DBRS Confirms 18 Classes of Real Estate Asset Liquidity Trust, Series 2005-2

DBRS has today confirmed the ratings of 18 classes of Real Estate Asset Liquidity Trust, Commercial Mortgage Pass-Through Certificates, Series 2005-2 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D-1 at BBB (sf)
-- Class D-2 at BBB (sf)
-- Class E-1 at BBB (low) (sf)
-- Class E-2 at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (sf)
-- Class H at B (high) (sf)
-- Class J at B (low) (sf)
-- Class K at CCC (sf)
-- Class L at CCC (sf)
-- Class XP-1 at AAA (sf)
-- Class XC-1 at AAA (sf)
-- Class XP-2 at AAA (sf)
-- Class XC-2 at AAA (sf)

As part of these rating actions, DBRS has upgraded the trend for Classes H and J from Negative to Stable. All other trends remain Stable.

As of the September 2012 remittance report, there were 64 of the original 95 loans remaining in the pool, for a collateral reduction of 34.96% since issuance. There are five defeased loans in the pool, representing 2.61% of the pool balance. The bulk of the loans in the pool are reporting updated cash flows, with 96.3% of the pool by allocated loan balance reporting YE2011 financials for a weighted-average debt service coverage ratio (DSCR) of 1.60 times (x) and a weighted-average debt yield of 13.50%, as compared with 2.00x and 12.20% at issuance, respectively.

Although the overall pool performance has declined since issuance, the weighted-average DSCR and weighted-average debt yield are considered to be relatively healthy and indicative of good overall credit metrics. In addition, the largest loans in the pool are generally performing well, with 14 of the largest 15 loans reporting YE2011 figures (54.93% of the pool), with a weighted-average DSCR and debt yield for those loans of 1.67x and 13.73%, respectively, and a weighted-average net cash flow growth of 11.63% since issuance. DBRS shadow rates six loans, representing 12.22% of the pool, as investment grade, based on strong credit metrics and experienced sponsorship.

There are four crossed pools in the transaction: Kitchener Office Portfolio, with two loans representing 6.71% of the overall pool balance; InnVest Portfolio, with four loans representing 6.67% of the overall pool balance; Medical Office Portfolio, with four loans representing 2.93% of the overall pool balance; and Ontario Retail Portfolio, with two loans (one of which is fully defeased) representing 1.81% of the overall pool balance. As of the YE2011 reporting period, all but the InnVest Portfolio is performing well.

The InnVest Portfolio comprises four loans secured by full-service and limited-service hotels in Ontario and Québec. The loans are all fully amortizing (scheduled to mature in 2015) and are fully guaranteed by InnVest REIT, one of the largest hotel owner/operators in Canada. The pool had a weighted-average YE2011 DSCR of 0.98x and a weighted-average debt yield of 8.37%, as based on the current loan balances. Although these figures are considered low, they represent improvement from YE2010, when the weighted-average DSCR was 0.83x and the debt yield, as based on the current balances for each loan, would be 7.12%. Despite declines in performance since 2009, the loans have remained current and the borrower continues to maintain the properties at a high level, as exhibited in the most recent servicer’s site inspections for each hotel. Prospectus ID #20 (Radisson Laval at issuance, now a Holiday Inn), representing 1.76% of the overall pool balance, has shown significant improvement in performance since 2010, with a YE2011 DSCR of 1.57x as compared with a YE2010 DSCR of 0.85x. The overall improved performance for this crossed pool provided the primary substantiation for the upgrade of the trend for Classes H and J from Negative to Stable.

As of the September 2012 remittance report, there was one loan, Prospectus ID #65 (Emerald), in special servicing. The loan transferred to the special servicer in March 2011 because of outstanding utility payments that resulted in a rent seizure by Gaz Métro, Inc. The utility payments were brought current shortly after the loan’s transfer to special servicing, but the loan did not transfer back to the master servicer at that time because the special servicer discovered that the property had been sold in 2010, without authorization from the servicer. According to the September 2012 remittance report, the loan was being prepared for a return to the master servicer, with all outstanding fees incurred to date to be added to the outstanding loan balance at maturity in 2015.

As of the September 2012 remittance report, there were 13 loans, representing 26.71% of the pool, on the servicer’s watchlist. Five of those loans (14.74% of the pool) are being monitored for issues not related to property performance. The largest loan on the watchlist is Prospectus ID #4, Colony Square, with 4.78% of the pool. That loan is being monitored for an unauthorized second mortgage secured by the collateral property, a 428-unit multifamily property in Winnipeg, Manitoba. The YE2011 DSCR was 2.03x and the sponsor, Lansboro REIT, has been working on repaying the second mortgage through a portfolio reposition over the past year, according to the servicer.

The sixth-largest loan on the watchlist, Prospectus ID #14 (Duncan Mill Road), represents 2.13% of the pool balance and was transferred to special servicing in June 2010 because of significant structural issues at the property. The loan was transferred back to the master servicer in May 2012 after the borrower brought the loan current and committed to correcting the deficiencies at the property. However, as of the most recent Property Condition Report received by the servicer, dated September 2010, the work that had been completed was not deemed sufficient, leaving approximately $99,000 in additional repairs to be completed over the immediate term and an additional $4.86 million in repairs deemed necessary through 2018. Prior to the loan’s transfer back to the master servicer, the special servicer obtained an updated appraisal dated December 2011, valuing the property at $9.0 million, indicating there is value outside of the outstanding trust balance at September 2012 of $8.62 million. However, as DBRS has been unable to obtain a concrete update on the status of the repairs from the servicer, there is significant uncertainty about the marketability of the asset. In addition, the property’s occupancy at YE2011 was reportedly around 40%, indicating that the property’s performance continues to suffer, and reducing the likelihood that property cash flows would be available for additional repairs through the intermediate term.

For additional details on the DBRS viewpoint for this transaction, and for details on the largest loans in the pool and the loans on the servicer’s watchlist or in special servicing, please see the September 2012 Monthly Surveillance Report for this transaction, which will be published shortly.

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance Methodology (May 2011), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.