DBRS Confirms Ratings on Real Estate Asset Liquidity Trust, Series 2005-2
CMBSDBRS Limited (DBRS) has today confirmed all classes of Real Estate Asset Liquidity Trust, Commercial Mortgage Pass-Through Certificates, Series 2005-2 as follows:
-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class XC-1 at AAA (sf)
-- Class XC-2 at AAA (sf)
-- Class C at A (high) (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 K at CCC (sf)
-- Class L at CCC (sf)
In addition to the rating actions above, DBRS has changed the trends on Class F through Class J to Stable from Negative. All other trends are Stable, with the exception of Class K and Class L, whose respective ratings do not carry trends. DBRS does not rate the first loss piece, Class M.
The rating confirmations reflect the stable performance of the loans remaining in the transaction and the increased credit enhancement to the bonds as a result of loan repayment and amortization. As of the August 2015 remittance, 32 of the original 95 loans remain in the pool, representing a collateral reduction of 68.5% since issuance. Within the past 12 months, 29 loans have repaid, representing a paydown of 20.4%. The pool benefits from defeasance collateral, as five loans, representing 13.8% of the current pool balance, are fully defeased. All remaining 32 loans are scheduled to mature by October 2015. According to YE2014 financials, the pool has a weighted-average (WA) debt service coverage ratio (DSCR) and WA exit debt yield of 1.75 times (x) and 16.3%, respectively. The strong exit debt yield is indicative of a high likelihood of refinance.
DBRS has changed the trends on Class F through Class J to Stable from Negative, as the overall performance of the loans on the servicer’s watchlist has improved. There are currently 26 loans on the servicer’s watchlist, representing 79.6% of the current pool balance; however, 23 of these loans, representing 71.8% of the current pool balance, have been flagged because of upcoming maturity and as stated above, most loans in the pool have very strong financeable debt yields.
Since the last DBRS rating action in October 2014, both the InnVest Portfolio-Holiday Inn Select Oakville loan (Prospectus ID#15) and the four cross-collateralized and cross-defaulted loans secured by the InnVest Portfolio – Radisson Suites Toronto (Prospectus ID#15), the InnVest Portfolio – Radisson Laval (Prospectus ID#20), the InnVest Portfolio – Radisson Kitchener (Prospectus ID#24) and the InnVest Portfolio – Radisson London (Prospectus ID#34) were repaid in full with the July 2015 remittance. Historically, poor performance of these loans as well as concerns regarding the borrowers’ ability to secure refinancing capital resulted in the trend changes in October 2014.
Two loans currently on the watchlist, which may have difficulty refinancing, are highlighted in detail below.
The Duncan Mill Road loan (Prospectus ID#14, 3.7% of the current pool balance) is secured by a 173,000-square foot (sf) Class B office building located in North York, Ontario. 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. In June 2010, the loan transferred to special servicing as a result of delinquent property taxes and loan reserve payments, as well as the 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. In September 2010, a property condition report cited $4.9 million in necessary repairs to be completed through 2018, including the replacement of the chiller, the rehabilitation of the garage roof, facade repairs and post-tension work. According to the August 2014 site inspection, the property was found to be in Fair condition with only minor items of deferred maintenance noted, including segments of deterioration found in portions of the sidewalk, service ramp and parking garage. The inspector noted that the borrower had corrected all structural issues; however, the vacant units did not appear to be rent ready and would require a significant amount of lease-hold improvements to be completed prior to potential tenants’ taking occupancy. There is an ongoing dispute regarding a second mortgage and Personal Property and Security Act (PPSA) registration that was placed on the property due to previous work completed. Negotiations to settle the issue are ongoing at this point, with no potential resolution date known at this time.
According to the March 2015 rent roll, the property was 60% occupied with an average rental rate of $19.51 per square foot (psf) compared with being 57.1% occupied with an average rental rate of $18.63 psf as of December 2013. The two largest tenants are HomeLife Dreams Realty (11.9% of the net rentable area (NRA)) and NY Family Health Team (10.7% of the NRA) with lease expirations in July 2017 and October 2018, respectively. Since March 2015, four tenants representing 9.0% of the NRA have had lease expirations, the largest being Bayview Glen School (5.3% of the NRA), which had a lease expiration in April 2015. No leasing update has been provided to date. As of YE2014 financial reporting, the loan had a DSCR and exit debt yield of 0.61x and 7.74%, respectively. The loan matures in October 2015, with the borrower reporting that the property has several parties interested in buying the property; however, if the property is not sold, the borrower will search for refinancing capital.
The Windsor Market Square loan (Prospectus ID#17, 3.7% of the current pool balance) is secured by a 150,755-sf mixed-use property located in Windsor, Ontario. The loan has been on the servicer’s watchlist since October 2013 as a result of a low DSCR caused by a decrease in rental income and expense reimbursements, as well as an increase in repairs and maintenance expense. As of YE2014 financial reporting, the loan had a DSCR and exit debt yield of 1.0x and 9.57%, respectively. According to the June 2015 rent roll, the property was 77.9% occupied with an average rental rate of $11.17 psf compared with being 85.2% occupied with an average rental rate of $10.00 psf as of December 2013. The three largest tenants include Absolute Fitness for Women (19.5% of the NRA) on a month-to-month lease, and Community Gaming and Entertainment GP Inc. (16.8% of the NRA) and Shoppers Drug Mart (13.2% of the NRA), which have lease expiration dates of November and December 2016, respectively. Since June 2015, ten tenants representing 6.2% of the NRA have had lease expirations, the largest being D’Hondt Connor (2.0% of the NRA), which has reportedly relocated. No leasing update has been provided to date. As of the August 2014 site inspection, the property was considered to be in Good condition with two deferred maintenance items: minor asphalt deterioration and deteriorating plaster in multiple stairwells. The inspector estimated year-to-date capital expenditures to be approximately $50,000, while noting that a partial roof replacement over the market area has a projected cost of $150,000. The borrower reportedly intends to convert the vacant commercial space in the office tower into residential lofts after loan maturity; however, it needs to refinance the loan in order to begin any construction. The loan matured in July 2015, yet it remains in the trust. DBRS has asked the servicer if the loan will be transferred to special serving if a take-out strategy is not determined in the immediate future and is awaiting a response.
DBRS maintains an investment-grade shadow rating on one loan, Jutland Road-OFF-BC (Prospectus ID#19), which represents 1.43% of the current pool balance. DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.
The DBRS analysis took into consideration the largest 15 loans, the shadow-rated loan and the loans on the servicer’s watchlist, which combined, account for 79.6% 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 August 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 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.
The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com
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