DBRS Upgrades Two Classes and Confirms Remaining Classes of Schooner Trust, Series 2006-5

DBRS Limited (DBRS) has today upgraded the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2006-5 issued by Schooner Trust as follows:

-- Class C upgraded to AAA (sf) from AA (high) (sf)
-- Class D upgraded to AAA (sf) from A (high) (sf)

DBRS has also confirmed the ratings on the following classes:

-- Class E at A (sf)
-- Classes F at BBB (high) (sf)
-- Classes G at BBB (sf)
-- Class H at BB (high) (sf)
-- Class J at BB (sf)
-- Class K at B (high) (sf)
-- Class L at B (low) (sf)
-- Class X-C at AAA (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of loan amortization and successful loan repayment. Since issuance, the pool has experienced a collateral reduction of 93.1%, with five of the original 91 loans outstanding as of the March 2016 remittance report. Since the last DBRS rating action in March 2015, 67 loans refinanced out of the Trust, contributing to a principal paydown of approximately $271 million, leaving an aggregate outstanding principal balance of $33.5 million. There is one defeased loan, representing 11.5% of the pool balance, and all loans are expected to pay out by April 2016. All loans are reporting YE2014 financials, and based on these figures (excluding the defeased loan), the pool reported a weighted-average (WA) amortizing debt service coverage ratio (DSCR) of 1.42 times (x), a WA DBRS refinance DSCR of 1.41x, a WA debt yield of 13.7% and a WA exit debt yield of 13.9%. All loans are on the servicer’s watchlist due to upcoming loan maturity. The two largest loans are highlighted below.

The Lindsay Square loan (Prospectus ID#2, 46.9% of the current pool balance) is secured by a community mall in Kawartha Lakes, Ontario, originally built in 1990 and renovated in 2005. This loan was originally placed on the watchlist after the former largest tenant, Target (51.3% of the net rentable area (NRA)), left the property in May 2015 following its announcement to exit the Canadian market. As a result, occupancy was at 44.7% as of the July 2015 rent roll. The servicer advises that three potential tenants have shown interest in occupying the majority of Target’s former space, with space requirements ranging between 16,000 sf and 44,000 sf. A variety store tenant has confirmed that it will execute a lease and will be occupying approximately 43,650 sf of space and paying a percentage rent of gross sales on a fifteen-year term. A major fashion tenant and a fitness center tenant provided a letter of interest and the borrower is working to finalize the leases. The leases are expected to extend for ten years, with triple net rents ranging from $8 psf to $13 psf. If all potential tenants successfully execute a lease, occupancy could increase to approximately 85%. According to the July 2015 rent roll, tenants occupying 20.6% of the NRA have leases that expire or will be expiring in 2016, including the second-largest tenant, Pharma Plus (5.3% of NRA), but the tenant executed a renewal for five years with a new lease expiration of December 2020. This loan was scheduled to mature in January 2016, but was recently granted an extension to April 2016 to allow the borrower time to finalize its refinance plans. According to the YE2014 financials, the DSCR was 1.25x, which is an increase from YE2013 of 1.14x. The DBRS Refi DSCR and exit debt yield for the loan are 1.26x and 11.9%, respectively. This loan was modelled with a lower cash flow to reflect the loss of Target’s rental revenue, which results in an elevated probability of default for the loan.

The Bank of Hamilton loan (Prospectus ID#14, 24.1% of the current pool balance) is secured by an office property in downtown Winnipeg within the Exchange District. The property was built in 1918, renovated in 2001 and is fully occupied by the City of Winnipeg on a long-term lease expiring in December 2036. According to the YE2014 financials, the DSCR was 1.65x, which is an increase from the YE2013 DSCR of 1.43x. The DBRS Refi DSCR and exit debt yield for the loan were 1.32x and 13.1%, respectively.

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 March 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 (March 2016) 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.