Fitch Affirms MSC 2006-IQ12
KEY RATING DRIVERS
The affirmations reflect sufficient credit enhancement relative to Fitch expected losses. Fitch modeled losses of 5.7% of the remaining pool; expected losses on the original pool balance total 13.2%, including $262.3 million (9.6% of the original pool balance) in realized losses to date. Fitch has designated 38 loans (17.5%) as Fitch Loans of Concern, which includes four specially serviced assets (2.1%).
As of the July 2015 distribution date, the pool's aggregate principal balance has been reduced by 37.2% to $1.71 billion from $2.73 billion at issuance. Per the servicer reporting, five loans (1.9% of the pool) are defeased. Interest shortfalls are currently affecting classes C, E, and H through S.
RATING SENSITIVITIES
The Rating Outlooks on classes A-1A and A-4 remain Stable due to sufficient credit enhancement and continued paydown. The Outlooks on classes A-M and A-MFX remain Negative due to high Fitch loan-to-value (LTV) for several of the top 15 loans. Performance risk associated with several of the top 15 loans includes lease rollover risk, secondary and tertiary market exposure, combined with single or large tenant exposures. In addition, the Negative Outlooks reflect maturity concentration concerns with approximately 96% of the pool scheduled to mature by year-end (YE) 2016. These classes could be subject to downward rating migration should realized losses exceed Fitch's expectation, or should loans not refinance at maturity as expected.
The largest contributor to expected losses is the Gateway Center IV loan (3.39%), which is secured by a 331,246 square foot (sf) office building located in downtown Newark, NJ. The 15-story office tower is part of the Gateway Centre complex, and located across the street from the Prudential Centre, with close proximity to Newark Penn Station. The March 2015 rent roll reported occupancy at 96%, with McCarter & English as the largest tenant occupying 180,198-sf (53% of the net rentable area [NRA]). The YE 2014 debt service coverage ratio (DSCR) reported at 1.35x. The subject loan had previously transferred to special servicing in March 2014 for imminent default when the borrower requested assistance due to expected lease rollover and associated leasing costs. The loan had remained current and was returned to the master servicer in March 2015 with no changes to the loan.
Upcoming lease rollover risks include Prudential (17% NRA) whose current lease expires in December 2016. According to the servicer, Prudential has options to extend its lease through 2019; however, extension discussions have not yet begun. Prudential has several leases in other buildings that are part of the Gateway Centre complex, and is currently in process of completing construction of a new office tower in Newark; the new building is reportedly expected to house staff from the Gateway Centre buildings.
The second largest contributor to expected losses is the Gateway Office Building loan (3.3%), which is secured by a 251,430 sf office building in Rockville, MD. Cash flow has declined since 2012 due to rent reductions on the properties largest tenant, EMMES Corporation (EMMES), which had extended its lease from May 2013 to May 2033. EMMES had expanded its space to approximately 97,000 sf (38% NRA) from 89,000 SF (31% NRA), but base rent was reduced by approximately 18% with 2.75% annual rent steps. The YE 2014 net operating income (NOI) reported a 10% decline from YE 2013, and a 17% decline from YE 2012. The YTD March 2015 DSCR was 1.23x, compared to 1.17x and 1.30x for YE 2014 and YE 2013, respectively. The March 2015 rent roll reported occupancy at 83%, with leases for approximately 15% of the property's NRA scheduled to roll over the next 24 months. The loan remains current as of the July 2015 distribution date.
The third largest contributor to expected losses is secured by a 66,000 sf medical office building in Landsdowne, VA (0.8%). The property had experienced cash flow issues due to large tenant vacancies in 2013. The loan had transferred to special servicing in February 2013 due to monetary default, and became real estate owned (REO) in January 2014. The property is currently 45% occupied. The servicer is working to lease up and stabilize the property. .
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.
Fitch affirms the following classes:
--$348.3 million class A-1A at 'AAAsf'; Outlook Stable;
--$809.4 million class A-4 at 'AAAsf'; Outlook Stable;
--$173 million class A-M at 'AAAsf'; Outlook Negative;
--$100 million class A-MFX at 'AAAsf'; Outlook Negative;
--$242.3 million class A-J at 'CCsf'; RE 85%;
--$17.1 million class B at 'Csf'; RE 0%;
--$24.3 million class C at 'Dsf'; RE 0%;
--$0 class D at 'Dsf'; RE 0%;
--$0 class E at 'Dsf'; RE 0%;
--$0 class F at 'Dsf'; RE 0%;
--$0 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%.
The class A-1, A-2, A-NM, A-3 and A-AB certificates have paid in full. Fitch does not rate the class O, P, Q and S certificates. Fitch previously withdrew the ratings on the class A-MFL certificate and the interest-only class X-1, X-2 and X-W certificates.
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