DBRS Places All Classes of Real Estate Asset Liquidity Trust, Series 2007-1 Under Review with Negative Implications

DBRS Limited (DBRS) has today placed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2007-1 issued by Real Estate Asset Liquidity Trust, Series 2007-1 Under Review with Negative Implications as follows:

-- Class XC-1 at A (sf), Under Review with Negative Implications
-- Class XC-2 at A (sf), Under Review with Negative Implications
-- Classes D-1 at BBB (sf), Under Review with Negative Implications
-- Classes D-2 at BBB (sf), Under Review with Negative Implications
-- Classes E-1 at BBB (low) (sf), Under Review with Negative Implications
-- Classes E-2 at BBB (low) (sf), Under Review with Negative Implications
-- Class F at BB (high) (sf), Under Review with Negative Implications
-- Class G at BB (sf), Under Review with Negative Implications
-- Class H at BB (low) (sf), Under Review with Negative Implications
-- Class J at B (high) (sf), Under Review with Negative Implications
-- Class K at B (sf), Under Review with Negative Implications
-- Class L at B (low) (sf), Under Review with Negative Implications

Additionally, DBRS has discontinued the rating on Class C, as the class was fully repaid with the June 2017 remittance.

The rating actions reflect the uncertainty surrounding the resolution of the largest loan, Prospectus ID#5 – Sundance Pooled Interest (82.1% of the current pool balance), which transferred to special servicing in April 2017 for maturity default. The loan is secured by a 180,000-square foot (sf) Class A office building with a 7,000 sf restaurant pad and a gas bar, located in southern Calgary. The trust note represents a 50.0% pari passu piece of the whole loan, as the other note is securitized in the REAL-T 2007-2 transaction, which is not rated by DBRS. The property has struggled since 2014, reporting declining cash flow figures as a result of a continually decreasing occupancy rate caused by the overall lack of demand for office supply throughout the Calgary market in recent years. According to the April 2017 rent roll, the subject was 4.0% occupied, which is a decline from the year-end occupancy rates of 6.9%, 34.7% and 53.3%, in 2016, 2015 and 2014, respectively. As a result, year-end debt service coverage ratios were reported at -0.21 times (x), 0.26x and 1.14x, respectively.

According to the servicer, three tenants, representing 17.1% of net rentable area, have signed new leases with scheduled move-in dates ranging from July 2017 to July 2018. In order to finalize these leases, the borrower had to provide significant tenant improvement packages, including, in some instances, free rent periods in addition to tenant build-out costs. An updated appraisal to determine the value of the property in the current environment was completed at the request of the servicer. The resulting value is significantly below the issuance appraised value of $74.8 million and is below the current whole loan balance of $45.2 million. It is expected that it will take several years for the property to achieve a stabilized occupancy rate and to season operations.

The loan does benefit from partial recourse to the sponsor, capped at $15 million ($7.5 million attributable to the trust note). The sponsor is a high net worth and experienced real estate professional with considerable experience in the Alberta market, whose portfolio currently consists of 154 commercial and residential properties located in Alberta, British Columbia, New Brunswick and Nova Scotia. The sponsor is committed to the property at this time, as he continues to keep the loan current and will fund significant leasing packages. According to the servicer, his net worth is well in excess of the recourse liability.

Currently, the special servicer and borrower are in negotiations to enter into a Forbearance Agreement, with the terms of the agreement expected to be finalized in the near term. Once the details of the Forbearance Agreement become available, DBRS will have the necessary information to provide a full evaluation of the resolution strategy of the subject loan, at which point, DBRS will remove the Under Review – Negative Implications status from all classes and provide an updated rating action to the outstanding bonds.

As of the June 2017 remittance, three loans remain in the pool with an outstanding trust balance of $27.5 million, representing a collateral reduction of 94.7% since issuance. The Yonge Davisville Commercial loan (Prospectus ID#46, 6.7% of the current pool balance) was granted a short-term maturity extension to June 2017 to allow the borrower time to finalize replacement financing. While the loan remains in the transaction past the extended maturity date, it is expected to pay in full in the near term. The Compass Centre One loan (Prospectus ID#30, 11.2% of the current pool balance) is scheduled to mature in April 2018.

DBRS has provided updated loan-level commentary and analysis for pivotal and noteworthy loans in the pool in the DBRS commercial mortgage-backed securities (CMBS) IReports platform. Registration is free. To view these and future loan-level updates provided as part of DBRS’s ongoing surveillance for this transaction, please register or log into www.ireports.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 principal methodology is CMBS North American Surveillance (March 2017), which can be found on dbrs.com under Methodologies.

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