 90% during 2010 and early 2011 and was 95.7% at issuance; however, performance declined drastically between 2010 and 2012 due to a significant drop in occupancy, which was attributable to three large tenants either vacating or downsizing at their lease expiration. Assurant and Unigraphics Solutions both vacated their entire occupied spaces at two of the underlying properties in 2010 and 2011 and Hewlett Packard downsized its occupied square footage at another underlying property.
As of the October 2014 rent roll, portfolio occupancy declined to 87.4% from 90.3% reported as of April 2014 at Fitch's last rating action. The majority of the occupancy decline was associated with one of the larger tenants at the Flagship Corporate Center building in Eden Prairie, MN vacating 15% of that building's square footage at its scheduled April 2014 lease expiration. Rollover risk remains significant prior to loan maturity, with 13% of the portfolio square footage rolling in 2015 and 16% in 2016, according to the October 2014 rent roll. According to REIS and as of fourth quarter 2014 (4Q'14), the underlying property submarkets reported high vacancies ranging between 10.6% and 28.7%. The weighted average portfolio in-place base rent is approximately \$19 per square foot (psf) compared to REIS-reported submarket asking rents ranging between \$15 and \$25 psf.
The special servicer indicated an earlier discounted payoff proposal from the borrower was rejected as it was too low and is currently pending an updated proposal from the borrower. The special servicer continues discussions with the borrower, while dual tracking the foreclosure action until a resolution is achieved.
The next largest contributor to Fitch-modeled losses, which remains the same since the last rating action, is the REO asset, One and Two Securities Centre (4.1%). The asset consists of two office buildings totaling 521,957 square feet located in the Buckhead submarket of Atlanta, GA. The loan was transferred to special servicing in December 2010 for imminent default when several tenants vacated upon lease expiration. The asset became REO in November 2011.
As of the November 2014 rent roll, One Securities Center was 90.5% leased and Two Securities Centre was 72.2% leased with a combined occupancy of 81.9%. This represents an improvement from the 75.7% reported as of June 2014 at Fitch's last rating action due to three new leases being executed at Two Securities Centre comprising nearly 15% of that building's square footage. Although occupancy has recently shown improvement, the combined net operating income for the trailing-twelve months ending September 2014 for the assets is still estimated to be 50% below issuance levels and occupancy still remains below the 95% reported at issuance.
Near-term rollover includes approximately 5% of the portfolio square footage in 2015 and 12% in 2016. According to REIS and as of 4Q'14, the Buckhead office submarket reported a vacancy of 21.8% and asking rents of \$29.01 psf compared to average in-place base rents of \$22 psf. The special servicer indicated the assets are currently being marketed for sale with a near-term sale expected. The offering memorandum was released in early December 2014 with first round bidding commencing in January 2015 and second round bidding ending early February 2015.
The third largest contributor to Fitch-modeled losses is the REO asset, 77 Corporate Park (0.9%). The asset consists of 13 office/industrial flex buildings totaling 325,661 square feet located in Charlotte, NC. The loan was transferred to special servicing in November 2012 for imminent default. The asset became REO in July 2013. As of the February 2015 rent roll, the asset was only 39% occupied. The special servicer indicated the physical condition of the overall property is poor and would require significant capital expenditures to stabilize the asset.
The majority of the roofs and HVAC units at the buildings are original components to when the property was built. The buildings are currently being listed and marketed for sale. It is expected that the new buyer will likely redevelop part of the property due to the significant deferred maintenance. Sales efforts remain ongoing.
RATING SENSITIVITIES
The Rating Outlooks on the super senior 'AAAsf' classes remain Stable due to sufficient credit enhancement and expected continued paydown. The Negative Rating Outlook on class A-M reflects the high concentration of REO assets in special servicing and downgrade risk to the class if there is a lack of progress on their workouts and final dispositions. Distressed classes (those rated below 'Bsf') may be subject to downgrades as losses are realized or if realized losses are greater than Fitch's expectations.
Fitch has downgraded the following classes:
--\$212.4 million class A-M to 'Asf' from 'AAsf'; Outlook Negative
--\$172.6 million class A-J to 'CCsf' from 'CCCsf'; RE 70%;
--\$42.5 million class B to 'Csf' from 'CCsf'; RE 0%;
--\$21.2 million class C to 'Csf' from 'CCsf'; RE 0%.
In addition, Fitch has affirmed the following classes:
--\$52.9 million class A-3 at 'AAAsf'; Outlook Stable;
--\$35.5 million class A-SB at 'AAAsf'; Outlook Stable;
--\$774.3 million class A-4 at 'AAAsf'; Outlook Stable;
--\$187 million class A-1A at 'AAAsf'; Outlook Stable;
--\$26.5 million class D at 'Csf'; RE 0%;
--\$29.2 million class E at 'Csf'; RE 0%;
--\$26.5 million class F at 'Csf'; RE 0%;
--\$12.2 million class G at 'Dsf'; RE 0%;
--\$0 class H at 'Dsf'; RE 0%;
--\$0 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%.
Fitch previously withdrew the ratings on the interest-only class XP and XC certificates. Classes A-1, A-2, AMP-1, AMP-2, and AMP-3 have paid in full. Fitch does not rate class P.
Additional information on Fitch's criteria for analyzing U.S. CMBS transactions is available in the Dec. 10, 2014 report, 'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria', which is available at 'www.fitchratings.com' under the following headers:
Structured Finance >> CMBS >> Criteria Reports
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