DBRS Upgrades Two Classes of Real Estate Asset Liquidity Trust, Series 2005-2

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

-- Class B to AAA (sf) from AA (high) (sf)
-- Class C to A (high) (sf) from A (sf)

The ratings on all remaining classes within the transaction have been confirmed. DBRS maintains the trends on Class F through Class J at Negative. The trends on the remaining classes are Stable, with the exception of Class K and Class L, whose respective ratings do not carry trends.

The rating upgrades reflect the increased credit enhancement to the bonds from a collateral reduction of 45.2% since issuance. As of the September 2014 remittance report, 32 loans have been successfully paid out of the pool and two loans have been liquidated from the pool at a realized loss, leaving 61 loans remaining in the transaction. Overall pool performance remains stable, as the largest 15 loans have a weighted-average (WA) debt service coverage ratio (DSCR) and WA Exit Debt Yield of 1.52 times (x) and 13.4%, respectively. The pool also benefits from defeasance collateral as eight loans, representing 5.0% of the current pool balance, are fully defeased. All remaining 61 loans in the transaction are scheduled to mature by October 2015. The transaction has a pool-wide WA Exit Debt Yield of 16.3%.

DBRS maintains the Negative trends on Class F through Class J, reflecting the continued poor performance of these specific loans on the servicer’s watchlist. There are currently 13 loans on the servicer’s watchlist, representing 21.9% of the current pool balance. Several large loans on the servicer’s watchlist experiencing performance issues are highlighted below.

The InnVest Portfolio-Holiday Inn Select Oakville loan (Prospectus ID#8) is the largest loan on the watchlist and is secured by a limited-service hotel in Oakville, Ontario. The loan has been on the servicer’s watchlist since 2007 because of long-term decreases in occupancy. In 2011, the property’s performance appeared to improve incrementally as the DSCR reached 1.01x at YE2011, with an occupancy rate of 62%; however, a major electrical malfunction forced the property to close for a two-month span in the summer of 2012, causing the YE2011 DSCR and occupancy rate to decrease to 0.21x and 43%, respectively. According to YE2013 figures, performance has slightly rebounded as the DSCR rose to 0.70x and occupancy increased to 65%. Despite performance-related issues, the loan has remained current and benefits from full recourse to InnVest REIT, one of the largest hotel operators in Canada. According to the servicer’s September 2013 site inspection, the property was in Above Average condition, having recently completed a $3.5 million renovation.

The InnVest Portfolio-Radisson Suites Toronto (Prospectus ID#15), InnVest Portfolio-Radisson Laval (Prospectus ID#20), InnVest Portfolio-Radisson Kitchener (Prospectus ID#24) and InnVest Portfolio-Radisson London (Prospectus ID#34) loans together account for 7.4% of the current pool balance and are cross-collateralized and cross-defaulted. The Toronto and London assets have been on the servicer’s watchlist for multiple years because of ongoing performance struggles, the result of depressed occupancy rates. As of YE2013 reporting, the properties had DSCRs of 0.09x and -0.27x and occupancy rates of 65.0% and 40.1%, respectively. The Kitchener, Ontario, asset was added to the servicer’s watchlist in April 2014 after the YE2013 DSCR decreased to 1.16x, which was a result of an increase in utilities expenses from the previous year. The three properties on the servicer’s watchlist are also negatively affected by newer and better located competition that is nearer to major thoroughfares. The Laval, Québec, asset continues to exhibit stable performance as its YE2013 DSCR and occupancy were 1.79x and 65.0%, respectively. Despite the ongoing performance issues at the Toronto and London locations, the individual loans have remained current and all four loans benefit from full recourse to InnVest REIT.

The Duncan Mill Road (Prospectus ID#14) is secured by a Class B office building in the North York submarket of Toronto. The loan was initially placed on the servicer’s watchlist in 2009 after an exterior panel became detached from the building and fell to the ground. The loan was also previously in special servicing because of delinquent property taxes and loan reserve payments as well as poor property condition; however, the borrower corrected the fiscal deficiencies in early 2012 and the loan was subsequently returned to the master servicer in May 2012. The property has a history of deferred maintenance issues as a result of absent management, with a property condition report dated June 2012 noting that $4.9 million in repairs were necessary through 2018. As of the September 2013 site inspection, the borrower has corrected all structural issues; however, outstanding items of deferred maintenance remain. As a result of the property’s ongoing issues, performance has been depressed for years, reaching a low point in 2011 when the YE2013 DSCR was -0.35x. While the YE2012 DSCR improved slightly to 0.40x, the YE2013 DSCR once again declined further to -0.19x. According to the December 2013 rent roll, the property was 57.1% occupied, which is consistent with previous years; however, it is well short of the issuance occupancy rate of 90.0%. The loan remains current, but poor occupancy trends coupled with seemingly absent property management make the possibility of significant cash flow recovery unlikely in the near term. DBRS believes the loan to have continued term and refinance risk, given the poor operating history and property condition issues.

At issuance, DBRS shadow-rated six loans, representing 13.4% of the current pool balance, as investment grade. DBRS has today confirmed that the performance of these loans continues to be representative of investment-grade loan characteristics.

The DBRS analysis took into consideration the largest 15 loans, the shadow-rated loans and the loans on the servicer’s watchlist which, combined, account for 74.2% of the current pool 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 2014 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS 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 and CMBS North American Surveillance Methodology, which can be found on our website under Methodologies.