DBRS Confirms Fifteen and Downgrades 3 Classes of Real Estate Asset Liquidity Trust, Series 2005-2

DBRS has today confirmed the ratings of 15 classes of Real Estate Asset Liquidity Trust, Commercial Mortgage Pass-Through Certificates, Series 2005-2.

The following classes were confirmed with Stable trends:

Class A-1 at AAA
Class A-2 at AAA
Class B at AA
Class C at A
Class D-1 at BBB
Class D-2 at BBB
Class E-1 at BBB (low)
Class E-2 at BBB (low)
Class F at BB (high)
Class G at BB
Class XP-1 at AAA
Class XC-1 at AAA
Class XP-2 at AAA
Class XC-2 at AAA

In addition, Class L was confirmed at CCC.

DBRS has downgraded three classes as follows:

Class H to B (high) from BB (low)
Class J to B (low) from B
Class K to CCC from B (low)

Classes H and J have been placed on trend Negative.

DBRS does not rate the $6.1 million first loss piece, Class M.

The pool collateral has been reduced by 31.27% since issuance, with the current pool balance at approximately $427.5 million, as of the August 2011 remittance report.

There have been realized losses of approximately $149,000 to the Class M certificate as of the August 2011 remittance report, due to the liquidation of Prospectus ID#67, Metropolitan Road, in January 2011.

Although the overall financial performance for the remaining collateral is considered healthy, the weighted-average debt-service coverage ratio (WADSCR) of 1.64x is a decline from 1.99x at issuance. The pool collateral has been reduced by 31.27% since issuance, with the current pool balance at approximately $427.5 million, as of the August 2011 remittance report. There are two defeased loans, representing 0.81% of the pool.

As of the August 2011 remittance report, there were 19 loans on the servicer’s watchlist, representing 32.9% of the pool balance. Of these loans, 11 individually represent greater than 1.0% of the pool.

The largest loan on the servicer’s watchlist is the third largest loan in the pool, SRI Portfolio, with 5.13% of the current pool balance. The loan is secured by a portfolio of quick-service restaurants located throughout Canada. At closing, the whole loan was comprised of a $55 million A-note, included in this transaction, and a B-note in the amount of $10 million, held outside the trust. Both notes are interest-only with the original maturity scheduled for October 2010. The servicer granted an extension of the maturity to February 2012 and in March 2011, a partial payoff of the loan in the amount of $33 million was received. That transaction included the release of the bulk of the Ontario properties included in the portfolio; all funds from the paydown were applied to the A-note. The servicer advised in August 2011 that the borrower is exploring several options for repaying the remainder of the loan. In March 2011, the largest tenant in the portfolio, Priszm, filed for bankruptcy protection. The borrower is reportedly taking advantage of the filing as an opportunity to secure stronger tenants for the remaining properties on the loan. DBRS has removed the investment-grade shadow rating on this loan, due to Priszm’s bankruptcy and the potential impact that has on the collateral cash flows in the near term.

As of the August 2011 remittance report, there were two loans in special servicing, representing 2.63% of the pool balance. One loan was in special servicing at the time of the last DBRS review in December 2010, Prospectus ID#14, Duncan Mill Road, comprising 2.13% of the current pool balance as of the August 2011 remittance report. The outlook for this loan had declined substantially since its initial transfer to special servicing in June 2010.

Duncan Mill Road is a 173,000 sf Class B office building located in suburban northeast Toronto. The loan transferred to special servicing because of outstanding real estate taxes, reserve payments in arrears and property maintenance issues. In August 2009, an exterior panel on the building became detached and fell to the ground below, resulting in the Toronto police declaring the building unsafe. These and other structural issues were reported to have been corrected by the borrower at YE2010, but an Engineering Report received by the servicer in March 2010 indicated that work completed does not sufficiently address the issues at the property. Furthermore, at the time of inspection, the engineer noted several safety hazards, including a playground that was exposed to falling debris from the building generated during the repair work. The servicer reported in August 2011 that the borrower had addressed these issues and that the daycare center using the playground was no longer operating at the property. The borrower has slated approximately $100,000 for repairs to be completed by YE2011. Any outstanding issues remaining after YE2011 will be addressed in the spring of 2012 due to weather impairments. The Engineer’s Report estimated the full cost of repairs and remediation for the property to cost nearly $5 million over the next eight years.

Property performance has been on the decline since 2008 when the DSCR was at 0.91x; by YE2010, the DSCR had fallen to 0.21x. The performance decline is due to a significant drop in occupancy from issuance, when it was 90% occupied. In July 2011, occupancy was reported to be 46%. Occupancy began declining in 2008, when it was at 68.7% at year-end; the servicer's September 2009 site inspection noted that several tenants had vacated in the previous twelve months, including tenants that had moved out in the night without providing notice to the property management. The current loan per square foot is $54 and the loan is full-recourse to the sponsor.

The loan is current and the special servicer reported in August 2011 that forbearance negotiations were underway as part of a strategy to remedy the outstanding structural issues at the property. There is a TI/LC reserve in-place with an approximate balance of $450,000. The special servicer is working with the borrower to apply those funds toward repairs at the property. Based on offers received by the special servicer to purchase the property in May 2011, the special servicer had previously estimated the property’s as-is value to be $12 million. However, those offers have since been withdrawn and it is anticipated a formal appraisal would represent a significant decline from the original value of $16.7 million at issuance given the structural issues and related performance decline at the property. The special servicer is not required to obtain an updated appraisal until the loan becomes 90 days delinquent, according to the transaction documents. Based on the NCF figures for the property at June 30, 2011, DBRS anticipates the as-is value to be well below the $9.1 million outstanding loan balance, as of the August 2011 remittance report. As such, a significant loss to the trust could be realized if workout efforts are not successful and the loan is liquidated.

The other loan in special servicing is Prospectus ID#65, Emerald, which represents 0.50% of the current pool balance as of the August 2011 remittance report.

This loan is secured by a 67-unit low-rise multifamily property located in Côte Saint-Luc, Québec, a suburb of Montréal located southwest of the CBD. The property was constructed in the 1960's and was found in Fair overall condition at the time of the servicer's September 2010 site inspection, which noted that the borrower was in the process of converting the property into "mini condos", with upgrades to the unit bathrooms and kitchens, as well as improvements to common areas in stairwells, elevators and the property lobby. Exterior upgrades in window replacement and balcony repairs were noted to have improved the property's curb appeal significantly.

The loan transferred to the special servicer in March 2011 because of outstanding utility payments at the property resulting in the property being subject to a rent seizure by GazMetro. Furthermore, the property transferred ownership in late 2010 when the borrower completed an unauthorized sale of its interest in the asset. The borrower has been communicating with the special servicer's counsel since May 2011 and the utility payments have been brought current. The special servicer advised in August 2011 that the condo conversion was halted and the property is operating as a multifamily community with renovations ongoing. The special servicer advised that the goal was to have the original borrower and property owner repay the trust loan and pay the associated fees to the trust for special servicing and early payoff. If an early payoff cannot be achieved, the special servicer has advised the loan will not be released at maturity unless all fees and costs are included in the payout. The T-12 DSCR, as June 30, 2011, was 0.47x with property occupancy at 67%. The current leverage is reasonable, at $34,300 per unit. The loan is current. DBRS will continue to monitor the loan’s performance and the special servicer’s efforts to achieve resolution.

DBRS shadow-rates eight loans in the pool, representing 20.25% of the current pool balance as of the August 2011 remittance report, investment grade. As a part of this review, one shadow rating was removed, Prospectus ID#1, SRI Portfolio, for reasons previously discussed. For the remaining seven loans, the respective property performance of the underlying collateral continues to be strong and the shadow ratings have been confirmed by DBRS.

DBRS continues to monitor this transaction on a monthly basis in the Monthly CMBS Surveillance Report, which can provide more detailed information on the individual loans in the pool.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is CMBS Rating Methodology and CMBS North American Surveillance Methodology, which can be found on our website under Methodologies.