DBRS Places Schooner Trust, Series 2007-8 Under Review with Developing Implications

DBRS has today placed all classes of Schooner Trust, Series 2007-8 (the Certificates) Under Review with Developing Implications, as listed below:

-- Class A-1 at AAA (sf), Under Review with Developing Implications
-- Class A-2 at AAA (sf), Under Review with Developing Implications
-- Class A-J at AAA (sf), Under Review with Developing Implications
-- Class B at AA (sf), Under Review with Developing Implications
-- Class C at A (sf), Under Review with Developing Implications
-- Class D at BBB (sf), Under Review with Developing Implications
-- Class E at BBB (low) (sf), Under Review with Developing Implications
-- Class F at BB (high) (sf), Under Review with Developing Implications
-- Class G at BB (sf), Under Review with Developing Implications
-- Class H at BB (low) (sf), Under Review with Developing Implications
-- Class J at B (high) (sf), Under Review with Developing Implications
-- Class K at B (sf), Under Review with Developing Implications
-- Class L at B (low) (sf), Under Review with Developing Implications
-- Class XC at AAA (sf), Under Review with Developing Implications

DBRS has placed each class of the Certificates Under Review with Developing Implications as a result of uncertainties surrounding the substantial redevelopment plan related to the collateral securing the largest loan in the pool, Londonderry Mall (Prospectus ID#1; 11.8% of the current pool balance). The mall is in the early stages of redevelopment, and DBRS expects to learn more regarding the potential cash flow implications in the coming months.

The Londonderry Mall loan is secured by a 775,000 square foot (sf), bi-level enclosed regional shopping centre in northwest Edmonton, built in 1972 and renovated in 1992. The subject features a mix of national, regional and local tenants. As of the March 2014 rent roll, the property was 76.5% occupied with major tenants, including The Bay (15.1% of net rentable area (NRA)), Army & Navy (7.7% of NRA) and Save-On-Foods (4.9% of NRA), which expire in August 2018, January 2015 and November 2020, respectively. The property was 95.9% occupied as of May 2013; however, Sport Chek vacated its space at lease expiry in December 2013 (in addition to a few smaller tenants), leaving the property 76.5% occupied by YE2013. Through 2015, an additional 12.5% of the NRA is scheduled to roll, including Army & Navy.

The property is currently undergoing the first phase of a substantial $100 million redevelopment project that has started to expose walls and ceilings leaving the property in what DBRS considers to be poor condition. The plan calls for the relocation of the food court and Winners (4.0% of the NRA), along with other upgrades including new ceilings, railings and a full renovation of common areas. The project in its entirety is reportedly scheduled to take approximately 36 months to complete, coinciding with loan maturity in 2017.

The sponsor, Montez Corporation, is a well-funded and experienced asset and investment advisor in the commercial real estate industry. It manages eight investment funds totalling over 10 million sf of real estate valued at approximately $3.5 billion. While the long-term vision of the sponsor and the reported investment commitment from its equity partners is viewed as positive, the loan is non-recourse and there is no completion guarantee for the construction. The committed equity funds will remain borrower controlled. Additionally, there is no requirement for either the property manager or sponsor to provide First National Financial, LP (First National), the mortgage loan servicer, with periodic progress updates. Lastly, while there is reported tenant interest in the post-remodel and repositioning of the asset, no new tenants have currently committed to the centre. DBRS views the risk to certificateholders to be elevated while the property is under construction because if a default occurred during certain stages of the renovation period, the property value is likely to be significantly impaired. DBRS will monitor the potential cash flow disruptions during the renovation and request regular updates from First National on the progress of the plan.

In addition to the elevated risk associated with the construction of Londonderry Mall, there are currently four loans on the servicer’s watchlist, representing 10.7% of the pool balance. The DBRS analysis considered that a few of these loans have an elevated probability of default as a result of these performance issues.

The most pivotal asset on the servicer’s watchlist is highlighted.

The Days Inn Dartmouth loan (Prospectus ID#33; 0.9% of the current pool balance) is secured by a limited-service hotel in Dartmouth, Nova Scotia. This loan has been on the servicer’s watchlist since November 2010 because of continued poor performance as a result of low occupancy figures. The loan has not operated above a 1.0 times (x) DSCR since YE2008, and the most recent figures from YE2013 report a DSCR and occupancy rate of -0.46x and 32%, respectively. While the borrower has kept the loan current in the past, it ceased making its debt service payments in July 2014 and the loan is now more than 90 days delinquent. DBRS contacted the servicer regarding whether the loan would be transferred to special servicing and, according to the servicer, the Controlling Class Representative is currently exploring a strategy for the loan. At issuance, the property was valued at $7.2 million, which is currently representative of a 48% loan-to-value ratio; however, a new appraised value is likely to be lower, given the long-term performance issues of the asset. DBRS expects to learn more regarding the servicer’s intentions for the loan in the near future.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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.