DBRS Downgrades Six Classes of Schooner Trust, Series 2007-8, Removes from Under Review with Negative Implications

DBRS Limited (DBRS) has downgraded the following classes of Commercial Mortgage Pass-Through Certificates, Series 2007-8 issued by Schooner Trust, Series 2007-8, as listed below:

-- Class F to B (high) (sf) from BB (high) (sf)
-- Class G to B (low) (sf) from BB (sf)
-- Class H to CCC (sf) from BB (low) (sf)
-- Class J to CCC (sf) from B (high) (sf)
-- Class K to CCC (sf) from B (sf)
-- Class L to C (sf) from B (low) (sf)

In addition, DBRS has confirmed the remaining classes in the transaction, 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)

All trends are Stable, with the exception of Classes E, F and G, which have Negative trends and Classes H, J, K and L, which have ratings that do not carry trends.

The ratings downgrades and Negative trend assignments are the result of an increase in the projected losses for the pool associated with the Best Western Grande Mountain loan (Prospectus ID#18, 2.1% of the current pool balance), which transferred to special servicing with the April 2016 remittance for payment default. The pool has taken a loss with the previous liquidation of another hotel loan, Future Inns Dartmouth (Prospectus ID#33), which was disposed with the January 2016 remittance at a loss of $1.3 million (loss severity of approximately 33.0%), contained to the first loss piece. DBRS anticipates the loss severity for the Best Western Grande Mountain loan, which is discussed in further detail below, will be significantly higher, with losses spilling beyond the first loss piece into the Class L certificates.

DBRS also notes the elevated risk associated with the ongoing redevelopment of the largest loan in the pool, Londonderry Mall (Prospectus ID#1, 13.7% of the current pool balance). That loan is discussed in more detail, below, as well.

The Best Western Grande Mountain loan is secured by an 81-key limited-service hotel located in Grande Cache, Alberta, approximately 432 kilometres west of Edmonton, Alberta. Although the area is heavily dependent on the oil industry, property cash flows were relatively healthy through the first part of the recent downturn in the energy sectors, with a YE2014 debt service coverage ratio (DSCR) of 1.77x, down from the Issuer’s underwritten (UW) level of 2.34 times (x) and the DBRS UW figure of 2.10x. The servicer reports that the borrower initially approached the servicer with a proposal for payment relief in mid-2015. The discussions with the borrower surrounding the proposal for relief revealed that the property had been consolidated with an adjacent suites property (64 units) under a new flag, Days Hotel. The suites property is encumbered by a separate lien and the consolidation and flag change were not authorized by the master servicer. The request for relief was denied as the master servicer determined the proposal was not a viable solution over the long term. The loan was not transferred to special servicing at that time. The first missed payment occurred in December 2015 and the loan was added to the servicer’s watchlist that month for monitoring. Subsequently, the loan was transferred to special servicing with the April 2016 remittance for payment default. The special servicer has obtained the YE2015 financials for the property and has calculated a DSCR for the period of 0.59x, with an occupancy rate of 43%, down from 62% at YE2014.

As of the June 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 $396,673 for a total Trust exposure of $7.3 million ($90,153 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 Pooling and Servicing Agreement (PSA), which 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. The loan was not transferred until the April 2016 remittance with the servicer advising that the delay in transferring the loan was part of a strategy to allow the borrower time to market the property for sale. Given the loan’s history, DBRS believes it should have been transferred to special servicing in accordance with the PSA guidelines so that workout preparations, such as the installation of a receiver, could begin immediately. The special servicer is currently working to resolve the loan, with an appraisal to be ordered in the near term and discussions ongoing with the affected parties, including the lender for the suites property that was adjoined in an unauthorized flag change in the last year. Based on information received from the special servicer and DBRS’s analysis of current market conditions in Grande Cache and areas similarly affected by the energy sector’s ongoing downturn, a significant loss is anticipated for this loan, with severity estimated to exceed 80.0% at disposition. Given the uncertainty of the resolution, losses could be higher, which could bring the ratings under further pressure, which is the primary rationale for assigning a Negative trend to the ratings of several classes.

The Londonderry Mall loan is secured by a 775,000 square foot (sf) enclosed regional shopping centre located in Edmonton, Alberta. The mall is anchored by The Bay, Save-on-Foods and Winners, which have lease expirations in 2018, 2020 and 2025, respectively, and combine for 24.0% of the net rentable area (NRA). The loan was added to the servicer’s watchlist with the June 2016 remittance due to the YE2015 DSCR declining to 1.08x, from a YE2014 DSCR of 1.31x, as a result of an ongoing redevelopment project that began in 2014 and is scheduled to be completed by October 2017, five months beyond the loan’s maturity date. As of June 2016, the project is reportedly on schedule and on budget with an overall cost to date of $80.6 million, representing 45.7% of the total budget of $176.3 million. Since the last review in March 2016, the borrower reports the relocation of the food court from the centre of the mall to the northwest quadrant in the upper level is near completion and is expected to be opened for shoppers by the end of June 2016. The borrower has offers executed for eight of 12 relocated food court suites and two kiosks, with the remainder in negotiations. The former food court space will be reconfigured into retail suites over the remainder of the year as part of the overall redevelopment project. Other projects completed to date include renovations for the east and south entrances, roofing upgrades and build-out work for new anchor tenant Simons, which will be added in the former Army & Navy and Sport Chek spaces.

The most recent financial reporting, from YE2015, shows a DSCR of 1.08x, with the decline in the coverage attributed to the occupancy rate falling to 63.0% compared with 72.0% at September 2015. According to the April 2016 rent roll, the decline in the occupancy rate is the result of the planned departure of Army & Navy (7.8% of the NRA – this space will be occupied by Simons) and smaller tenants that have vacated at lease expiration. The Simons store is slated to be open by August 2017, with that tenant occupying approximately 100,000 sf (13.0% of the NRA), to be evenly distributed between two anchor suites stacked on the lower and upper levels. According to the servicer, Simons will be paying a base rental rate of $9.00 psf (above the Army & Navy lease rate of $5.00 psf and in line with the rate paid by Sport Chek) with a lease expiration in January 2028. The borrower advised the servicer that Simons is receiving $25 million in capital improvements that will be repaid over a 25-year period at an annual rate of $15.00 per sf (psf), a tenant improvement allowance of $30 million and an exterior facade allowance of $1.3 million. Demolition is estimated at 95% on the Simons’ space, with build out to begin in the near term.

Although the redevelopment project represents recent capital investment by the sponsors in the collateral asset, DBRS believes the lack of structure around the redevelopment in the way of additional cash reserves and/or guarantees presents heightened risk to the Trust with this loan, particularly in light of the near-term maturity in May 2017. As such, this loan was modelled with an elevated risk of default.

DBRS maintains an investment-grade shadow rating on one loan in the pool, Atrium on Bay (Prospectus ID#2, 11.3% 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, loans on the servicer’s watchlist and in special servicing. The June 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 (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.