DBRS Confirms Ratings of Merrill Lynch Financial Assets Inc., Series 2006-Canada 19

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2006-Canada 19 (the Certificates) issued by Merrill Lynch Financial Assets Inc., 2006-Canada 19:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (sf)
-- Class H at BB (low) (sf)
-- Class J at B (high) (sf)
-- Class K at B (sf)
-- Class L at B (low) (sf)
-- Class XC at AAA (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class M.

The rating confirmations reflect the overall stability of the pool, which has experienced a collateral reduction of 40.0% since issuance as a result of scheduled loan amortization and successful loan repayment. At issuance, the pool consisted of 75 fixed-rate loans secured by 124 multi-family, mobile home parks, and commercial properties. As of the February 2015 remittance, 52 loans remain in the pool with an aggregate outstanding principal balance of $350.6 million. The top 15 loans continue to exhibit stable performance with a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.44 times (x) and 11.9%, respectively, based on the most recent year-end reporting available. In addition, there are three fully defeased loans representing 2.1% of the pool balance as of the February 2015 remittance. Three loans, representing 15.2% of the current pool balance, are scheduled to mature by December 2015. These loans report a WA exit debt yield of 11.0%. As of the February 2015 remittance, there are 17 loans on the servicer’s watchlist, representing 33.5% of the current pool balance, five of which individually represent more than 1.0% of the current pool balance. The three most pivotal loans on the servicer’s watchlist are highlighted below.

400 University (Prospectus ID#1, representing 13.9% of the current pool balance) is secured by a high profile office tower in downtown Toronto. The loan was added to the servicer’s watchlist after the former largest tenant, Zurich Insurance Company (Zurich), vacated its space at lease expiration in January 2014, leaving approximately 33.0% of the net rentable area (NRA) vacant. According to the July 2014 rent roll, the property was 61.7% occupied, with the largest tenants including Ontario Minister of Infrastructure (53.8% of NRA, expiring in October 2015), Tata Consultancy Services Canada Inc. (4.4% of NRA, expiring in October 2024) and Olson Canada, Inc. (3.5% of NRA, expiring in September 2019). According to the servicer, the borrower continues to market the vacant space and has been able to sign two new tenants since October 2014, which have leased the 17th and 20th floors, together representing 5.8% of the NRA. A leasing reserve was established in 2010 specifically for re-leasing the space previously occupied by Zurich. As of the February 2015 remittance, this leasing reserve had a balance of $900,891, equating to approximately $7.44 per square foot. The loan was modeled with an elevated probability of default to reflect the cash flow decline from Zurich’s departure.

Castel Royale (Prospectus ID#3, representing 7.4% of the current pool balance) is secured by a 250-unit independent-living property located in an affluent area of Montréal. The loan is currently on the servicer’s watchlist as a result of a prolonged decrease in the occupancy rate at the subject, which was 63.4%, as of the December 2014 rent roll compared with 68.3% at YE2013. As a result, the YE2014 DSCR remains depressed at 0.53x. According to the servicer, renovations to the exterior of the property have been completed, and an engineering firm has been hired to address the remaining deferred maintenance at the property, including the parking garage, which is in need of repair. The borrower has also engaged in a new marketing strategy to target local demographics in an effort to gain leasing momentum. The property’s cash flow is likely to remain low until the deferred maintenance has been addressed at the property and leasing activity has improved as a result of the borrower’s renewed marketing efforts. The loan benefits from full-recourse to Chartwell Seniors Housing REIT, one of the largest operators of senior housing in Canada.

The Best Western-Dorval loan (Prospectus ID#21, representing 2.0% of the current pool balance) is secured by a 173-key full-service airport hotel in Dorval, Québec. The YE2013 DSCR was reported at 0.96x as a result of a 4.0% decline in departmental revenue and a 72.7% increase in departmental expenses. Room expenses increased 86.3% over YE2012 because of higher airport guest parking expenses along with a 54.4% increase in Food & Beverage costs. This is reflective of a 58.4% decline in cash flow over the DBRS underwritten figures as a result of the higher expense base. However, the February 2015 Smith Travel Research report shows the subject has been outperforming its competitive set for the past month on the average daily rate (ADR) metric at $120.63 compared with the competitors’ ADR of $109.98, and based on the RevPAR metric at $82.21 compared with the competitors’ RevPAR of $73.88. The occupancy was reported at 68.1%, consistent with the competitive set’s average of 67.2% for the past month, and has continued to show improvement year over year since 2006. According to the September 2014 site inspection, the property is in average condition, with renovations in process to the common area bathrooms and no deferred maintenance noted. Despite the recent financial difficulties, the property exhibits stable performance in comparison to the competitive set, and the loan benefits from full recourse to an experienced and well-capitalized sponsor.

DBRS maintains investment-grade shadow ratings on Wal-Mart Collingwood (Prospectus ID#8, representing 4.2% of the current pool balance) and Winnipeg Health (Prospectus ID#61, representing 0.5% of the current pool balance). DBRS has today confirmed that the performance of these loans remains consistent with investment-grade loan characteristics.

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. The February 2015 monthly 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 (January 2015), which can be found on our website under Methodologies.