Fitch Ratings has downgraded three and affirmed 17 classes of Morgan Stanley Capital I Trust's commercial mortgage pass-through certificates, series 2006-HQ10 (MSCI 2006-HQ10). A detailed list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The downgrades reflect an increase in Fitch modeled losses across the pool attributed to specially serviced loans, as well as several loans in the top 15 with continued underperformance. Fitch modeled losses of 11.2% of the remaining pool. Modeled losses are 12.9% of the original pool, including losses realized to date.
Fitch has designated 46 loans (33.6%) as Fitch Loans of Concern. They include 10 specially serviced loans (14.8%), two of which are among the top fifteen loans (8.6%). One of the top 15 loans is defeased (5.6%).
As of the December 2012 distribution date, the pool's aggregate principal balance has decreased by approximately 15.5% to $1.26 billion from $1.49 billion at issuance. Of this amount, 12.1% was due to paydowns and 3.4% was due to realized losses. Interest shortfalls totaling $6.6 million are affecting classes D through P.
The largest contributors to modeled losses are three cross-collateralized and cross-defaulted loans (5.7% of the pool) secured by a portfolio of two unanchored retail properties and one office property, totaling 336,074 square feet (sf), located in Scottsdale, AZ. These loans were transferred to special servicing in March 2012 for imminent default. The loans remain current. According to the special servicer, discussions with the borrower continue, but a final workout scenario has not yet been finalized.
The portfolio has suffered declining performance since issuance as a result of market conditions and reductions in occupancy. As of the September 2012 rent roll, combined portfolio occupancy was 79.9% down from the 84.1% at issuance. According to the rent roll, approximately 51% of the property square footage has lease expirations prior to the end of 2016 (the loan matures in October 2016). According to REIS and as of third-quarter-2012 (3Q'12), the Scottsdale office submarket reported a vacancy rate of 27.8%. Additionally, the North Scottsdale-Paradise Valley/North Phoenix unanchored retail submarket reported a vacancy rate of 16.6%.
Year-end (YE) 2011 net operating income (NOI) has improved slightly by 5.6% when compared to YE 2010. That said, NOI is still approximately 30% below issuance. The most recent servicer-reported debt service coverage ratio, on a NOI basis, was 1.09 times (x) as of YE 2011, a significant decrease from 1.55x at issuance.
The second largest contributor to modeled losses is a REO asset (2.8%) of a 272,136 sf retail property located in Shreveport, LA. The loan was transferred to special servicing in September 2009 for imminent default. Occupancy has declined significantly due to tenant bankruptcies and vacancies in 2008 and 2009. As of the June 2012 rent roll, the property was 56.2% occupied. The special servicer continues to lease up the property hoping to increase value.
The third largest contributor to modeled losses is secured by a 228,150 sf retail property (5.7%) located in Colorado Springs, CO. As of the September 2012 rent roll, the property was 95% occupied. According to the rent roll, approximately 62.6% of the property square footage has lease expirations prior to the end of 2016 (the loan matures in July 2016). According to REIS and as of 3Q'12, the Northeast unanchored retail submarket of Colorado Springs reported a vacancy rate of 15.5%.
Fitch downgrades the following classes:
--$149.1 million class A-M to 'AAsf' from 'AAAsf'; Outlook Stable;
--$119.3 million class A-J to 'CCCsf' from 'BBsf'; RE 95%;
--$22.4 million class D to 'Csf' from 'CCsf'; RE 0%.
Additionally, Fitch affirms the following classes:
--$68 million class A-1A at 'AAAsf'; Outlook Stable;
--$35.2 million class A-3 at 'AAAsf'; Outlook Stable;
--$610.2 million class A-4 at 'AAAsf'; Outlook Stable;
--$79.1 million class A-4FL at 'AAAsf'; Outlook Stable;
--$70.9 million class A-4FX at 'AAAsf'; Outlook Stable;
--$31.7 million class B at 'CCCsf'; RE 0%;
--$16.8 million class C at 'CCCsf'; RE 0%;
--$16.8 million class E at 'Csf'; RE 0%;
--$18.6 million class F at 'Csf'; RE 0%;
--$18.6 million class G at 'Csf'; RE 0%;
--$3.5 million class H at 'Dsf'; RE 0%;
--Class J at 'Dsf'; RE 0%;
--Class K at 'Dsf'; RE 0%;
--Class L at 'Dsf'; RE 0%;
--Class M at 'Dsf'; RE 0%;
--Class N at 'Dsf'; RE 0%;
--Class O at 'Dsf'; RE 0%.
Classes A-1 and A-2 have been paid in full. Class P is not rated by Fitch.
Fitch had previously withdrawn the ratings on the interest-only classes X-1 and X-2. Additional information on the withdrawal of the rating on classes X-1 and X-2 is available in the June 23, 2010 report, 'Fitch Revises Practice for Rating IO & Pre-Payment Related Structured Finance Securities'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria' (Dec. 18, 2012).
Applicable Criteria and Related Research:
U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria
Global Structured Finance Rating Criteria
Melissa Che, +1-212-908-9107
Fitch Ratings, One State Street Plaza, New York, NY 10004
Mary MacNeill, +1-212-908-0785
Sandro Scenga, +1-212-908-0278 (New York)
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