DBRS Upgrades Four Classes, Confirms 11 of Schooner Trust, Series 2005-3

DBRS has today upgraded the ratings of four classes of Schooner Trust, Series 2005-3 as follows:

-- Class C to AAA (sf) from AA (sf)
-- Class D1 to A (sf) from BBB (high) (sf)
-- Class D2 to A (sf) from BBB (high) (sf)
-- Class E to BBB (high) (sf) from BBB (sf)

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction. The trends on Class K through Class L remain Negative, reflecting the risk associated with the 71 Rexdale Boulevard loan, which is discussed in detail below. The trends on the remaining classes are Stable, including Class J, which had its trend changed to Stable from Negative with this review as the DBRS analysis concluded that the class is no longer subject to risk associated with the current poor performance of the aforementioned 71 Rexdale Boulevard loan.

The rating upgrades reflect the increased credit enhancement to the bonds from a collateral reduction of approximately 29.9% since issuance. As of the September 2013 remittance, 13 loans have paid out of the pool since issuance, leaving 81 loans remaining in the transaction. The transaction also benefits from defeasance collateral as 23 loans, representing 12.2% of the current pool balance, are fully defeased. Overall pool performance remains stable as the largest 15 loans in the transaction, excluding defeasance collateral and the 71 Rexdale Boulevard loan, have a weighted-average debt service coverage ratio (DSCR) and weighted-average debt yield of 1.66 times (x) and 16.0%, respectively.

The 71 Rexdale Boulevard loan (3.6% of the current pool balance) remains on the servicer’s watchlist with this rating action and has been on the servicer’s watchlist since October 2012. The loan is secured by a former food processing and cold storage facility near the Islington Avenue and Highway 401 interchange in northwestern Toronto. The property has been 100% vacant since July 2011, when the previous sole tenant exercised its lease termination option, which included paying a termination fee roughly equivalent to 80% of the annual debt service. While the servicer reports some interest in the property from new tenants, the specific use, size and specialty build-out of the property have proven to be an on-going challenge in leasing the subject. As a result of the building being vacant for the entire 2012 calendar year, the YE2012 DSCR was -1.08x compared with 1.18x at YE2011 and 1.52x at YE2010. According to the servicer, the borrower is now considering alternative options to re-tenant the space, including possible sub-division to convert it for multi-tenant usage. The loan remains current as the borrower continues to pay debt service and operating expenses. As of the September 2013 remittance, the loan has a reserve account balance of $1.4 million, which can be used for capital repairs, improvements to the property, leasing commissions and tenant inducements. DBRS continues to closely monitor this loan. In its analysis, DBRS concluded that if a distressed sale of the asset were to occur, it is unlikely that such loss would impact the rated Classes; however, any loss could erode the credit enhancement to Classes K and L. Therefore, the trends remain Negative.

As part of its review, DBRS analyzed the top 15 loans, the loans on the servicer’s watchlist and the shadow-rated loans, which comprise approximately 64.8% of the current pool balance. At issuance, DBRS shadow-rated seven loans, representing 8.0% of the current pool balance, as investment grade. DBRS has today confirmed that the performance of these individual loans remain consistent with investment-grade loan characteristics.

There are currently four loans on the servicer’s watchlist, representing 5.7% of the current pool balance. The DBRS analysis considered that a few of these loans, including 71 Rexdale Boulevard, have an elevated probability of default as a result of these performance issues. There are no loans in special servicing.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool, specially serviced loans and loans on the servicer’s watchlist. The September 2013 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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

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