DBRS Upgrades One Class of Real Estate Asset Liquidity Trust, Series 2005-2

DBRS has today upgraded one class of Real Estate Asset Liquidity Trust, Commercial Mortgage Pass-Through Certificates, Series 2005-2, as follows:

-- Class B from AA (sf) to AA (high) (sf)

DBRS has also confirmed 13 classes in this transaction.

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (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 XC-1 at AAA (sf)
-- Class XC-2 at AAA (sf)

Classes F, G, H, and J were put on a Negative trend, while classes A-1, A-2, C, D-1, D-2, E-1 and E-2 were confirmed with Stable trends.

In addition, two classes were confirmed with no trends, as follows:

-- Class K at CCC (sf)
-- Class L at CCC (sf)

The rating upgrade reflects the continued collateral reduction of the pool, as a result of loan amortization and payoffs, in addition to a number of large loans that continued to exhibit strong performance. The assignment of Negative trends to Classes F, G, H and J reflects the continued poor performance of the loans on the servicer’s watchlist.

As of the September 2013 remittance report, there are 61 of the 95 original loans remaining in the pool, with a collateral reduction of 42.9% since issuance. The largest 15 loans in the pool have a healthy weighted-average DSCR and debt yield of 1.57 times (x) and 13.5%, respectively, as of the September 2013 remittance report and the most recent year-end NCF figures, with a weighted-average net cash flow growth of 6.0% since issuance. The pool also benefits from seven defeased loans, representing 4.6% of the current pool balance.

There are 12 loans on the servicer’s watchlist representing 19.7% of the current pool balance; however, four loans, representing 5.7% of the current pool balance, are being monitored for issues not related to property performance.

The largest loan on the watchlist is Prospectus ID#8 InnVest Portfolio-Holiday Inn Select Oakville. This loan is secured by a full-service hotel in Oakville, Ontario. The loan has been on the watchlist for performance issues since 2007. In recent years, the property displayed incremental improvements, increasing the DSCR to 1.01x at YE2011, but experienced a setback in 2012 when an electrical malfunction caused the property to close for two months, decreasing the DSCR to 0.21x at YE2012. Despite the setback, the loan has full recourse to a large Canadian hotel operator, who has kept the loan current while on the servicer’s watchlist. DBRS will continue to monitor the loan closely.

Prospectus ID#14 Duncan Mill Road, representing 2.3% of the current pool balance, is the fourth-largest loan on the servicer’s watchlist and is secured by a Class B office building in Toronto, Ontario. The loan has been on the watchlist for the past several years, and at one point was transferred to special servicing, due to poor property performance and deferred maintenance issues. Property performance started to decline when the occupancy rate dropped to 40.0% in December 2011. The 2012 occupancy rate showed a slight improvement, to 53.6%; however, it remained well below the issuance level of 90.0%. Additionally, the property has a history of deferred maintenance issues as a result of absent management and was subsequently transferred to the special servicer in June 2010. The deficiencies were remedied and the loan returned to the master servicer in May 2012; however, a property condition report noted an additional $4.9 million in repairs were necessary through 2018. As of the September 2012 site inspection, the property was reported to be in Fair condition overall, with few issues still remaining. According to the servicer, the remaining issues were expected to be remediated by the end of 2012, but a more thorough update and new property condition report have not been provided. As a result of the poor property performance, the DSCR has declined, fluctuating from 1.44x at issuance to as low as -0.35x at YE2011, with a slight recovery in 2012, to 0.40x. Poor occupancy trends, coupled with a seemingly absent property manager and borrower, make the possibility of significant cash flow recovery unlikely in the near term. While the borrower has continued to keep the loan current, DBRS believes the loan to have continued term and refinance risk, given the poor operating history and property condition issues. DBRS continues to communicate with the servicer for updates on this property and intends to update the monthly surveillance report as new information becomes available.

Prospectus IDs #15 (InnVest Portfolio-Radisson Suites Toronto) and #34 (InnVest Portfolio-Radisson London) are part of four crossed loans in the InnVest Portfolio, along with Prospectus IDs #20 and #24, and are on the watchlist for poor property performance. The crossed InnVest Portfolio represents approximately 7.3% of the current pool balance and is fully guaranteed by a large Canadian hotel operator. The two watchlisted loans have resulted in a decline in the weighted-average DSCR of 0.78x for the crossed loans, which represents a 60% decline in cash flow over issuance levels. Prospectus IDs #15 (InnVest Portfolio-Radisson Suites Toronto) and #34 (InnVest Portfolio-Radisson London) continue to struggle with low DSCRs of 0.53x and -0.64x, respectively. Based on the August 2012 STR report, both properties are being outperformed by their competitive set. Despite the property performance issues, the sponsor has kept the loans current and DBRS believes the leverage of the loans, on a per-key basis, to be low.

There are a total of six loans shadow-rated investment grade by DBRS remaining in the pool, representing 13.4% of the outstanding balance.

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 and the loans on the servicer’s watchlist. The September 2013 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

Note:
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.