DBRS Confirms all Classes of Real Estate Asset Liquidity Trust, Series 2014-1

DBRS Limited (DBRS) has today confirmed the ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2014-1 issued by Real Estate Asset Liquidity Trust, Series 2014-1:

-- Class A at AAA (sf)
-- Class X 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 F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance in October 2014. The collateral consists of 34 fixed-rate loans secured by 46 commercial properties. As of the September 2016 remittance, the pool has experienced a collateral reduction of 4.1% since issuance as a result of scheduled loan amortization.

The transaction benefits from a strong concentration of properties located in the province of Ontario (54% of the current pool balance) and a healthy concentration of properties located in urban and suburban markets (77% of the current pool balance). There are only two loans (representing 9.9% of the pool balance) located in Alberta. In addition, there are 32 loans, representing 91.2% of the current pool balance, that have partial or full recourse to their respective sponsors. Three of the top ten loans, representing 13.8% of the current pool balance, have full or partial recourse to entities considered to be strong sponsors. As of the September 2016 remittance, there are no loans in special servicing and three loans, representing 6.7% of the pool, on the servicer’s watchlist. The largest loan on the watchlist, Prospectus ID#12, Newmarket Plaza (3.53% of the pool), is on the watchlist for a low debt service coverage ratio (DSCR), but DBRS believes that figure is likely significantly depressed due to the borrower’s omission of reimbursements in the YE2015 reporting.

The pool reported a weighted-average DSCR of 1.50 times (x) as of the most recent reporting on file for the loans as of September 2016, with a weighted-average debt yield of 9.8%. Although the average DSCR is down from 1.60x, that drop is largely a factor of the performance decline of one top ten loan and an artificially depressed DSCR for Prospectus ID #12, with most loans performing in line or slightly above the DBRS underwritten (UW) levels. One of the top ten loans and one of the watchlisted loans are discussed in detail below.

The Sheraton Cavalier Hotel Calgary loan (Prospectus ID#5, 5.7% of the current pool balance) is secured by a 306-key, full-service hotel located in Calgary, Alberta. The property is situated just outside of the Calgary International Airport and caters mainly to corporate clientele. The hotel has operated with the Sheraton brand since inception in 1983 and the franchise expires beyond the loan term in July 2033. The property has experienced incremental cash flow declines since issuance, reflective of the weaker oil price environment in the provincial energy sector. As of YE2015, the loan had a DSCR of 3.60x compared to 4.28x at YE2014 and the DBRS UW DSCR of 4.62x. At issuance, the subject reported an occupancy rate of 73.75%, average daily rate (ADR) of $163.44 and revenue per available room (RevPAR) of $120.54. The effects of the current economic environment in Alberta are reflected in the June 2016 trailing 12-month (T-12) Smith Travel Accommodation Report (STR) as the subject reported occupancy at 65%, ADR of $159.34 and RevPAR of $103.58. The softer market has impacted the competitive set, as well, with the average occupancy at 68% and RevPAR at $89.00. The soft market conditions will likely continue as new supply was recently added in the Calgary Airport Marriot In-Terminal Hotel, a 318-key hotel that opened in September 2016. At issuance, DBRS shadow rated the loan AAA, reflective of the strong credit metrics, recent investment in property upgrades and strong operating history. Although the property performance has declined, with the issuance AAA shadow rating no longer supported, the performance is still within the DBRS standards for an investment-grade shadow rating.

The Four Points Sheraton Kamloops loan (2.62% of the current pool balance) is the second-largest loan on the watchlist and is secured by a 78-key, full-service hotel constructed in 1998 in Kamloops, British Columbia, approximately 20 kilometres (km) from the Kamloops Airport. This loan was added to the servicer’s watchlist for a low YE2015 DSCR of 1.03x. Comparatively, the DBRS UW DSCR was 1.58x. The low YE2015 DSCR was due to a decrease in occupancy and room revenue driven by increased competition with the addition of The Fairfield Inn by Marriott approximately one km west of the subject in June 2015. According to the T-12 ending July 2016 STR report, performance continues to lag the issuance levels as the subject had an occupancy rate of 66.8%, ADR of $117.20 and RevPAR of $78.25. The figures reported by the borrower at issuance indicate YE2013 occupancy was 81.6%, with ADR and RevPAR at $125.30 and $102.29, respectively. Although occupancy has declined, the subject still outperforms its competitive set that reports an occupancy rate of 53.6%, ADR at $119.91 and RevPAR of $64.23. News reports found online by DBRS indicate that tourist traffic in Kamloops has increased in 2016, driven by the favourable exchange rate for travellers from the United States and lower gas prices that have drawn travellers from Alberta; however, it remains to be seen if these factors will contribute to a significant improvement in property cash flows. To account for the increased risk with the cash flow decline, this loan was modelled with an increased probability of default. DBRS will continue to monitor closely for developments.

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 September 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 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.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.