DBRS Confirms Ratings on Real Estate Asset Liquidity Trust, Series 2007-1

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued by Real Estate Asset Liquidity Trust, Series 2007-1as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class XC-1 at AAA (sf)
-- Class XC-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Classes D-1 at BBB (sf)
-- Classes D-2 at BBB (sf)
-- Classes E-1 at BBB (low) (sf)
-- Classes E-2 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)

DBRS has changed the trend from Stable to Negative for Classes J, K and L, to reflect the increased risks for the pool discussed herein. All remaining trends are Stable.

The pool exhibits overall stable performance since closing, with the February 2016 remittance showing 55 loans remain in the pool with an aggregate outstanding principal balance of $330.2 million, representing a collateral reduction of 35.8% since issuance. There are three defeased loans, representing 7.5% of the pool balance, as well. There are nine loans scheduled to mature in 2016, representing 11.1% of the current pool balance. The bulk of the remaining loans are scheduled to mature in 2017. Loans representing 89.6% of the current pool balance are reporting YE2014 financials, and based on those figures, the top 15 non-defeased loans reported a weighted-average (WA) amortizing debt service coverage ratio (DSCR) of 1.46 times (x), a WA DBRS refinance DSCR of 1.50x, with WA debt yield and exit debt yield of 11.7% and 12.0%, respectively. Although the bulk of the transaction is exhibiting healthy metrics in close proximity to the respective maturity dates, there are five loans, representing 10.3% of the pool with a DBRS refinance DSCR below 1.0x, implying that a refinance by the scheduled maturity dates could be difficult without cash flow improvements over the near term.

DBRS maintains investment-grade shadow ratings on two loans in this transaction, which are also the largest two loans in the pool, representing 22.1% of the current pool balance. DBRS has today confirmed that the performance of these loans remains consistent with investment-grade characteristics.

As of the February 2016 remittance, there are eight loans on the servicer’s watchlist, representing 13.8% of the current pool balance, four of which represent less than 1.0% of the pool. There are no loans in special servicing. The largest watchlisted loan and a loan in the top 15 are highlighted below.

The Sundance Pooled Interest Loan (Prospectus ID#5, 7.1% of the current pool balance) is a pari passu loan secured by a four-storey Class A office building, a 7,000 square foot (sf) restaurant pad and a gas bar, all located on the same commercial parcel in southern Calgary, approximately 20 kilometres south of the downtown core. The property is located within the same office campus as three other Sundance properties, all of which are owned by the same sponsor, Strategic Group. This loan was added to the watchlist in December 2014 because occupancy declined to 29.3% after the former largest tenant, WorleyParsons Limited (WorleyParsons), vacated the majority of its space in November 2014, ahead of its original lease expiration of September 2016. WorleyParsons retained only 0.5% of the net rentable area (NRA) on a lease through May 2015 at a reduced rental rate from $22 per square foot (psf) to $20 psf. Cattlebaron Investments Limited is the sole tenant of the restaurant pad, representing 4.0% of the NRA with a lease scheduled to expire in November 2018.

Following the departure of WorleyParsons, in 2015 part of its former space in the entire third and fourth floors of the building were leased to Fluor Canada Limited (Fluor) representing 48.8% of the NRA on a lease through October 2016. Fluor was paying $25 psf for the third floor and $5 psf for the fourth floor. With this lease signing, the property was 53.3% occupied as of the October 2015 rent roll; however, the rent roll also showed that the Fluor lease had been amended to reflect a new lease expiry for the third-floor space to November 2015, with the original October 2016 expiry for the fourth floor and the originally low rental rate retained. It appears that the tenant is no longer in occupancy at the property as of March 2016. DBRS has asked the servicer to confirm and is awaiting confirmation. According to Avison Young, Calgary’s suburban south submarket had an overall vacancy rate of 15.8% at Q4 2015 (up from 11.0% at Q1 2015), with Class A properties averaging 16.7% vacancy (up from 13.0% at Q1 2015). Altus Insite (Altus) lists approximately 168,000 sf of space at the subject property (95.9% of the NRA) as available across all four storeys of the building as of March 2016. The borrower has been actively marketing the space and has advised the servicer that potential leasing traffic has been healthy, with tenants touring the property that have been looking for various amounts of space that generally range between 8,000 sf to 80,000 sf. Although no leases have been signed to date, the interest in the property is a positive sign, particularly when combined with the fact that occupancy is strong at the other office buildings located within the Sundance development

This loan has partial recourse to the sponsor, capped at $15 million for the whole loan, $7.5 million of which is attributable to the trust. The sponsor is considered a seasoned real estate professional with considerable experience in the Alberta market whose current portfolio consists of over 111 commercial and residential properties located in Alberta, British Columbia, New Brunswick and Nova Scotia. The borrower’s recently reported net worth is consistent with previously stated figures that show net worth well in excess of the recourse liability. Additionally, as the servicer advises that the sponsor is currently working on multiple development projects, there is incentive to fulfill the obligations on this loan to ensure future financing opportunity for those projects. Although these mitigants provide comfort, DBRS does recognize the increased risk associated with the declining energy markets and the effect on the Calgary real estate markets and has modelled the loan based on a stressed net cash flow figure to inflate the credit enhancement levels across all rating categories.

The Rockyview Professional Centre loan (Prospectus ID#11, 2.6% of the current pool balance) is secured by a 69,000 sf medical office building in Calgary, located less than eight kilometres south of the central business district. According to the March 2015 rent roll, the property was 71.5% occupied with tenants representing 29.9% of NRA, including the largest tenant, Ent Associates (11.1% of the NRA), which have leases scheduled to expire in 2016. The lease for Ent Associates is scheduled to expire in June 2016. DBRS does not expect the tenant to renew as Altus reported the tenant’s space as available as of March 2016. In total, Altus reported 16,500 sf of space (23.9% of NRA) as available at the property, indicating some leasing activity may have occurred since the time of the rent roll on file. According to the YE2014 financials, the amortizing DSCR was at 1.25x, which is an improvement from YE2013 DSCR of 1.01x and YE2012 DSCR of 0.85x. This loan has partial recourse of $2 million guaranteed by the sponsor, Northwest Healthcare Properties REIT, one of the largest owner/operators of medical office buildings in Western Canada. Although the experienced sponsor in place with partial recourse provides cushion against the near-term refinance risk, DBRS modelled the loan with a stressed cash flow to account for the uncertainty surrounding the current occupancy and near-term rollover at the property in advance of the scheduled maturity date.

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 2016 monthly surveillance report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS at info@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 (June 2015) and CMBS North American Surveillance (December 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.