DBRS Confirms Ratings on Schooner Trust, Series 2007-7

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2013-C9 issued by Schooner Trust as follows:

-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class XC at AAA (sf)
-- Class C at A (high) (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)

All trends are Stable. DBRS does not rate the first loss piece, Class M.

The rating confirmations reflect the overall stable performance of the transaction. At issuance, the collateral consisted of 72 fixed-rate loans secured by 73 commercial properties. As of the April 2016 remittance, 46 loans remain in the pool out of the original 72 loans, with an aggregate outstanding principal balance of $239.4 million, representing a collateral reduction of 44.0% as a result of scheduled loan amortization and repayment. All of the remaining loans in the pool are scheduled to mature between August 2016 and February 2017. Loans representing 73.3% of the current pool balance are reporting YE2014 financials and none of the loans are reporting YE2015 financials. The 14 loans in the Top 15 with YE2014 financials available (representing 69.1% of the current pool balance), reported a weighted-average (WA) amortizing debt service coverage ratio (DSCR) of 1.64 times (x), a DBRS Refi DSCR of 1.65x and an exit debt yield of 13.5%. In addition, there are two defeased loans as of the April 2016 remittance, representing 3.0% of the current pool balance.

DBRS maintains an investment-grade shadow-rating on MTS Building (Prospectus ID#1, representing 15.0% of the current pool balance). DBRS has today confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

As of the April 2016 remittance, there are no loans in special servicing and 18 loans on the servicer’s watchlist, representing 35.6% of the current pool balance. However, 13 loans, representing 28.3% of the current pool balance, benefit from full or partial recourse to the respective sponsor. One loan in the top 15 and two loans on the servicer’s watchlist are discussed below.

The Aviva Insurance Complex loan (Prospectus ID#2, 11.2% of the current pool balance) is secured by a 439,000 square foot (sf) mixed-use commercial complex located in Scarborough, Ontario, approximately 18 kilometers north of the Toronto CBD. The property is composed mainly of office space and serves as headquarters for the largest tenant, Aviva Insurance Canada (Aviva), which occupies 73.1% of the net rentable area (NRA) with a lease scheduled to expire in September 2016. The tenant has a one-year renewal option available and DBRS has requested a leasing update from the servicer and a response is currently outstanding as of the date of this press release. According to a February 2014 press release published by Aviva; however, Aviva is relocating its headquarters to a new building currently under construction, located in downtown Markham with an estimated completion date in 2017. As of the March 2015 rent roll, the property was 92.7% occupied and may decrease following Aviva’s departure. According to Altus InSite, approximately 254,000 sf of space (57.8% of NRA) was listed as available including a portion of Aviva’s space. The Q4 2015 CBRE Canada Office MarketView reported an average vacancy rate of 10.2% and an average rental rate of $11.52 per square foot (psf) for the Scarborough submarket. In comparison, the subject reported a vacancy rate of 7.3% and average rental rate of $7 psf as of the March 2015 rent roll. According to the YE2014 financials, the DSCR was at 1.87x, an increase from the YE2013 DSCR of 1.61x and YE2012 DSCR of 1.54x; however, future net cash flow may decline given Aviva’s eventual departure from the property and the potential increased vacancy by loan maturity in February 2017. Although the loan has full recourse to the sponsor, Dream Office REIT (Dream), an investment-grade REIT, this loan was modeled with a stressed cash flow to reflect the potential difficulties to refinance the loan.

The Milner Professional Building loan (Prospectus ID#4, 5.8% of the current pool balance) is secured by a 270,000 sf Class B office building in Scarborough, Ontario. This loan was placed on the servicer’s watchlist for a low DSCR as a result of two tenants vacating the property in 2012 and 2013, which combined to formerly occupy 20.0% of the NRA. As of the November 2015 rent roll, occupancy remains depressed at 74.0%.The largest tenant, CIBC (20.1% of NRA), has renewed its lease through July 2020 and received rent concessions in 2015.The current rental rate of $6.75 psf is expected to increase to $8.38 psf once the period of free rent ends. In comparison, according to the Q4 2015 CBRE Canada Office MarketView, the Scarborough submarket reported an average vacancy rate of 10.2% and rental rate of $11.52 psf. As of April 2016, Altus InSite reported approximately 27,000 sf of space (10.0% of NRA) as available at the subject, which suggests occupancy could have increased. DBRS has requested a leasing update from the servicer and is currently awaiting a response. According to the YE2014 financials, the DSCR was at 0.76x, which is a decrease from the YE2013 of 0.79x and YE2012 of 1.36x. In addition, the DBRS Refi DSCR and exit debt yield for the loan are 0.75x and 7.27% respectively, indicating potential difficulties to refinance the loan. As such, the loan was modeled with a stressed cash flow.

The 2121 Argentia Road loan (Prospectus ID#19, 2.9% of the current pool balance) is secured by a 61,000 sf office property in Mississauga, Ontario. The loan was added to the servicer’s watchlist because of a low DSCR, mainly driven by a period of decreased occupancy in mid-2013, when one major tenant vacated and another tenant reduced its footprint, collectively leaving 18.3% of NRA vacant. Occupancy remained low until January 2015, when IRC Building Sciences Group, the largest tenant occupying 21.2% of NRA, executed a lease through 2024. As a result, occupancy increased to 100% as of the May 2015 rent roll. Upcoming lease rollover is a concern as six tenants, occupying 45.7% of NRA, have leases scheduled to expire in 2016, including the second-largest tenant, InMoment (20.5% of NRA). The tenant was formerly known as Empathica and has a lease expiring in July 2016. As of April 2016, Altus InSite listed one unit (4,855 sf of space, 7.9% of NRA) as available. DBRS has requested a leasing update from the servicer. According to the Q4 2015 CBRE Toronto Office MarketView for the Meadowvale submarket, the average vacancy rate was 19.6% and the average rental rate was $16.11 psf. In comparison, the subject property reported an average rental rate of $13.19 psf as per the May 2015 rent roll. According to the YE2014 financials, the DSCR was at 0.76x, which is below the YE2013 DSCR of 1.11x and YE2012 DSCR of 1.37x. In addition, the DBRS Refi DSCR and exit debt yield for the loan are 6.2% and 0.76x, respectively. Although the loan has full recourse to the sponsor, Dream, this loan was modeled with a stressed cash flow to reflect the potential tenant rollover risk and volatile net cash flows.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction, as well as the largest loans in the pool and the loans on the servicer’s watchlist. The April 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 U.S 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.