DBRS Confirms Ratings of Schooner Trust, Series 2007-8, Removes from Under Review with Developing Implications

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates issued by Schooner Trust, Series 2007-8 and removed the Under Review with Developing Implications status on each class of the Certificates, as listed below:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-J at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (high) (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.

The rating confirmations reflect the results of the sensitivity analysis regarding the redevelopment of the Londonderry Mall (Prospectus ID#1; 12.0% of the current pool balance), the largest loan in the pool. DBRS is continuing to monitor the potential cash flow disruptions during the renovation as updates from the servicer on the progress of the plan are made available.

Because of the risk to bondholders during the repositioning and construction of the asset, which could result in a non-functional commercial real estate asset with significant impaired value, DBRS conducted a sensitivity analysis relating to the cash flows and tenancy of Londonderry Mall and ran various scenarios to analyze the level of net cash flow (NCF) decline that could be sustained prior to a potential downgrade of a rated class. The analysis was based on the current loan balance, current rent roll and the YE2013 NCF reporting, as updated financials have not been made available. Based on this analysis, DBRS believes that a cash flow decline in excess of 20% could be sustained prior to potential rating actions. Depending on the level of stress applied to the cash flows, the ratings implications would be mainly limited to the non-investment-grade classes. In addition, the investment-grade classes have generally shown the propensity to withstand the cash flow volatility that DBRS anticipates Londonderry Mall to experience throughout the course of this redevelopment. Further, there has been pre-leasing activity at the property, as Simons is reported be taking over the space previously occupied by Sportchek and the space currently held by Army and Navy (7.8% of the net rentable area) once the tenant vacates upon its January 2016 lease expiration. Simons is reported to be opening in 2017; however DBRS has not seen an executed lease nor does it know the terms of the lease. As previously noted, the sponsor has obtained an equity investment in the amount of $100 million to reinvest and improve the asset. While DBRS believes this substantial capital commitment to be a positive step toward repositioning the asset and executing the sponsor’s plan, it does not come without risk to bondholders. In an effort to assess the progress of the borrower to execute on its business plan to redevelop Londonderry, DBRS will continue to maintain a dialogue with the servicer to track the redevelopment process of the mall, renewal of leases expiring and the signing of new leases. To the extent that the property begins to experience cash flow declines outside of the 20% stress discussed herein without mitigating future leasing, it may result in rating actions.

In addition to the ongoing developments with Londonderry Mall, one loan has been transferred to special servicing for payment default. The Future Inn Dartmouth (Pros ID#33, representing 0.9% of the current pool balance) loan is secured by a limited-service hotel in Dartmouth, Nova Scotia. The property is managed by Hurst Hospitality, which manages other budget hotels in New Brunswick and Nova Scotia. The loan was previously on the watchlist for several years because of a decline in performance and poor property quality. The loan remained current until July 2014 but did not transfer to special servicing until January 26, 2015. When asked why the loan was not transferred when it was 60 days delinquent, as prescribed in the Pooling and Servicing Agreement, First National indicated that the delay was related to a potential sale of the asset. However, DBRS has not been made aware that a purchase agreement is forthcoming, and suspects that such sale may no longer be viable. The YE2013 debt service coverage ratio (DSCR) remains low at -0.46 times (x) with a corresponding occupancy rate of 32.0%, a further decline from 0.07x and 41.0%, respectively, at YE2012. DBRS has requested the most recent appraisal report, as a workout strategy has not yet been determined.

The remaining loans in the pool exhibit stable performance overall, and the pool’s weighted-average DSCR and Debt Yield are 1.50x and 12.2%, respectively, as of the March 2015 remittance. 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, loans on the servicer’s watchlist and the loan in special servicing. The April 2015 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at infor@dbrs.com.

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 North American CMBS Rating Methodology (March 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

This rating did not include issuer participation and is based solely on publicly available information.