DBRS Confirms Eight Classes and Places Six Classes of Schooner Trust, Series 2007-8 Under Review with Negative Implications

DBRS Limited (DBRS) has today confirmed the following classes of Commercial Mortgage Pass-Through Certificates issued by Schooner Trust, Series 2007-8, 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 XC at AAA (sf)

In addition, DBRS has placed the remaining classes in the transaction Under Review with Negative Implications, as listed below:

-- Class F at BB (high) (sf), Under Review with Negative Implications
-- Class G at BB (sf), Under Review with Negative Implications
-- Class H at BB (low) (sf), Under Review with Negative Implications
-- Class J at B (high) (sf), Under Review with Negative Implications
-- Class K at B (sf), Under Review with Negative Implications
-- Class L at B (low) (sf), Under Review with Negative Implications

All trends are Stable, with the exception of Class F through Class L, which have ratings that do not carry trends.

DBRS has placed six classes of the Certificates Under Review with Negative Implications, primarily due to concerns surrounding the servicing, particular and performance of the Best Western Grand Mountain loan (Prospectus ID#18, 2.0% of the current pool balance), which, as of the March 2016 remittance is more than 90 days delinquent. The Master Servicer, First National Financial, LP (First National) has not transferred the loan to Special Servicing. A Servicing Transfer Event, as defined in the Pooling and Servicing Agreement (PSA), states that a loan that fails to make a monthly payment, and that failure continues unremedied for 60 days, will be transferred to Special Servicing. Based on the foregoing and in accordance with the expectations set out in the methodology, DBRS expected the loan to have been transferred to Special Servicing. DBRS is concerned that the delay in transferring the loan to Special Servicing and the lack of servicer action in response to the borrower delinquency could increase losses to the Trust and/or could bring the ratings under further pressure. A discussion of the performance and outlook of the Best Western Grand Mountain loan and DBRS’s concerns regarding servicing is detailed below.

Since issuance, the pool has experienced collateral reduction of 31.1%, as a result of scheduled loan amortization and repayment, and the principal recovered and losses realized from one loan liquidated in January 2016, Prospectus ID #33, Future Inn Dartmouth, at a loss of $1.3 million to the Trust, contained to the unrated first loss piece. As of the March 2016 remittance report, 46 loans remain in the pool of the original 68 loans. All of the remaining loans in the pool were originally scheduled to mature between January 2017 and June 2017. The weighted-average debt service coverage ratio (DSCR) and exit debt yield as of the most recent reporting for the loans in the pool is 1.43 times (x) and 11.6%, respectively. The pool’s largest 15 loans represent 75.0% of the pool balance and overall are exhibiting stable performance, with a weighted-average DSCR and debt yield of 1.41 times (x) and 10.8%, respectively, based on the most recent year-end reporting available for the individual loans. Further, 51.8% of the pool benefits from recourse to the respective sponsor, as 21 loans (38.5% of the current pool balance) are full recourse and 11 loans (13.3% of the current pool balance) are partial recourse.

As of the March 2016 remittance report, there are four loans on the servicer’s watchlist representing 10.7% of the current pool balance. Three of the four loans are being monitored for a low DSCR, with the Best Western Grand Mountain loan monitored for delinquency. Although the largest loan in the pool, Londonderry Mall (Prospectus ID#1, 12.7% of the current pool balance), is not on the watchlist and is reporting stable financial metrics as of YE2014, DBRS views the ongoing redevelopment of the asset as an increased risk to the Trust and is modeling the loan with an increased risk of default, as discussed below.

The Londonderry Mall loan is secured by a 775,000 square foot (sf), bi-level enclosed regional shopping mall located in northeast Edmonton, Alberta. The property is currently undergoing a $130 million redevelopment project that began in 2014. The mall is to remain open and fully operational during the renovation. At completion of the project in 2017, the mall will have fully renovated common areas and interiors, a relocated food court with additional seating, and upgraded energy-efficient lighting. DBRS walked the property in August 2015 and found the property to be in overall good condition. During the visit, DBRS observed considerable renovation progress, most notably in the northeast section of the mall. Completed upgrades included the installation of floor tile at tenant storefronts and handrails around floor openings, along with the addition of spotlights to modernize the appearance of the common areas. Generally, occupied spaces appeared to be operational, with a fair amount of foot traffic at the mall during the visit. Since DBRS’s visit in August 2015, the borrower reports additional progress has been made on the roofs, elevators, the food court and a connecting bridge at the property, with an overall cost as of March 2016 of $67.0 million, representing 56.0% of the total budget. The project is reportedly on schedule and on budget.

The most recent financial reporting, from YE2014, shows the DSCR as relatively unchanged at 1.31x when compared to the prior year, but coverage has declined from the DBRS UW DSCR of 1.36x. The subject’s December 2015 occupancy rate of 71.8% is down when compared to the YE2014 occupancy rate of 76.0%, attributed to the loss of smaller tenants that have vacated the subject. In addition, the second-largest tenant at the property, Army & Navy Dept. Store Limited, which represented 7.8% of the NRA, has vacated the subject upon its January 2016 lease expiration. As of March 2016, the borrower has noted that the space will remain vacant in preparation for a new tenant, a Simon’s department store, which is reportedly scheduled to open in 2017. The two largest tenants at the subject include Hudson’s Bay Company (15.4% of the NRA) and Save on Foods (5.0% of the NRA), which have leases that expire in August 2018 and November 2020, respectively. Rollover throughout the remaining loan term is generally moderate, with 32 tenants, representing 12.4% of the NRA, that have lease expirations within the next 12 months, according to the December 2015 rent roll. According to CB Richard Ellis (CBRE’s) H2 2015 Edmonton Retail MarketView Report, the overall retail market for regional shopping centres reported an average vacancy rate of 9.7%, while the North East submarket reported an overall retail market vacancy rate of 2.0%. Retail market vacancy has increased to 4.8% for the city of Edmonton, reflective of an increase of 2.5% year over year, mainly attributed to the Target and Future Shop closures in the first half of the year, according to the MarketView Report.

The Best Western Grand Mountain loan (Pros ID#18, 2.0% of the current pool balance) is secured by a limited-service hotel in Grande Cache, Alberta, with a scheduled loan maturity in June 2017. The loan was added to the watchlist at the end of December 2015 for delinquency. As of the March 2016 remittance report, the loan was due for the December 2015 payment and all scheduled payments due thereafter, with total servicer advances to date of $224,988 for a total exposure of $7.2 million ($88,826 per key). Although the loan passed the 60-day delinquency mark in February 2016, the loan was not transferred to special servicing as prescribed in the PSA. The servicer has advised DBRS that the delay in transferring the loan was related to the borrower’s ongoing efforts to market the property for sale. In response to a DBRS inquiry in March 2016, the servicer stated that the borrower had recently enlisted Colliers to market the property, and forwarded a marketing brochure. Based on the materials provided, the property’s flag was changed from Best Western to a Days Hotel at some point during the loan term. No information has been provided to date with regard to asking price or interest in the property.

The servicer advises that the borrower is not able to bring the loan current, as 2015 cash flows have fallen significantly from the YE2014 DSCR of 1.77x. The YE2015 figures have not been finalized, but will be published with the April 2016 remittance report. An occupancy report for December 2015 was made available to DBRS, showing the subject reported a T-12 occupancy rate of 43.0%, a decline from T-12 December 2014 occupancy rate of 61.9%. The property was valued at $14.6 million at issuance. The servicer has not ordered an updated appraisal, but DBRS has requested an updated value be obtained as soon as possible and anticipates the value will be well under the issuance figure. The property is situated in a remote location in Western Alberta with a local economy heavily reliant on oil and gas exploration. A slowdown in the energy sector has driven the recent performance decline of the hotel. Given these factors and the borrower’s inability to bring any cash to the table to bring the loan current, or, likely, to fund any shortfall between the selling price and the Trust’s exposure, DBRS anticipates a loss to the Trust. Based on the foregoing, DBRS would expect the servicer to transfer the loan to the special servicer and initiate workout proceedings in accordance with the PSA.

DBRS maintains an investment-grade shadow rating on one loan in the pool, Atrium on Bay (Prospectus ID#2, 10.5% of the current pool balance). DBRS has today confirmed that the performance of this loan 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 and the loans on the servicer’s watchlist. The February 2016 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.

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 (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.