Fitch Upgrades One Class and Affirms 18 in MSCI 2006-HQ10

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded one class and affirmed 18 others in Morgan Stanley Capital I Trust series 2006-HQ10 commercial mortgage pass-through certificates. A detailed list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

The affirmations reflect the largely unchanged performance expectations for the pool overall since the last review. Fitch modelled losses of 7.3% for the remaining pool; expected losses on the original pool balance total 10.4%, including $84.9 million (5.4% of the original pool balance) in realized losses to date. At the last review, Fitch modelled losses of 6.1% on the then-remaining pool (9.7% of the original balance). In the last twelve months, five loans have repaid from the trust, one loan that was previously in special servicing liquidated with minimal realized loss and another loan has transferred to special servicing.

The upgrade reflects the expected continued improvement in credit support to the senior bonds as loans refinance. There are 77 loans (96.8% of the pool) scheduled to mature by YE2016. This includes twelve loans (18.5% of the pool) which are fully defeased. The upgrade was limited to one class as there are currently 33 loans on the servicer's watchlist and two in special servicing. Slippage in pool level credit metrics suggests it is possible that some loans may have challenges securing refinancing and could transfer to special servicing. In its modelling, Fitch applied various NOI stress scenarios before determining whether or not upgrades were warranted.

The largest contributor to modelled losses is the AZ Office/Retail Portfolio, three cross-collateralized and cross-defaulted loans (6.7% of the pool) secured by a portfolio of two retail properties and one office property, totalling 335,653 square feet (sf), located in Scottsdale, Arizona. These loans had previously been transferred to special servicing in March 2012 for imminent default and transferred back to the master servicer in February 2014 with no modifications. Two of the three loans have since been added to the servicer's watchlist for underperformance. While the portfolio YE2014 NOI and DSCR, at 1.06x and 87.7% respectively, have improved over the YE2013 figures, there is a significant amount of tenant rollover scheduled to occur in the next year and the loans are interest only, with a combined leverage point of $215 on a per-square-foot basis.

The next largest contributor to expected losses is The Shops at Briargate (6.7% of the pool), which is secured by an open-air lifestyle center in Colorado Springs, Colorado. Major tenants include Pottery Barn, Apple, Sephora, Pier 1 Imports, Biaggi's and PF Chang's. There is minimal upcoming tenant roll for the remainder of 2015; however, leases representing 15.6% of the NRA are scheduled to expire in 2016. The NOI DSCR was reported to be 1.29x at YE2014, down from 1.50x for YE2013, and the property was 91.6% occupied as of June 2015, down from 95.6% occupied at YE2014. The loan is interest only and has a leverage point of $314 on a per-square-foot basis.

The third largest contributor to expected losses is the PPG Portfolio (9.2% of the pool). The loan is collateralized by a portfolio of seven medical office properties located in three states: Colorado (4), Indiana (2) and Arizona (1). Although there is minimal upcoming roll ahead of the loans scheduled maturity, there is significant exposure to lease roll in 2017 and the borrower has already been notified that many tenants intend to vacate. While the borrower has the benefit of advance notice to market the space, the portfolio is highly levered at $226 psf and concentrated in mainly tertiary and suburban markets.

RATING SENSITIVITIES

The ratings on the investment grade classes are expected to remain stable due to sufficient credit enhancement, defeasance and continued paydown. Future upgrades to Class A-J are unlikely given the number of underperforming loans with upcoming maturities. Distressed classes may be subject to downgrades as losses are realized.

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action.

Fitch upgrades the following class as indicated:

--$149.1 million class A-M to 'AAAsf' from 'AAsf'; Outlook Stable.

Fitch affirms the following classes as indicated:

--$48.9 million class A-1A at 'AAAsf'; Outlook Stable;

--$528 million class A-4 at 'AAAsf'; Outlook Stable;

--$68.4 million class A-4FL at 'AAAsf'; Outlook Stable;

--$61.3 million class A-4FX at 'AAAsf'; Outlook Stable;

--$119.3 million class A-J at 'Bsf'; Outlook Stable;

--$31.7 million class B at 'CCCsf'; RE 100%;

--$16.8 million class C at 'CCCsf'; RE 10%;

--$22.4 million class D at 'Csf'; RE 0%;

--$16.8 million class E at 'Csf'; RE 0%;

--$6.4 million 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%;

--$0 class O at 'Dsf', RE 0%;

The class A-1, A-2 and A-3 certificates have paid in full. Fitch does not rate the class P certificate. Fitch previously withdrew the ratings on the interest-only class X-1 and X-2 certificates.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

U.S. Fixed-Rate Multiborrower CMBS Surveillance and Re-REMIC Criteria (pub. 10 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=812608

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=993131

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993131

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151029006789/en/

Fitch Ratings
Primary Analyst
Roxanna Tangen, +1-312-368-3116
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Committee Chairperson
R. Brook Sutherland, +1-312-606-2346
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278 (New York)
[email protected]

Source: Fitch Ratings

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