KBRA Downgrades Two Ratings and Affirms Two Ratings for VMC 2019-FL3
13 Sep 2024 | New York
KBRA downgrades the ratings of two notes and affirms the ratings of two notes of VMC 2019-FL3, a CRE CLO transaction with limited post-closing acquisition ability. The downgrades are driven by an increase in KBRA’s estimated losses for the remaining six assets, all of which have been identified as K-LOCs with losses. Of the six remaining assets, four (66.2% of the current pool balance) are specially serviced and include two REO assets (25.6%), one loan in foreclosure (23.3%), and one non-performing matured balloon loan (17.3%). However, the transaction has benefited from increased note subordination levels, which resulted in the trust paying down by $479.8 million (76.5% of the issuance balance).
The securitization includes an overcollateralization cash diversion test, which has been satisfied during each remittance date since closing. However, Classes E and F are accumulating interest deferrals at this time, as insufficient cash is being generated as a result of the specially serviced loans deferring monthly interest payments. If additional loans were to defer monthly interest payments, the PIKable feature could shift vertically in the capital structure to impact additional classes up to the Cass C Notes. The details of the loans are outlined below.
Bay Vista (largest, 23.3%, Foreclosure)
- The loan is collateralized by a 117,884 sf, mixed-use, office and retail condominium located in Seattle, Washington, approximately two miles northwest of the city’s CBD.
- KBRA identified the loan as a K-LOC due to the loan’s foreclosure status. The loan transferred to the special servicer in October 2023 following its maturity default. According to the manager’s most recent update, the receiver has been appointed and a foreclosure sale was scheduled for August 9, 2024. The property has failed to meet the business plan’s expectation of maintaining a stabilized occupancy of 93.0% due to a decline in the office market sector. As of the March 2024 rent roll, inclusive of leasing updates, the property was 68.5% leased, compared to 68.6% at last review and 93.0% at securitization.
- An appraisal dated December 2023 indicates an as-is value of $28.0 million, down from $46.5 million at origination. KBRA’s analysis resulted in an estimated loss of $13.5 million (39.7% estimated loss severity) on the in-trust participation of $34.0 million. There is currently no funded balance outside the trust. KBRA excluded approximately $679,000 of unfunded future funding from the loan balance due to the loan’s specially serviced status.
Phoenix Corporate Towers (2nd largest, 22.9%, K-LOC)
- The loan is collateralized by a 457,878 sf, Class-A office property located in Phoenix, Arizona, approximately two miles north of the city’s CBD.
- KBRA identified the loan as a K-LOC due to challenges in the ability of the asset to meet business plan expectations as a result of a decline in the office market sector. The loan was modified in April 2024 to extend the final maturity to July 2025. As part of the modification, the loan was paid down by $1.6 million and $1.2 million was deposited into reserve accounts.
- The sponsor’s business plan included spending approximately $3.3 million primarily for various infrastructure and common area upgrades. Additionally, the borrower planned to continue leasing up the property throughout the loan term to a stabilized occupancy of 85.0%. According to the manager’s most recent update, the capital improvement plan has been completed. As of the May 2024 rent roll, the property was 78.8% leased, compared to 81.0% at last review and 64.4% at closing. KBRA’s analysis resulted in an estimated loss given default of $6.8 million (18.7% estimated loss severity) on the whole loan of $36.4 million. The whole loan includes the in-trust participation of $33.5 million and outside participation of $2.9 million.
2001 York (3rd largest, 17.3%, Non-Performing Matured Balloon)
- The loan is collateralized by a five-story, 184,017 sf, suburban office property located in Oak Brook, Illinois, approximately 17 miles west of the Chicago CBD.
- KBRA identified the loan as a K-LOC due to the loan’s non-performing matured balloon status. The loan transferred to the special servicer in November 2023 and subsequently failed to pay-off at its April 2024 final maturity. According to the manager’s most recent update, foreclosure has been initiated and a receiver was appointed in May 2024. As of the April 2024 rent roll, the property was 58.2% leased, in line with last review and closing. The largest tenant, Comcast Corporation, an 88,462 sf user, has a September 2025 lease expiration. The tenant failed to provide notice 12 months prior to the lease expiration.
- An appraisal dated February 2024 indicates an as-is value of $19.8 million, down from $33.0 million at origination. KBRA’s analysis resulted in an estimated loss of $7.9 million (30.9% estimated loss severity) on the in-trust participation of $17.5 million. There is currently no funded balance outside the trust. KBRA excluded approximately $7.9 million of unfunded future funding due to the loan’s specially serviced status.
Lumber Exchange (4th largest, 13.7%, REO)
- The asset is collateralized by a 225,102 sf, Class-B office property, located in Minneapolis, Minnesota, within the CBD.
- KBRA maintains the asset’s K-LOC designation due to its REO status. The title was taken via deed-in-lieu foreclosure in June 2023. The property has failed to meet the business plan’s expectation of achieving a stabilized occupancy of 90.2% due to a decline in the office market sector. As of the May 2024 rent roll, the property was 42.6% leased, compared to 44.9% at last review and 54.0% at securitization.
- According to the manager’s most recent update, a consultant has been retained to carry out the entitlement, zoning, architectural, and tax credit process for a residential conversion. The process is expected to be completed by the end of 2025, with maximum recoveries generated through a sale to a developer. An appraisal dated April 2023 indicates an as-is value of $18.0 million, down from $24.3 million at origination. KBRA’s analysis resulted in an estimated loss of $11.1 million (55.0% estimated loss severity) on the whole loan of $20.2 million. The whole loan includes the in-trust participation of $20.1 million and outside participation of approximately $85,000.
Metro Denver Office Portfolio (5th largest, 11.8%, REO)
- The asset is currently collateralized by two, suburban office properties, totaling 148,429 sf located in the Denver Colorado MSA. Since issuance, four properties, totaling 269,434 sf have been released from the portfolio and the whole loan has paid down by $28.6 million.
- KBRA identified the asset as a K-LOC due to its REO status. The title was taken via deed-in-lieu foreclosure in April 2024. The portfolio has failed to meet the business plan’s expectation of achieving a stabilized occupancy of 91.5% due to a decline in the office market sector. As of the March 2024 rent roll, the portfolio was 47.3% leased, compared to 70.3% at last review and 64.2% at securitization. Of the two remaining properties, one is vacant while the other is 63.2% occupied.
- According to the manager’s most recent update, the vacant property is listed for sale and has received an offer. The final sale price is being negotiated. Concurrently, at the other property, the leasing broker has engaged two in place tenants for possible expansion, which could increase occupancy to 89.0%. KBRA’s analysis resulted in an estimated loss of $3.9 million (21.4% estimated loss severity) on the whole loan of $18.3 million. The whole loan includes the in-trust participation of $17.3 million and outside participation of approximately $962,000.
1500 Portland Office (6th largest, 10.9%, K-LOC)
- The loan is collateralized by a 68,392 sf, Class-A office property, located in Portland, Oregon, approximately two miles northeast of the CBD.
- KBRA maintains the loan’s K-LOC designation due to challenges in the ability of the asset to meet business plan expectations as a result of a decline in the office market sector. The loan was modified in July 2023 to extend the final maturity to April 2026. As part of the modification, the loan will remain interest-only through the term, a new rate cap agreement was purchased, stabilization cost will be funded through equity, and $1.0 million was deposited into reserve accounts.
- Following acquisition in 2016, the sponsor invested $3.9 million in capital improvements to modernize the property. The sponsor’s business plan included leasing up the property to a stabilized level of 90.0%. According to the manager’s most recent update, three leases totaling 13,000 sf have been signed and vary from five- to seven-year terms. Currently, the manager intends to lease up three speculative suites, that total 10,000 sf. As of the April 2024 rent roll, the property was 74.5% leased, compared to 57.0% at last review and 49.4% at securitization. An appraisal dated August 2023 indicates an as-is value of $14.9 million, down from $25.8 million at origination. KBRA’s analysis resulted in an estimated loss given default of $1.6 million (10.3% estimated loss severity) on the in-trust whole loan of $15.9 million.
Details concerning the ratings are as follows:
Affirmations:
- Class C at A+ (sf)
- Class D at BBB- (sf)
Downgrades:
- Class E to B (sf) from BB- (sf)
- Class F to CCC (sf) from B- (sf)
Ratings Sensitivities
Future rating actions will be dependent upon the ongoing assessment of the timing and likelihood of ultimate payment of principal and deferred interest on the rated notes. The assessment will consider the expected and actual losses on the remaining assets in the transaction, as well as, the magnitude and extent of interest deferrals, if any, on the notes.
To access rating and relevant documents, click here.