DBRS Upgrades Seven and Confirms Five Classes of Schooner Trust, Series 2006-6

DBRS, Inc. (DBRS) has today upgraded the ratings of seven classes of Commercial Mortgage Pass-Through Certificates, Series 2006-6 issued by Schooner Trust, Series 2006-6 as follows:

-- Class D to AAA (sf) from AA (sf)
-- Class E to AAA (sf) from A (low) (sf)
-- Class F to A (sf) from BBB (low) (sf)
-- Class G to BBB (low) (sf) from BB (sf)
-- Class H to BB (sf) from BB (low) (sf)
-- Class J to BB (low) (sf) from B (high) (sf)
-- Class K to B (high) (sf) from B (sf)

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction as follows:

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

The trends on all classes are Stable.

The rating upgrades reflected the continued strong performance of the transaction as well as the overall collateral reduction since issuance. Since issuance, the transaction has experienced a collateral reduction of 64.5% as a result of scheduled loan amortization and successful loan repayment, leaving 35 remaining loans out of the original 98 loans at issuance. The transaction also benefits from defeasance as four loans, representing 10.8% of the current pool balance, have fully defeased. The largest 15 loans represent 76.8% of the pool balance, with strong credit metrics for the 13 non-defeased loans in the top 15, which showed a weighted-average (WA) exit debt yield of 14.36%, a WA debt service coverage ratio (DSCR) of 1.63 times (x) and WA net cash flow growth over the DBRS underwritten figures of +25.3% at YE2015.

Within the next three months, all 35 loans (100% of the pool balance) are scheduled to mature. The WA DSCR and exit debt yield for these maturing loans are 1.59x and 15.0%, respectively, with 66.7% of the pool reporting year-end 2015 financials. DBRS considers the credit metrics of the maturing loans to generally be strong, with successful refinancing expected for the bulk of those loans within a few months of the scheduled maturity dates. As of the June 2016 remittance, there are 28 loans on the servicer’s watchlist, representing 77.8% of the pool balance. Most of these loans have been flagged for upcoming maturity, with four loans, representing 8.6% of the pool balance, flagged for performance-related concerns. One loan, representing 6.7% of the pool balance, has been transferred to special servicing for maturity default; however, the special servicer has advised that a refinance is in the works and the loan is expected to repay as agreed.

The specially serviced loan, Northwest Centre (Prospectus ID#7, 6.7% of the pool), is secured by two Class B office buildings totalling 84,000 square feet (sf) and is located in northwestern Calgary, Alberta, approximately ten kilometres (km) northwest of the downtown core. As of March 2016, the property was 92.2% occupied with an average rental rate of $19.66 per square foot (psf), with no significant rollover scheduled for the near term. The largest tenant at the property is Alberta Health Services, occupying 83.9% of the net rentable area (NRA) on a lease through October 2024. According to the YE2015 figures, coverage is healthy with a DSCR of 2.62x, an increase over the YE2014 DSCR of 2.50x. This loan was originally scheduled to mature in March 2016, but an extension to June 2016 was granted to accommodate the borrower’s refinance schedule. As the timing has not progressed as originally planned, the loan was transferred to special servicing as a matter of procedure for monitoring through pay out, which the servicer expects to occur in the near term. Given the strong credit metrics, limited near term rollover and the full recourse to Artis Real Estate Investment Trust (rated BBB (low) with a Stable trend by DBRS), DBRS anticipates the loan will repay in full.

The largest loan currently on the servicer’s watchlist is the 165-167 Hymus Boulevard loan (Prospectus ID#9, 5.1% of pool), which is secured by a multi-tenant industrial building in Pointe-Claire, Québec. The loan has been on the watchlist since two tenants vacated the property in early 2013. With the loss of those tenants, only one tenant remained in Leviton Manufacturing (Leviton), occupying 59.8% of the NRA. In 2015, a second tenant, Vitesse Transportation (Vitesse), was signed, bringing the occupancy rate up to 94.7%, but at lease expiry in December 2015, Vitesse vacated its space and occupancy returned to the previous level. Leviton has signed a 15-year renewal through December 2030, adding two smaller vacant units to bring its overall footprint to 65.1% of the NRA. According to the servicer, Leviton will expand into an additional 4.9% of the NRA in February 2017. According to the June 2015 servicer site inspection, approximately $2.9 million will be spent on office and warehouse renovations of the current and future Leviton space as part of the renewal and expansion. The YE2015 operating statement analysis report showed a DSCR of 1.10x, an increase over the YE2014 DSCR of 0.69x; however, that increase was due to a temporary increase in occupancy at the property in 2015 and DBRS expects the DSCR will fall to approximately 0.81x at YE2016 at the current occupancy level. The loan is scheduled to mature in September 2016; given the weak credit metrics, a refinance could be difficult, but the loan does benefit from a relatively low exposure psf of $29 and the collateral’s location in a healthy submarket that showed overall vacancy of 12.0% at Q1 2016, according to CBRE. DBRS has modelled an increased probability of default (POD) to account for the increased refinance risk for this loan.

Another loan monitored on the servicer’s watchlist for performance issues, the 2770 14th Avenue loan (Prospectus ID#56, 1.4% of the pool), is secured by a 26,000 sf office building in Markham, Ontario, situated approximately 25 km north of downtown Toronto. Occupancy has declined gradually through the years, falling to 37.1% by early 2016 from 92.0% in 2010, with two of the five units occupied. According to the June 2016 rent roll, a tenant has taken occupancy of one of the vacant suites representing 25.2% of the NRA on a lease through March 2021. That tenant, Restaurants Development Partners Corp, is now the largest tenant at the property, bringing occupancy to 62.4%, with no short-term rollover. The average in-place rent of $9.66 psf is well below the $14.52 psf average asking rent reported in the Markham South industrial submarket, according to CBRE. According to the servicer, the borrower is working with the lender on refinancing the loan in time for its scheduled July 2016 maturity date. The last reported DSCR was 0.38x at YE2014, a sharp decrease from 1.13x at YE2013 as the result of the decreased occupancy rate at the property. Although the low occupancy rate could mean issues for a successful refinance, the loan benefits from a relatively low exposure psf of $66 psf and the collateral property’s location in a submarket with an overall vacancy rate of 14.2% (as reported by CBRE), well below that of the subject. DBRS has modelled an increased POD to account for the enhanced refinance risk for this loan.

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 loans on the servicer’s watchlist. The June 2016 Monthly CMBS 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 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.