JUNE 2019
STRUCTURED FINANCE: CMBS PRESALE REPORT Real Estate Asset Liquidity Trust, Series 2019-1 Table of Contents
Capital Structure 3 Transaction Summary 3 Rating Considerations 4 DBRS Credit Characteristics 5 Largest Loan Summary 6 DBRS Sample 7 Transaction Concentrations 9 Loan Structural Features 10 WSP Place 13 Woodside Square Retail 18 Mont-Tremblant Retail 23 Leima Building 29 Gateway Boulevard Retail 34 The Redwoods Retirement I 38 Résidence Monseigneur Bourget 43 Westwood Terrace Multi-Family 47 Leamington Walmart 51 Gross Medical Office Oshawa 56 Transaction Structural Features 61 Methodologies 63 Surveillance 63 Glossary 65
Karen Gu Peter Wideman Senior Vice President Assistant Vice President +1 416 597 7340 +1 416 597 7466 [email protected] [email protected]
Erin Stafford Managing Director +1 312 332 3291 [email protected] PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Capital Structure
Description Rating Action Balance Subordination DBRS Rating Trend
Class A-1 New Rating - Provisional $185,395,000 13.000% AAA (sf) Stable
Class A-2 New Rating - Provisional $202,971,000 13.000% AAA (sf) Stable
Class X New Rating - Provisional $410,686,000 - A (high) (sf) Stable
Class B New Rating - Provisional $9,486,000 10.875% AA (sf) Stable
Class C New Rating - Provisional $12,834,000 8.000% A (sf) Stable
Class D-1 New Rating - Provisional $4,796,000 4.875% BBB (sf) Stable
Class D-2 New Rating - Provisional $9,154,000 4.875% BBB (sf) Stable
Class E New Rating - Provisional $2,790,000 4.250% BBB (low) (sf) Stable
Class F New Rating - Provisional $6,696,000 2.875% BB (sf) Stable
Class G New Rating - Provisional $5,580,000 1.875% B (sf) Stable
Class H NR $6,696,139 0.000% NR n/a
Notes: 1. NR = not rated. 2. Classes D-2, E, F and G will be privately placed. 3. The Class X balances are notional.
Transaction Summary
POOL CHARACTERISTICS
Trust Amount $446,398,140 Wtd. Avg. Interest Rate 4.4403%
Number of Loans1 48 Wtd. Avg. Remaining Term 85
Number of Properties 77 Wtd. Avg. Remaining Amortization 332
Average Loan Size $9,299,961 Total DBRS Expected Amortization2 15.5%
Wtd. Avg. DBRS Term DSCR1 1.39 Wtd. Avg. DBRS Term DSCR Whole Loan 1.47x
Top Ten Loan Concentration 49.8% Avg. DBRS NCF Variance -4.95%
1. Includes pari passu debt, but excludes subordinate debt. 2. For certain ARD loans, expected amortization may include amortization expected to occur after the ARD but prior to single/major tenant expiry.
PARTICIPANTS
Issuer Real Estate Asset Liquidity Trust
Administrative Agent Royal Bank of Canada
Mortgage Loan Sellers Royal Bank of Canada
Master Servicer MCAP Financial Corporation
Special Servicer MCAP Financial Corporation
Custodian Computershare Trust Company of Canada
Backup Servicer and Reporting Agent Wells Fargo Bank, National Association
Operating Advisor First National Financial LP
Structured Finance: CMBS 3 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Rating Considerations
The collateral consists of 43 fixed-rate loans, four pari passu co-ownership interests and one senior co-ownership interest (collectively, the loans) secured by 77 commercial properties. The transaction is of a sequential-pay pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized NCF and their respective actual constants, one loan, representing 4.9% of the pool, had a DBRS Term DSCR below 1.15x, which is a threshold indicative of a high likelihood of mid-term default.
STRENGTHS • Twenty-eight loans, representing 60.4% of the pool, have been given recourse credit in the DBRS credit analytics because of some form of recourse to individuals and real estate investment trusts or established corporations. Recourse generally results in lower POD over the term of the loan. While it is generally difficult to quantify the impact of recourse, all else being equal, there is a small shift lowering the loan’s POD for warm-body or corporate sponsors that give recourse. Recourse can also serve as a mitigating factor to other risks, such as single-tenant risk, by providing an extra incentive for the loan sponsor to make debt service payments if the sole tenant vacates. • Based on the DBRS sample and analysis, four loans (18.5% of the pool) were considered to be of Above Average property quality and three loans (11.0% of the pool) of Average (+) property quality. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in more stable performance. • Two loans, representing 3.1% of the pool, were considered by DBRS to have Strong sponsor strength. • All loans in the pool amortize for the entire loan term. Fourteen loans, representing 23.4% of the pool, have approximately 25 years or less of remaining amortization. The remaining amortization ranges between 25 years and 30 years. The expected amortization for the pool is approximately 15.5% during the expected life of the transaction.
CHALLENGES & CONSIDERATIONS • Seven loans, representing 6.9% of the pool, are secured by properties that are leased to single tenants. Single-tenant loans have been found to suffer from higher loss severities in the event of default. –– All seven loans have meaningful full or partial recourse to sponsors. –– DBRS assumes a higher loss profile for the loans secured by single-tenant assets than it did for the loans secured by multi- tenant assets. • One loan (1.8% of the pool) is secured by a second-priority mortgage. –– The loan is cross-defaulted with the first-priority loan, which is also included in this transaction. • There is sponsor concentration within this transaction. The pool comprises 48 loans; however, there are only 42 different sponsors or sponsor groups. Ten loans, representing 20.5% of the pool balance, have related borrowers to one or more loans within the pool. The most significant sponsor concentration is Econo-Malls, which affects four loans, representing 10.6% of the pool. –– Of the ten loans that have related borrowers, two loans (5.6% of the pool) are cross-defaulted first- and second-priority loans secured by the same retail property. Two loans (2.9% of the pool) are secured by two multifamily properties located in an urban market. –– With respect to the four loans related to Econo-Malls, the loans are secured by Walmart-anchored retail properties. Econo- Malls is a commercial real estate investment company that specializes in large retail centres. The company currently owns and manages 40 properties totalling 7.0 million sf throughout Ontario, Quebec, Newfoundland and Labrador, Nova Scotia and New Brunswick.
Structured Finance: CMBS 4 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
DBRS Credit Characteristics
DBRS TERM DSCR ISSUANCE LTV
% of the Pool % of the Pool DSCR (Trust Balance)1 LTV (Trust Balance)1 0.00x-0.90x 0.0% 0.0%-50.0% 7.1%
0.90x-1.00x 0.0% 50.0%-55.0% 6.5%
1.00x-1.15x 4.9% 55.0%-60.0% 18.3%
1.15x-1.30x 26.2% 60.0%-65.0% 12.4%
1.30x-1.45x 43.9% 65.0%-70.0% 27.0%
1.45x-1.60x 11.8% 70.0%-75.0% 26.5%
1.60x-1.75x 7.2% >75.0% 2.2%
>1.75x 6.1% Wtd. Avg. 63.4%
Wtd. Avg. 1.39x
BALLOON LTV
% of the Pool LTV (Trust Balance)1 0.0%-50.0% 28.2%
50.0%-55.0% 29.8%
55.0%-60.0% 21.4%
60.0%-65.0% 7.8%
65.0%-70.0% 12.8%
70.0%-75.0% 0.0%
>75.0% 0.0%
Wtd. Avg. 53.0%
1. Includes pari passu debt, but excludes subordinate debt.
Structured Finance: CMBS 5 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Largest Loan Summary
LOAN DETAIL
DBRS Shadow Loan Name Trust Balance % of Pool Rating Appraised LTV DBRS DSCR (x) WSP Place $37,752,843 8.5% n/a 74.03% 1.23 Woodside Square Retail $28,465,038 6.4% n/a 57.86% 1.31 Mont-Tremblant $24,785,908 5.6% n/a 68.65% 1.43 Leima Office Building $22,000,000 4.9% n/a 70.06% 1.14 Gateway Boulevard Retail Edmonton $19,824,902 4.4% n/a 58.74% 1.35 The Redwoods Retirement $19,621,292 4.4% n/a 64.46% 1.32 Residences MGR Bourget $19,371,611 4.3% n/a 71.75% 1.25 Westwood Terrace Multi-Family $17,201,997 3.9% n/a 68.00% 1.31 Leamington Walmart $16,968,998 3.8% n/a 62.85% 1.38 Gross Medical Office Oshawa $16,303,472 3.7% n/a 54.34% 1.65
PROPERTY DETAIL
Maturity DBRS Property Loan per Balance per Loan Name Type City State Year Built SF/Units SF/Units SF/Units WSP Place Office Edmonton AB 1978 184,707 $204 $188 Woodside Square Retail Anchored Retail Toronto ON 1977 280,725 $203 $189 Mont-Tremblant Unanchored Retail Mont-Tremblant QC 1994 149,336 $349 $323 Leima Office Building Office Ottawa ON 1977 147,521 $149 $118 Gateway Boulevard Retail Edmonton Unanchored Retail Edmonton AB 1994 161,431 $273 $215 The Redwoods Retirement Senior Housing Ottawa ON 1984 208 $165,497 $136,218 Residences MGR Bourget Senior Housing Levis QC 1989 156 $124,177 $100,245 Westwood Terrace Multi-Family Multifamily Fort Saskatchewan AB 2008 149 $115,450 $111,829 Leamington Walmart Anchored Retail Leamington ON 1999 192,943 $88 $71 Gross Medical Office Oshawa Office Oshawa ON 1915 86,450 $189 $164
Structured Finance: CMBS 6 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
DBRS Sample
DBRS SAMPLE RESULTS
Prospectus DBRS DBRS DBRS Major DBRS ID Loan Name % of Pool NCF NCF Variance Variance Drivers Property Quality
1 WSP Place 8.5% $2,883,453 -10.4% Recoveries, TI/LC Above Average
2 Woodside Square Retail 6.4% $4,687,410 -2.6% TI/LC Average -
3 The Mont-Tremblant 5.6% $4,463,770 -7.3% Capex, Vacancy Above Average
4 Leima Office Building 4.9% $1,450,548 -11.9% Recoveries, TI/LC, Vacancy Average +
Gateway Boulevard Retail 5 4.4% $4,106,529 -7.0% Vacancy, TI/LC Above Average Edmonton
6 The Redwoods Retirement 4.4% $2,915,161 -4.6% Vacancy, Expenses Average
7 Residences MGR Bourget 4.3% $1,492,226 -11.5% Expenses, Vacancy Average
8 Westwood Terrace Multi-Family 3.9% $1,257,843 -4.7% Expenses Average +
9 Leamington Walmart 3.8% $1,470,951 -5.3% Recoveries, Capex Average
10 Gross Medical Office Oshawa 3.7% $1,702,550 -4.2% TI/LC, Rent mark-to-market Average
11 Saint-Hyacinthe Walmart 3.3% $1,427,666 -1.6% Nominal Average
12 Yarmouth Mall & Shoppes 3.2% $1,574,621 -3.0% Recoveries, TI/LC Average
13 Group Guzzo Retail Terrebonne 2.9% $1,376,122 -0.9% Recoveries, Parking income Average -
14 Clayton Crossing SC 2.7% $853,866 -7.6% TI/LC, Vacancy Average
15 Churchill Plaza 2.6% $1,137,724 -1.2% Recoveries Average
16 Leslie Medical Centre 2.6% $953,417 -3.1% TI/LC, Vacancy Average
17 LBC Keltic Plaza 2.5% $1,173,290 -3.0% TI/LC Average
18 Christie Gardens Retirement 2.2% $1,635,964 -9.2% Vacancy, Management fees Average +
19 Trenton Walmart 2.1% $828,135 -4.0% TI/LC, Vacancy Average
20 Yonge Street Thornhill Retail 1.8% $657,746 -3.7% TI/LC Average
Grand Avenue & Savannah Oaks 21 1.5% $515,417 -7.0% Vacancy, Recoveries Average Mixed Use
22 Ambiance Apartments North 1.5% $497,104 -3.3% Expenses, Capex Average
23 Ambiance Apartments South 1.5% $479,821 -3.4% Expenses, Capex Average
26 Four Points Sheraton Hotel 1.4% $638,846 -2.3% Nominal Average
27 Kirkland Lake Fedex Centre 1.3% $471,834 -3.0% Vacancy, TI/LC Average
29 Strathmore & Brooks Self Storage 1.1% $473,989 -1.1% Minimal Average
31 Greenwood Plaza 1.0% $498,247 -1.8% Minimal Average
Bluebird Self Storage Sanford 32 1.0% $340,084 -6.8% Expenses Average Hamilton
38 Bathurst St Multifamily 0.6% $325,628 -5.8% Vacancy, Capex Average -
43 Lester Multifamily Waterloo 0.5% $180,015 -3.8% Vacancy, Expenses Average
44 Regina Office 0.5% $160,862 -8.3% Capex Average
Structured Finance: CMBS 7 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
DBRS SITE INSPECTIONS DBRS Sampled Property Quality
The DBRS sample included 32 of the 48 loans in the pool % of # of (87.5% of the pool). Site inspections were performed Property Quality Sample Loans on 50 of the 77 properties in the portfolio (75.4% of Excellent 0.0% 0 the pool by allocated loan balance). DBRS conducted Above Average 21.1% 4 meetings with the on-site property manager, leasing Average (+) 12.6% 3 agent or a representative of the borrowing entity for Average 55.0% 22 58.6% of the pool. The resulting DBRS property quality Average (-) 11.3% 3 scores are highlighted in the following charts: Below Average 0.0% 0 Poor 0.0% 0 DBRS CASH FLOW ANALYSIS A net cash flow review, a cash flow stability review and a structural review were completed on 33 of the 48 loans, representing 87.5% of the pool by loan balance. For the loans not reviewed, DBRS applied the average NCF variance.
DBRS generally adjusted cash flow to current in-place rent, and in some instances, an additional vacancy adjustment was recognized to account for tenant credit quality and local market conditions. Generally, most expenses were recognized based on the higher of historical figures or the borrower’s budgeted figures. Real estate taxes and insurance premiums were inflated if a current bill was not provided. Capex was deducted based on the greater of the engineer’s inflated estimates or the DBRS standard, according to property type. Finally, leasing costs were deducted to arrive at the DBRS NCF. If a significant upfront leasing reserve was established at closing, DBRS reduced its recognized costs. DBRS gave credit to tenants not yet in occupancy if a lease had been signed and the loan was adequately structured with a reserve, LOC or holdback earn-out. The DBRS sample had an average NCF variance of -4.95% and ranged from -11.9% (Leima Office Building) to -0.9% (Group Guzzo Retail Terrebonne).
DBRS Sampled Property Type 40.0% 35.0%
35.0% 30.0%
30.0% 25.0% 25.0% 20.0% Pool
Sample 20.0%
15.0% % of % of 15.0% 10.0% 10.0%
5.0% 5.0%
0.0% 0.0% Anchored Industrial Limited MHCMMixed ultifamily Office Senior Self Student Unanchored Retail Service Use Housing Storage Housing Retail Hotel Excellent Above Average Average + Average Average - Pool
Structured Finance: CMBS 8 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Transaction Concentrations
DBRS Property Type Geography
% of # of State % of Pool # of Properties Property Type Pool Loans Anchored Retail 32.2% 12 ON 46.6% 24 Industrial 2.3% 2 QC 21.5% 9 Limited Service Hotel 2.2% 2 AB 18.3% 5 MHC 2.3% 3 NS 6.7% 3 Mixed Use 2.0% 2 BC 4.7% 3 Multifamily 7.4% 4 SK 1.5% 2 Office 20.1% 5 All others 0.8% 31 Senior Housing 10.9% 3 Self Storage 2.7% 3 Student Housing 0.5% 1 Unanchored Retail 17.6% 11
Loan Size DBRS Market Types
% of % of Loan Size Pool Loans Market Type % of Pool # of Loans Very Large (>$20.0 million) 25.3% 5 1 14.4% 9 Large ($10.0-$20.0 million) 44.3% 13 2 12.8% 10 Medium ($5.0-$10.0 million) 18.5% 12 3 9.8% 3 Small ($2.0-$5.0 million) 11.1% 16 4 20.7% 10 Very Small (<$2.0 million) 0.8% 2 5 10.9% 6 6 28.6% 8 7 2.9% 2 8 0.0% 0
Largest Property Locations
8) Westwood Terrace Multi-Family Fort Saskatchewan, AB 7) Résidence Monseigneur Bourget 1) WSP Place 10) Gross Medical Office Oshawa Lévis, QC Edmonton, AB Oshawa, ON 5) Gateway Boulevard Retail Edmonton 3) Mont-Tremblant Retail Edmonton, AB Mont-Tremblant, QC 9) Leamington Walmart Leamington, ON 4) Leima Office Building Ottawa, ON 2) Woodside Square Retail Toronto, ON 6) The Redwoods Retirement Ottawa, ON
Structured Finance: CMBS 9 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Loan Structural Features
CO-OWNERSHIP INTEREST Four loans, representing 19.0% of the pool, consist of pari passu co-ownership interests, and one loan (0.5% of the pool) consists of a senior and a subordinate (B-Note) co-ownership interest. These loans are identified in the table below.
PARI PASSU NOTES
% of Total Controlling Piece Loan Balance % of Pool Deal ID Pari Passu Loan (Y/N)
Woodside Square Retail $28,465,038 6.4% REAL-T 2019-1 50.0% N
$28,465,038 8.2% REAL-T 2018-1 50.0% Y
Mont-Tremblant Retail $16,785,908 3.8% REAL-T 2019-1 38.0% N
$27,387,535 7.9% REAL-T 2018-1 62.0% Y
Gateway Boulevard Retail Edmonton $19,824,902 4.4% REAL-T 2019-1 45.0% N
$24,230,436 7.1% REAL-T 2018-1 55.0% Y
The Redwoods Retirement $19,621,292 4.4% REAL-T 2019-1 57.0% N
$14,802,027 4.3% REAL-T 2018-1 43.0% Y
The four loans with pari passu co-ownership interests are held in the name of the custodian of the REAL-T 2018-1 securitization for and on behalf of the holders of the co-ownership interests (including the custodian of this transaction), and MCAP Financial Corp. (MFC) is the REAL-T 2018-1 master servicer and special servicer. The REAL-T 2018-1 custodian is the controlling lender in respect of each of these loans. MFC retained the Royal Bank of Canada (RBC; rated AA with a Positive trend by DBRS) as sub-servicer to provide primary and special servicing functions with respect to these loans.
The loan with senior and subordinate co-ownership interests will be serviced and administered under the PSA.
Each controlling party has the ability to advise and direct the special servicer and has certain rights of approval and direction with respect to certain major actions that can be taken by the special servicer, as set out in more detail in the relevant participation agreement and the PSA. When it comes to maximizing net present value for these loans in a workout scenario, DBRS expects that the interests of the holders of each pari passu interest in the paired loans are likely to be aligned. Under the applicable transaction documents and the participation agreements, consent or approval of the holder(s) of the companion interest(s) or the service provider(s) for the applicable Whole Loans for the relevant previous securitization (as referenced above) may also be required in certain circumstances. It is possible that any such party may withhold its consent or approval or there may be delays in obtaining such consents or approval. Generally speaking, mitigants are provided for in the transaction documents that attempt to minimize delays or challenges in the decision-making process with respect to these loans. As is the case in all commercial mortgage-backed security (CMBS) transactions that include split-loan structures, any actions of the holders of each companion interest (or the other relevant service provider(s)) that arise from unforeseen diverging interests could have an adverse impact on certain Classes of Certificates in certain circumstances.
PERMITTED SUBORDINATE DEBT For five loans, representing 9.9% of the pool, the related mortgage properties were encumbered by subordinate secured financing existing at the time of the origination of the loans. Of these loans, four loans (9.4% of the pool) are subject to the terms of a subordination and standstill agreement entered into in favour of the lender. One loan (0.5% of the pool) does not have a standstill agreement but is subject to the terms of a subordination agreement entered into in favour of the lender.
Structured Finance: CMBS 10 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
In addition, three loans, representing 5.6% of the pool, are permitted to incur subordinate debt in the future subject to acceptable subordination and standstill agreements as well as certain terms and conditions being met, including satisfactory DSCR and LTV tests.
SUBORDINATE DEBT
Second Future Pari Passu Mortgage B-Note Subordinate Total Loan Name Trust Balance Balance Balance Balance Debt (Y/N) Debt Balance
Westwood Terrace Multi-Family $17,201,997 $0 $0 $0 Y $17,201,997
Mont-Tremblant Retail $16,785,908 $27,387,535 $8,000,000 $0 Y $52,173,443
Clayton Crossing SC $12,232,619 $0 $1,000,000 $0 N $13,232,619
Grand Avenue & Savannah Oaks Mixed Use $6,712,288 $0 $100,000 $0 N $6,812,288
Reynolds Place Wellington $6,250,000 $0 $3,750,000 $0 N $10,000,000
Strathmore & Brooks Self Storage $5,093,163 $0 $0 $0 Y $5,093,163
Bathurst St Multifamily $2,888,207 $0 $0 $0 Y $2,888,207
Regina Office $2,071,306 $0 $0 $157,500 N $2,228,806
Leasehold: No properties in this pool are secured by a DBRS Expected Amoritization leasehold interest. Expected Amoritization % of Pool # of Loans 0% 0.0% 0 0.0%-5.0% 3.9% 1 5.0%-10.0% 32.0% 12 10.0%-15.0% 9.6% 7 15.0%-20.0% 27.8% 12 20.0%-25.0% 21.7% 12 >25.0% 5.0% 4
Note: For certain ARD loans, expected amortization may include amortization expected to occur after the ARD but prior to single/major tenant expiry.
RESERVE REQUIREMENT BORROWER STRUCTURE
Type Loans % of Pool Type Loans % of Pool Tax Ongoing 1 1.0% SAE Only 25 47.8%
Insurance Ongoing 0 0.0% Other 23 52.2%
CapEx Ongoing 1 0.5%
Leasing Costs Ongoing1 3 16.5%
1. Percent of office, retail, industrial and mixed use assets based on DBRS property types.
Borrowers: Consistent with other Canadian CMBS transactions, each borrower or the beneficial owner of the mortgaged properties is generally not an SPE and will not be restricted from having or acquiring other properties and assets and/or incurring other liabilities or indebtedness that are either unsecured or secured by real or personal property other than a
Structured Finance: CMBS 11 PRESALE REPORT — REAL-T 2019-1 JUNE 2019 mortgaged property. While all loans in the transaction are first liens perfecting the Trust’s interest in the collateral, any such additional liability or indebtedness may have an adverse effect on that borrower’s ability to satisfy its obligations with respect to the relevant mortgaged property under the applicable mortgage loan.
Sponsor Strength: Two loans, representing 3.1% of DBRS Sponsor Strength the pool, were considered by DBRS to have Strong Sponsor sponsor strength, and one loan, representing 3.2% of the Strength % of Pool # of Loans pool, was considered by DBRS to have Weak sponsor Strong 3.1% 2 strength. No loans were considered by DBRS to have Bad Average 93.7% 45 sponsor strength. Weak 3.2% 1 Bad (Litigious) 0.0% 0
Transfers of a Mortgaged Property: Subject to certain exceptions, the mortgage loans generally do not permit a borrower or any beneficial owner of any mortgaged property to sell, transfer and assign its beneficial interest in the related mortgaged property without consent of the lender.
Structured Finance: CMBS 12 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WSP Place Edmonton, Alberta
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $37.8 Loan psf/Unit $204 Percentage of the Pool 8.5% Loan Maturity/ARD January 2024 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Office Year Built/Renovated 1978/2017 Issuance DSCR Fort Saskatchewan, 1.37x City, State Physical Occupancy 91.5% AB Issuance LTV 74.0% Units/SF 184,707 Physical Occupancy Date March 2019 Balloon LTV 68.0% The loan is secured by the borrower’s fee simple interest in WSP Place, a 184,707 sf multi-tenanted office building located in Edmonton, Alberta. The five-year loan holds DBRS Property Type Office full recourse to the borrower and amortizes over a 30-year schedule. Loan proceeds DBRS Property Quality of $38.0 million, along with $7.0 million of borrower equity, will be used to refinance Above Average the $45.0 million existing debt. A general leasing reserve of $500,000, and a tenant- specific leasing reserve of $200,000 for WSP Canada Inc. (WSP) was held back from Debt Stack ($ million) Trust the loan proceeds. Additionally, a $350,000 tenant specific leasing reserve for AIMCo $37.8 will be collected during the first seven month of the loan term at $50,000 per month. Pari Passu $0.0 The office building, which was constructed in 1978 and renovated from 2015 to 2017, B-Note consists of a single 12-storey building situated on a 1.91-acre lot. The renovations, $0.0 which cost approximately $40.0 million, included complete renewal of the building Mezz envelop, which increased the total rentable area, and improvements to the fifth and $0.0 seventh floors, ground-floor lobby, elevators, security cameras, roof and parkade. The Total Debt $37.8 renovation also includes an electrical system upgrade and a major mechanical upgrade to a cogeneration system, which, along with the addition of high-efficiency materials, Loan Purpose enable the building to cut down on its electrical consumption by approximately 40.0%. Refinance The borrower, therefore, intends to apply for Leadership in Energy and Environmental Equity Contribution/ Design (LEED) Gold certification in 2019. (Distribution) ($ million) $7.0
Structured Finance: CMBS 13 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WSP PLACE – EDMONTON, AB
TENANT SUMMARY
DBRS Base % of Total DBRS Investment Tenant SF % of Total NRA Rent PSF Base Rent Lease Expiry Grade? (Y/N)
WSP Canada Inc. 67,270 36.4% $15.00 32.8% July 2026 N
Her Majesty the Queen in right of 43,500 23.6% $18.00 25.5% September 2021 Y Alberta (Alberta Health Services)
Alberta Investment Management 15,667 8.5% $23.00 11.7% December 2019 N Corporation (AIMCo)
Employabilities Society of Alberta 15,651 8.5% $15.00 7.6% January 2020 N
Zebra Child Protection Centre 10,818 5.9% $20.00 7.0% August 2023 N Society
Subtotal/Wtd. Avg. 152,906 82.8% $17.03 84.7% Various N
Other Tenants 17,217 9.3% $27.40 15.3% Various N
Vacant Space 14,584 7.9% n/a n/a n/a n/a
Total/Wtd. Avg. 184,707 100.0% $16.65 100.0% Various N
As at the March 2019 rent roll, the property is 92.1% leased, including a tenant on month-to-month lease, and the largest tenant is WSP, an engineering solutions firm that establishes partnerships with companies to help in the planning, design, management and engineering of properties. It accounted for 36.4% of the NRA and 32.8% of the DBRS Base Rent. Her Majesty the Queen in Right of Alberta is the second-largest tenant at the property, representing the monarchy’s interest in Canada. It holds 23.6% of the NRA and 25.5% of the base rent. Rollover throughout the loan term is heavily concentrated in 2026, which is two years beyond the loan term, when a single tenant’s lease, WSP, representing 36.4% of the NRA and 32.8% of the base rent, is scheduled to expire. However, with a 12 months’ notice, WSP has the right to terminate the lease at the end of the fifth year (2021) subject to approximately $3.0 milion termination fee or seventh year (2023) subject to approximately $2.0 million termination fee, and/or reduce its space by up to 50.0% any time after the fifth year. In addition, the third-largest tenant, Alberta Investment Management Corporation (AIMCo.), will vacate upon its lease expiration in December 2019 and relocate to its newly acquired office tower in Edmonton’s Financial District.
SPONSORSHIP The sponsorship for the loan is shared between GSRI Ltd., Pacific Plaza LP and George Schluessel, all of which provide full joint and several guarantees on the loan. George Schluessel, who is the beneficial owner, founder and Chief Executive Officer of GSRI Ltd., has over 39 years of experience in real estate and has a net worth in the hundreds of millions. Pacific Plaza LP is a limited partnership that holds a net worth of $34.9 million.
Property management is provided by ProCura Real Estate Services Ltd. (ProCura), which is also owned by Mr. Schluessel. Over 39 years, ProCura has owned, managed and developed properties in excess of $1.9 billion. The company currently holds another $3.0 billion worth of land for future projects.
Structured Finance: CMBS 14 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WSP PLACE – EDMONTON, AB
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the DBRS site inspection and management meeting held on May 15, 2019, DBRS found the property to be Above Average.
The subject property is a 12-storey office building located in Edmonton’s Government District at the southwest corner of Jasper Avenue and 109 Street Northwest, which are two busy arterials in downtown Edmonton. Public transportation is conveniently provided by buses along both streets, and the Corona and Grandin light-rail transit stations are within walking distance. The immediate surrounding area features mixed office, residential and street-front retail properties of various heights. Located on the southeast and northeast corners of the same intersection are a rental apartment building and an office building, respectively, also owned by the subject’s sponsor, Mr. Schluessel.
The most notable component of the recently completed two-year renovation and repositioning program was the recladding of the building’s horizontal concrete edifice with an aluminum and deep-blue-green glass curtain wall that completely transformed the formerly beige-coloured 1970s Class B office building into an attractive modern Class A office tower aiming for LEED Gold certification. According to the property manager, all tenants endured the entire renovation process and stayed in occupancy even during the months of total blackout of the exterior windows, which is strong indication of tenants’ commitment to the building. DBRS noted the ground-floor lobby is well designed and furnished with graphical wood-panelled walls and clustered contemporary light pendants complemented by recessed lighting. The elevator lobbies on most floors have been renovated with the remaining floors to be completed in 2019. DBRS toured all four floors of WSP- occupied space and noted the functional floorplate and typical modern office layout of open working stations combined with individual offices. DBRS also toured the vacant space on the seventh floor and was told by the property manager that the space would be taken as an expansion by Zebra Child Protection Centre, which currently occupies the rest of the seventh floor. DBRS noted the three-level underground parking was well maintained, and according to the property manager, all 173 indoor parking spots were fully leased on a monthly basis. An additional 166 surface parking spaces from two parking lots were available for daily or hourly parking.
Overall, DBRS found this property to be well maintained and in good condition.
Structured Finance: CMBS 15 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WSP PLACE – EDMONTON, AB
DBRS NCF SUMMARY
NCF ANALYSIS
2016 2017 2018 Issuer NCF DBRS NCF NCF Variance
GPR $2,846,316 $2,976,136 $3,242,246 $3,380,208 $3,381,585 0.0%
Recoveries $643,341 $2,821,708 $2,911,054 $2,661,054 $2,377,978 -10.6%
Other Income $550,618 $523,917 $610,130 $610,130 $610,130 0.0%
Vacancy -$618,085 -$264,076 -$265,315 (422,526) (408,324) -3.4%
EGI $3,432,190 $6,057,686 $6,498,115 $6,228,866 $5,961,368 -4.3%
Expenses $2,564,953 $3,086,906 $2,946,404 $2,938,707 $2,928,007 -0.4%
NOI $867,238 $2,970,780 $3,551,711 $3,290,159 $3,033,361 -7.8%
Capex $3,999 $55,412 $36,941 -33.3%
TI/LC $72,567 $18,157 $112,966 522.2%
NCF $867,238 $2,970,780 $3,475,145 $3,216,589 $2,883,453 -10.4%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $2,883,453, a variance of -10.4% from the Issuer’s NCF. The primary drivers of the variance are expense recoveries and leasing costs. DBRS’s recoveries were based on the appraisal’s recovery ratio, which was calculated based on actual terms of lease agreements. For leasing costs, DBRS generally applied $15.00 psf and $7.50 psf, respectively, for new and renewal leases, while leasing commissions were based on 5.0% and 2.5% for new and renewal leases, respectively. DBRS also gave credit to the upfront $500,000 general leasing reserve and $200,000 tenant-specific leasing reserve for WSP. The resulting DBRS total leasing cost was $0.61 psf compared with the Issuer’s figure of $0.10 psf.
DBRS VIEWPOINT The subject property benefits from a capable and committed property owner who, as the landlord of an old Class B office building, realized, in a timely way, the increasing competition from many new office buildings scheduled to be completed in 2016 and 2017; the owner started a $40.0 million renovation and repositioning program in 2015 in order to elevate the property’s status and remain competitive in a potentially oversupplied Edmonton downtown office market. Soon after the renovation started, the ownership was able to secure a major tenant, WSP (36.4% of the total NRA), to take over the vacant space created by the recent departure of a former major tenant. The successful repositioning enables the subject property to compete effectively with other Class A office properties within the Government District submarket, as evidenced by the current in-place vacancy of 7.9% (or 8.5% if including the space occupied by a tenant on the month- to-month lease), which is lower than the submarket vacancy that ranges from 17.6% to 26.5% reported by different market research groups. Additionally, Edmonton’s downtown core has seen significant developments in recent years, driven by the municipal government’s downtown revitalization initiatives. The continued urbanization and densification, coupled with the recently completed Rogers Place, which is a 18,500-seat home arena for the Edmonton Oilers of the National Hockey League, and the ongoing development of the ICE District, which is a $2.5 billion mixed-use sports and entertainment district on 25.0 acres in downtown Edmonton, have transformed the downtown area into a vibrate commercial, cultural and entertainment centre that draws residents into the downtown area to live, work and play, which in turn attracts office tenants and ultimately entices office leasing activity.
The loan demonstrates elevated refinance risk, as evidenced by the DBRS Going-In and Exit Debt Yields of 7.64% and 8.36%, respectively.
Structured Finance: CMBS 16 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WSP PLACE – EDMONTON, AB
DOWNSIDE RISKS –– The largest tenant, WSP, has early-termination and space-reduction rights. –– The tenant AIMCo. (8.5% of the total NRA and 11.7% of the in-place base rent) will relocate to its owned Edmonton Tower in the ICE District upon its lease expiration in December 2019.
STABILIZING FACTORS ––There is a $200,000 tenant-specific leasing reserve for WSP held back from the loan proceeds. –– There is a general leasing reserve of $500,000 held back from the loan proceeds to cover potential leasing costs. Additionally, a $350,000 tenant-specific leasing reserve will be collected during the first seven months of the loan term at $50,000 per month. ––The loan is full recourse to Mr. Schluessel, GSRI Ltd. and Pacific Plaza LP.
Structured Finance: CMBS 17 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Woodside Square Retail Toronto, ON
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $28.5 Loan psf/Unit $203 Percentage of the Pool 6.4% Loan Maturity/ARD April 2023 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Anchored Retail Year Built/Renovated 1977/2004 Issuance DSCR 1.34x City, State Toronto, ON Physical Occupancy 91.8% Issuance LTV SF 280,725 Physical Occupancy Date March 2019 57.9% Balloon LTV The loan is secured by the borrower’s fee simple interest in Woodside Square, a 280,725 53.8% sf enclosed shopping centre located at 1571 Sandhurst Circle in Toronto. The five-year DBRS Property Type loan is full recourse to three individuals on a joint and several basis and amortizes Anchored Retail over a 30-year schedule. Loan proceeds of $58.0 million were used to finance the DBRS Property Quality $97.3 million acquisition of the subject and fund a general leasing reserve of $500,000 Average - and a $1.1 million structural reserve. The $29.0 million pari passu loan contained in Debt Stack ($ million) the REALT 2019-1 transaction represents the A2 component of the whole loan with Trust Balance an original balance of $58.0 million. $28.5 Pari Passu The anchored retail complex, which was constructed in 1977 and renovated in 2004, is $28.5 situated across a 24-acre lot and consists of a grocery-anchored retail mall with a small B-Note portion of second-floor office space and a free-standing building leased to McDonald’s. $0.0 Mezz The property has 282,176 sf in total leasable area and 1,500 surface parking spaces. $0.0 Total Debt $56.9
Loan Purpose Acquisition Equity Contribution/ (Distribution) ($ million) $39.3
Structured Finance: CMBS 18 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WOODSIDE SQUARE RETAIL – TORONTO, ON
TENANT SUMMARY
% of DBRS Base % of Total DBRS Investment Tenant SF Total NRA Rent PSF Base Rent Lease Expiry Grade? (Y/N)
Food Basics 41,315 14.7% $11.25 7.7% August 2023 Y¹
Casa Deluz Banquet Hall 17,690 6.3% $19.00 5.6% June 2029 N
Woodside Square Cinemas 16,321 5.8% $9.19 2.5% September 2022 N
Shoppers Drug Mart 15,367 5.5% $30.00 7.6% May 2019 Y²
Le Chateau 13,597 4.8% $16.00 3.6% November 2019 N
Subtotal/Wtd. Avg. 104,290 37.2% $15.62 26.9% Various N
Other Tenants 153,356 54.6% $28.83 73.1% Various N
Vacant Space 23,079 8.2% n/a n/a n/a n/a
Total/Wtd. Avg. 282,176 100.0% $22.34 100.0% Various Various
Note: 1. Based on the rating of the parent company Metro Inc. 2. Based on the rating of the parent company Loblaw Companies Limited.
The subject is leased to a broadly diverse roster of tenants. The largest tenant at the property is Food Basics, which is owned by METRO INC. (rated BBB with a Stable trend by DBRS), a leading Canadian food retailer and wholesaler that operates or supplies nearly 942 food stores and 258 drugstores in Québec and Ontario. Food Basics covers 14.7% of the NRA and provides 7.7% of the DBRS Base Rent. As of the March 2019 rent roll, the collateral was 91.8% occupied, including 0.4% that is occupied by month-to-month tenants. Historical occupancy prior to 2015 was not available; however, the property manager indicated occupancy of 92.0% and 91.0% in 2015 and 2016, respectively. Leases that represent 57.4% of the total NRA will expire during the loan term with rollover concentrated in 2019 and 2023, when leases representing 16.4% and 27.1% of the NRA, respectively, are scheduled to expire. Although tenant sales were not provided, DBRS was advised by the loan originator that sales from anchor tenant Food Basics were $449 psf in 2017. The appraisal identified four properties that are considered competitive with the subject due to their similar market demographics, locations and grocery anchors.
COMPETITIVE SET
Distance Property Location from Subject SF Major Tenants Occupancy
Agincourt Mall Toronto, ON 4.3 KM 290,079 Walmart, No Frills n.a.
Bridlewood Mall Toronto, ON 4.8 KM 331,188 Metro, Price Chopper n.a.
Malvern Town Centre Toronto, ON 5.0 KM 291,435 No Frills n.a.
Parkway Mall Toronto, ON 9.6 KM 282,634 Metro n.a.
Woodside Square - Subject Toronto, ON n/a 280,725 Food Basics 92.5%
Source: Appraisal.
SPONSORSHIP The loan’s sponsorship is shared by three real estate investors with extensive experience. The loan is full recourse to each of the three sponsors who have a combined net worth over $119.0 million.
Structured Finance: CMBS 19 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WOODSIDE SQUARE RETAIL – TORONTO, ON
Property management is provided by Triovest for a contractual management fee of 3.5% EGI. Triovest manages over $9.0 billion in assets across 37.0 million sf all over Canada as a real estate advisory firm.
DBRS ANALYSIS SITE INSPECTION SUMMARY DBRS held a management meeting and conducted a guided site tour on June 21, 2018, and found the property quality to be Average (-).
The property is located in the northeast portion of the city of Toronto, within a mature residential neighbourhood approximately 25.0 kilometres northeast of the Toronto CBD. More specifically, the property site is situated at the northwest corner of two major arterial routes, Finch Avenue East and McCowan Road, and bordered by a secondary curved road, Sandhurst Circle, on the west and north. Land uses surrounding the property consist of a mix of low-density residential houses and high-rise residential buildings on the south, north and east and a high school campus and two high-rise residential buildings on the west. In addition to multiple vehicular access points to the shopping centre from McCowan Road and Sandhurst Circle, several pedestrian access points are provided from a sidewalk along Finch Avenue East. The free-standing McDonald’s sits at the outmost southeast corner of the property site directly accessible from sidewalks on Finch Avenue East and McCowan Road. The enclosed mall is anchored by Food Basics on the northwest end, while Shoppers Drug Mart and the LCBO anchor the southwest end, with various restaurants occupying the southeast end. A single-level underground parking garage is located under the Food Basics store and is currently used as staff area and tenant storage. In general, the exterior of the southern portion of the property appeared to be newer and more colourful compared with the northern portion’s brownish and dated appearance. While most retail units are accessible only through the interior common area, some units, including all major tenants and most restaurant tenants, have direct access from the parking lot. A small food court sits at the northern portion of the mall near Food Basics. DBRS noted that interior tenants are predominantly local businesses catered toward South Asian and Chinese shoppers. Overall, the interior of the mall appeared dark and dated. However, the new ownership is set to start a major renovation to replace the entire floor covering and light fixtures; renovate and expand the food court, including all tables and chairs; refinish all columns with modern material; and renovate and expand public washrooms. This renovation is estimated to cost approximately $2.0 million and is expected to be completed by the end of the year. In the meantime, replacements of several sections of the roof and the HVAC system are currently in progress and will be covered by the $1.1 million in-place replacement reserve. The ownership expects the renovation to improve the appearance of the mall, thereby attracting more shoppers, which in turn enables management to raise rental rates. For this reason, management has postponed all lease-renewal negotiations to after the renovation. Recently expired leases have either rolled over to month-to-month status or were extended for a few months. At the time of the DBRS site inspection, there were five vacant units; however, one vacant unit (4,250 sf ) had been leased to Jungle Adventure, which is an indoor children’s playground furnished with trendy play
Structured Finance: CMBS 20 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WOODSIDE SQUARE RETAIL – TORONTO, ON structures, for a five-year term at a net rent of $25.00 psf. The tenant was in the final stage of fitting out and scheduled to open in September 2018. Another vacant unit (approximately 1,200 sf ) was taken by the neighbouring tenant, The Best Shop, for expansion. The vacant food court unit was also reportedly being leased-up.
Overall, the property site and building exterior appear to be in reasonable condition, while the mall interior is in need of updating.
DBRS NCF SUMMARY
NCF ANALYSIS
NCF 2014 2015 2016 2018 Issuer NCF DBRS NCF Variance
GPR $5,486,378 $6,181,700 $6,191,946 $5,957,386 $6,551,045 $6,845,717 4.5%
Recoveries $3,075,753 $3,646,083 $3,682,052 $3,523,337 $3,273,337 $3,404,111 4.0%
Percentage Rents $18,940 $26,094 $26,940 $23,709 $23,709 $23,709
Other Income $166,140 $170,712 $228,979 $203,593 $114,019 $147,825 29.6%
Vacancy $0 -$789,292 -$722,554 (491,328) (795,257) 61.9%
EGI $8,747,211 $9,235,297 $9,407,363 $9,708,025 $9,470,782 $9,626,106 1.6%
Expenses $4,147,755 $4,230,135 $4,300,875 $4,277,343 $4,353,177 $4,350,108 -0.1%
NOI $4,599,456 $5,005,162 $5,106,488 $5,430,682 $5,117,605 $5,275,997 3.1%
Capex $48,605 $31,169 $21,920 $61,902 $215,063 $189,422 -11.9%
TI/LC $89,342 $446,618 399.9%
NCF $4,550,851 $4,973,993 $5,084,568 $5,368,780 $4,813,200 $4,639,957 -3.6%
The DBRS NCF is based on the DBRS North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $4,639,957, a variance of -3.6% from the Issuer’s NCF. The primary drivers of the variance were leasing costs. DBRS generally based TIs on the appraiser’s estimate for new and renewal leases, while LCs were based on 5.0% and 2.5% for new and renewal leases, respectively. DBRS gave credit to the in-place general leasing reserve of $500,000 over the five-year loan term, which equated to $100,000 per annum. The resulting DBRS total leasing costs were $1.59 psf compared with the Issuer’s figure of $0.32 psf.
DBRS VIEWPOINT The subject shopping centre is well-located within a mature residential neighbourhood. The existing tenancy of national and regional retailers coupled with local ethnic businesses serves well to the targeted multicultural demographics. Despite four similar food-anchored shopping centres identified by the appraiser as competitors, management noted this type of retail centre generally targets their respective immediate neighbourhoods and are therefore not direct competition for the subject. While older enclosed community malls have been increasingly challenged by ever-growing e-commerce, the subject’s ethnic tenancy is less affected due to the uniqueness of merchandise. Additionally, the ownership is set to start a re-merchandising program after the completion of the imminent renovation by introducing more experience- focused tenants such as entertainment-oriented and food-related tenants. Although leases representing nearly 27.0% of NRA will expire in the next couple of years and over 57.0% during the loan term, they effectively provide the ownership opportunities to eliminate weaker tenants and introduce more productive tenants while covering associated leasing costs by the $500,000 in-place general leasing reserve. Furthermore, the property benefits from long-term commitment from the new ownership who is proposing to add a two-level cinema building at the central-west side of the mall. The new 52,000 sf building is designed to house an 11-screen cinema on the upper level and several retail units on the ground
Structured Finance: CMBS 21 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WOODSIDE SQUARE RETAIL – TORONTO, ON floor plus a two-level underground parking garage. The ownership also plans to intensify the property site by developing 2.0 million sf of high-rise residential condominium projects along the inner peripheral of the site to house approximately 3,000 residential units. This development proposal is reportedly well supported by the city, although it will take many years to execute.
Overall, the property benefits from capable ownership and experienced third-party property management. The near-term re-merchandising and long-term site intensification are expected to bring more shoppers to the subject centre, which in turn should improve property cash flow.
DOWNSIDE RISKS –– The loan demonstrated elevated refinance risk, as evidenced by an exit debt yield of 8.8%.
STABILIZING FACTORS AND UPSIDE POTENTIAL –– The loan is full recourse to three wealthy real estate investors who have already invested nearly $40.0 million of cash equity in the subject.
Structured Finance: CMBS 22 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Mont-Tremblant Retail Mont-Tremblant, QC
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $24.8 Loan psf/Unit $349 Percentage of the Pool 5.6% Loan Maturity/ARD May 2023 Amortization COLLATERAL SUMMARY 28.9 Years 1994/2009-2015, DBRS Property Type Unanchored Retail Year Built/Renovated Issuance DSCR 2018 1.55x City, State Mont-Tremblant, QC Physical Occupancy 86.0% Issuance LTV 68.6% SF 149,336 Physical Occupancy Date March 2019 Balloon LTV 63.5% This loan is secured by the borrower’s fee simple interest in Mont-Tremblant Retail, a 146,336 sf unanchored retail village in Mont-Tremblant, Québec, located approximately DBRS Property Type Unanchored Retail 122.0 kilometres northwest of the Montréal-Pierre Elliott Trudeau International DBRS Property Quality Airport in Montréal. Loan proceeds of $53.0 million, along with $15.1 million of sponsor Above Average equity, financed the acquisition of the property at a purchase price of $68.1 million. The whole loan comprises two pari passu A-Notes with an aggregate principal balance of Debt Stack ($ million) Trust Balance $45.0 million and an $8.0 million second mortgage. The A-2 piece of $17.2 million and $24.8 the $8.0 million second mortgage are held in this REAL-T 2019-1 transaction, while Pari Passu the $27.8 million controlling A-1 piece is secured in the REAL-T 2018-1 transaction. $27.4 The A-Note component is a five-year fixed-rate loan that amortizes over a 30-year B-Note schedule. The second mortgage was funded in May 2019 to ensure compliance with $0.0 subordinated debt requirements contained in the loan documents of the first mortgage Mezz to be inclusive of a full subordination and standstill agreement. The second mortgage $0.0 loan and amortization terms are co-terminus with the existing first mortgage. Total Debt $52.2 The retail village, which was constructed in 1994 and most recently renovated in 2018, Loan Purpose consists of 21 buildings spread across an 8.28-acre lot. The property is sectioned into Acquisition villages: Place St-Bernard, Forge, Westin, Johannsen, Deslauriers, Vieux-Tremblant, Equity Contribution/ Marriott, Kandahar and Tours des Voyageurs I and II. The subject is part of Mont- (Distribution) ($ million) $15.1 Tremblant Resort, which is a popular tourist destination during the winter and summer seasons and is primarily known for having the highest skiable terrain in the Laurentian Mountains. Mont-Tremblant Resort is a world-class four-seasons resort and was ranked as the top resort in Eastern Canada in 2017 by Ski Magazine. The resort also offers accommodations, bars and restaurants, shopping, a casino and spas. During the summer season, the resort offers outdoor activities, which include golfing, hiking,
Structured Finance: CMBS 23 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MONT-TREMBLANT RETAIL – MONT-TREMBLANT, QC watersports and other family-oriented activities. The Mont-Tremblant Village hosts many events throughout the year, with the most notable events being the Ironman Triathlon, Burton El Nino, Caribou Cup and Tremblant International Blues Festival. Considering the large collection of attractions across the property, the resort attracts approximately 2.6 million visitors each year. The buildings are largely wood-framed concrete constructs that follow a European architectural style.
TENANT SUMMARY
% of DBRS % of Total DBRS Investment Tenant SF Total NRA Base Rent PSF Base Rent Lease Expiry Grade? (Y/N)
La Forge 9,675 6.5% $31.01 5.9% December 2028 N
Johannsen Day Lodge 7,158 4.8% $34.73 4.9% June 2023 N
Le Shack 6,650 4.5% $33.49 4.4% August 2019 N
Immobilier Tremblant 5,180 3.5% $32.98 3.4% June 2023 N
Bullseye Saloon Bar and Grill 5,109 3.4% $29.84 3.0% November 2020 N
Le P'tit Caribou 4,962 3.3% $46.38 4.5% November 2025 N
Casey's 4,949 3.3% $41.07 4.0% December 2021 N
Gypsy Lounge 4,867 3.3% $20.00 1.9% June 2019 N
Boutique Explore! 3,945 2.6% $41.50 3.2% June 2023 N
Subtotal/Wtd. Avg. 52,495 35.2% $34.08 35.2% Various N
Other Tenants 75,974 50.9% $43.43 64.8% Various N
Vacant Space 20,867 14.0% n/a n/a n/a n/a
Total/Wtd. Avg. 149,336 100.0% $34.07 100.0% Various N
The subject is leased to a mix of national, regional and independent local businesses that include restaurants, lodging services and boutique stores. The tenants are granular, as no tenant occupies more than 10.0% of the NRA. The subject’s largest tenant is La Forge, an upscale restaurant situated at the base of the mountain that is immediately available to skiers descending from the slopes. La Forge accounts for 6.5% of the NRA and 5.9% of the DBRS Base Rent. As of the March 2019 rent roll, the collateral was 86.0% occupied. The property has been operating in the mid-90.0% range since 2014. Rollover throughout the loan term is heavily concentrated in 2023 when 15 tenants, representing 22.9% of the NRA, are scheduled to expire, while a total of 60.5% of the NRA is set to expire during the loan term. Many tenants have renewal options, and the granularity of the tenants, coupled with the property’s strong historical occupancy, helps mitigate rollover risk.
SPONSORSHIP The loan’s sponsor is Lasalle Asset Management, a private real estate investment corporation with 19 years of experience in the industry. The sponsor is an independent subsidiary of Jones Lang LaSalle, a private investment firm based in Chicago. Jones Lang LaSalle provides services to over 400 investors worldwide in various industries and manages $58.1 billion in assets. The borrowing entity is Mont Tremblant CIG IV Nominee Inc.
Property management is provided by M.T. Laurentians Inc. for a contractual management fee of 4.0% EGI. The management company has been operating at the company since 2003 and will continue its service with four five-year extensions in an agreement with the sponsor.
Structured Finance: CMBS 24 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MONT-TREMBLANT RETAIL – MONT-TREMBLANT, QC
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the DBRS site inspection and management meeting conducted at 1:00 p.m. on June 20, 2018, DBRS found the property quality to be Above Average.
The collateral is the retail component of Mont-Tremblant Resort, which is located in the Laurentian Mountains approximately 122.0 kilometres north of Montréal-Pierre Elliott Trudeau International Airport and 147.0 kilometres north of the Montréal CBD. The resort is accessible via Québec Route 327, a major road connecting from Hwy. 15. The resort serves as a summer and winter hotspot with over 665 acres of terrain and a large lake for watersports to appeal to travellers, attracting approximately 2.6 million visitors each year, most of whom are from Canada. The surrounding area is largely vacant with swathes of densely forested land, scattered rivers and lakes. The forests on the property itself hold 96 ski runs and are veined with hiking trails. Aside from the abundant number of winter and summer activities available in the area, the resort offers a variety of amenities to its guests, including hotel and lodging accommodations, restaurants and bars and boutique shops occupied by national and local-based retailers. In addition, the resort provides activities for all ages such as rock climbing, laser tag, golfing, arts and crafts, concerts and events, boat rentals, private swimming pools, spas and lounge areas in hotels. A unique attraction offered at the resort is Tonga Lumina, which is a sensory experience in the forest that guides visitors through a trail in the evening.
The exteriors of the buildings are vibrant in colour and is inspired by a European architectural style, with wooden frames, exposed beams within the interior and cobblestone pathways throughout the property. The collateral is sectioned into villages, with the Place St-Bernard and Forge villages located in the northernmost part of the collateral near the base of the mountain. These two villages are considered the most productive villages in terms of sales psf per management because the two largest restaurant tenants, La Forge and Le Shack, are conveniently placed near the entrance of the ski lifts, making them easily accessible to skiers descending the slopes. The Deslauriers and Johannsen villages are south of the Place St-Bernard and Forge villages, and there is an open area in between these villages used for stage performances. The Deslauriers and Johannsen villages create a pathway cascading down the mountain and are flanked by the Westin and Kandahar villages, while the Marriott and Vieux Tremblant villages are located at the centre of the collateral. The Vieux Tremblant village consists of individual cabins primarily occupied by restaurant and bar tenants. The property manager noted that the cabins were originally owned and occupied by independent owners but were subsequently sold to the resort and repurposed into restaurant and bar space. The Tours des Voyageurs I and II villages are located in the southernmost part of the collateral and serve as the main entrance to the resort. A gondola is located at the bottom and top of the collateral and carries guests to the ends of the property for convenience. There is ample parking available surrounding the collateral, but the largest parking lot is located south of the collateral and within proximity to the two
Structured Finance: CMBS 25 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MONT-TREMBLANT RETAIL – MONT-TREMBLANT, QC
Tours des Voyageurs villages. The resort provides multiple transportation services to its guests, including direct flights to the Mont-Tremblant International Airport from Toronto with shuttle buses and public transportation available to service tourists to and from the resort.
At the time of the inspection, DBRS observed seasonal maintenance and construction work being performed at the property, specifically the repainting of garbage cans and benches, power-washing of the pedestrian path, refinishing of the wooden decks and the installation of a metal roof over the Deslauriers building. The property manager commented that levels above the ground floor within most of the buildings are independently owned through strata, and a few free- standing buildings are owned by the ski resort association. The three parties are joined by a shared services agreement where the cost of capex is allocated among the parties. DBRS observed a significant amount of foot traffic despite the fact that summer was just beginning and the resort has not reached the peak of the season. At the time of the inspection, the resort was concluding the Ironman Triathlon and was preparing for the Tremblant International Blues Festival — hence the increased foot traffic in the area. The property manager noted that the summer season is becoming equally as popular as the winter season, and this is largely due to the many events hosted by the resort, with some events garnering international attention.
DBRS toured the interior of a few restaurant and retail units and observed that the units were in good condition. According to management, in preparation for the summer season, a few restaurant and bar tenants were closed at the time of the inspections because the tenants were updating the interior and landscaping, and a few tenants were repaving their decks and patios. Some tenants had made significant improvements to their space in the last year, including La Pizzateria, which replaced its windows and doors and expanded its outdoor deck and patio. The largest tenant, La Forge (a restaurant tenant occupying 6.6% of the NRA), occupies its own free-standing building and was recently granted approval from the city to increase its ground-floor interior space by building into its outdoor patio surrounding the building. The main reason driving the expansion is for guests to keep warm during the winter season while dining at the restaurant. The construction is expected to begin in 2019. DBRS inquired about leases that were scheduled to expire in 2018, and according to the property manager, a majority of the tenants have exercised their renewal options at a rental rate similar to or slightly above their current rental rate. None of the renewal tenants received TIs from the borrower, but some received one to two months of free rent if the tenants performed upgrades to the unit and were required to remain closed during the renovation. La Savoie (1.4% of the NRA) had a lease expiring in November 2018; however, the tenant renewed its lease on a ten-year term, and as part of its lease terms, the tenant completed upgrades to the unit that included the replacement of windows and doors. La Savoie also has two ten-year renewal options but is required to complete approximately $200,000 of hard cost improvements to the unit in order to exercise its first renewal option. A vacant unit in the Place St-Bernard village is located adjacent to the Homewood Suites (non-collateral) and may be occupied by Magasin de la Place, a sporting goods store. This tenant currently occupies the unit on the opposite side of the Homewood Suites and is planning on reducing its footprint at its current unit and building a pathway through Homewood Suites into the vacant unit. Magasin de la Place and the borrower are working with Homewood Suites on the construction plans. Samurai Pub, a sushi restaurant, will ultimately expand its current space into Magasin de la Place’s unit. A majority of the vacant units are progressively being leased out to tenants, with one unit to be leased to an escape room and virtual reality tenant; however, the terms of that lease have yet to be determined.
According to the property manager, there is no direct competition to the subject in the immediate area, considering the unique nature of the resort property type and the size of the property. The property manager did note that Sommet Saint-Sauveur is the closest ski mountain destination that competes with the subject for Montréal guests, as it is located approximately an hour from Montréal. Sommet Saint-Sauveur is significantly smaller in size and offers fewer amenities than Mont-Tremblant Resort. The property management has over 15 years of experience operating the subject. Overall, the property appeared to be in good condition and well maintained.
Structured Finance: CMBS 26 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MONT-TREMBLANT RETAIL – MONT-TREMBLANT, QC
NCF SUMMARY
NCF ANALYSIS
T-12 March Issuer DBRS NCF 2014 2015 2016 2017 2019 NCF NCF Variance
GPR $4,349,293 $4,254,393 $4,562,349 $4,845,422 $4,880,131 $5,738,435 $5,825,048 1.5%
Recoveries $1,764,282 $1,980,192 $1,922,403 $2,170,522 $2,302,506 $2,302,506 $2,153,808 -6.5%
Percentage Rents $377,506 $476,056 $459,541 $534,996 $512,923 $333,400 $512,923
Other Income $123,145 $125,416 $126,035 $132,169 $131,351 $131,351 $131,351 0.0%
Vacancy -$145,207 -$57,300 -$39,123 -$28,986 (609,892) (736,555) 20.8%
EGI $6,469,018 $6,778,757 $7,031,205 $7,654,123 $7,826,911 $7,895,800 $7,886,574 -0.1%
Expenses $2,333,758 $2,597,665 $2,399,841 $2,616,515 $2,586,221 $2,616,158 $2,615,789 0.0%
NOI $4,135,261 $4,181,091 $4,631,364 $5,037,608 $5,240,690 $5,279,642 $5,270,786 -0.2%
Capex $249,391 $576,496 131.2%
TI/LC $212,584 $230,520 8.4%
NCF $4,135,261 $4,181,091 $4,631,364 $5,037,608 $5,240,690 $4,817,667 $4,463,770 -7.3%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $4,463,770, a variance of -7.4% from the Issuer’s NCF. The main driver of the variance is capex. DBRS based the GPR on the March 2019 rent roll and used a 12.6% vacancy loss based on the economic vacancy. The Issuer applied $1.67 psf of capex, whereas DBRS applied $3.97 psf, which is based on the engineer’s estimate.
DBRS VIEWPOINT The subject is a popular tourist destination, attracting visitors from across Canada, the United States and other countries. The tenant roster is composed of a diverse tenant mix catering to all demographics, providing both traditional retail and modern-experiential attractions to its guests. Furthermore, there are a variety of dining options, though many restaurants appeal to a French Canadian–style menu for the novelty of a true Montréal experience. Although the resort naturally experiences the most traffic in the winter season, the summer season is becoming increasingly popular due to the many events hosted at the resort as well as the diverse tenant roster from the subject property and the variety of activities available to visitors within and outside of the resort. The borrower and the resort are receptive to evolving social trends, and as a result, the borrower executed a lease with a laser tag tenant and is in discussions with an escape room and virtual reality tenant. The borrower and tenants are committed to the subject, considering that a majority of tenants have renewal options, tenants are moving or expanding their units to optimize the use of the collateral space and capex improvements and routine maintenance are performed by management.
The loan demonstrates stable fundamentals as evidenced by a moderate issuance appraised LTV of 68.7% and balloon LTV of 63.5%, which is inclusive of the $8.0 million second mortgage. The issuance LTV and balloon LTV drops to 58.1% and 53.8%, respectively, when excluding the second mortgage.
DOWNSIDE RISKS –– The loan is exposed to significant rollover risk throughout the loan term, as 60.5% of the NRA is scheduled to expire within the loan term, with the highest concentration in 2023 when 22.9% of the NRA is scheduled to expire. –– Sommet Saint-Sauveur is a competitor to the subject property and is located an hour away, or 80 kilometres from the Montréal CBD, compared with the subject property, which is approximately two hours, or 147.0 kilometres away.
Structured Finance: CMBS 27 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MONT-TREMBLANT RETAIL – MONT-TREMBLANT, QC
STABILIZING FACTORS –– The majority of tenants have renewal options available, and the granularity of the tenants, coupled with the property’s strong historical occupancy, helps mitigate rollover risk. –– Sommet Saint-Sauveur competes for Montréal visitors only per management. The Mont-Tremblant Resort is larger in size and offers a wider range of amenities compared with Sommet Saint-Sauveur. In addition, the subject resort hosts many events throughout the year and is widely known as a world-class four-seasons resort.
Structured Finance: CMBS 28 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Leima Building Ottawa, ON
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $22.0 Loan psf/Unit $149 Percentage of the Pool 4.9% Loan Maturity/ARD June 2029 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Office Year Built/Renovated 1977 Issuance DSCR 1.30x City, State Ottawa, ON Physical Occupancy 100.0% Issuance LTV Units/SF 147,521 Physical Occupancy Date May 2019 70.1% Balloon LTV The loan is secured by the borrower’s fee simple interest in the Leima Building, a 147,521 55.3% sf office building located in Ottawa. The ten-year non-recourse loan will amortize DBRS Property Type over a 30-year schedule. Loan proceeds of $22.0 million will be used to repay the Office $11.0 million existing loan and fund an equity takeout of $11.0 million. A general leasing DBRS Property Quality reserve of $290,000 will be held for the duration of the loan term. Any withdrawals Average + from the leasing reserve will be subject to refreshment at lender’s discretion. Debt Stack ($ million) Trust Balance The Class B office building, which was constructed in 1977, consists of a single building $22.0 situated across a 0.6-acre lot. The penthouse and roof area of the building house the Pari Passu majority of the mechanical equipment, and the basement of the subject is where the $0.0 electrical room and vault are located. There were recent TIs completed on the eighth B-Note floor and further planned improvements for floors nine through 11. $0.0 Mezz $0.0 Total Debt $22.0
Loan Purpose Refinance Equity Contribution/ (Distribution) ($ million) ($11.0)
Structured Finance: CMBS 29 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEIMA BUILDING – OTTAWA, ON
TENANT SUMMARY
% of DBRS % of Total DBRS Investment Tenant SF Total NRA Base Rent PSF Base Rent Lease Expiry Grade? (Y/N)
PWGSC 130,973 88.8% $12.26 85.0% Various Y
Subtotal/Wtd. Avg. 130,973 88.8% $12.26 85.0% Various N
Other Tenants 16,548 11.2% $17.08 15.0% Various N
Vacant Space 0 0% N/A N/A N/A N/A
Total/Wtd. Avg. 147,521 100.0% $12.80 Various N
The subject is largely leased to Public Works and Government Services Canada (PWGSC), which is a federal arm of the government that oversees the internal servicing and administration function. The organization has over 11,000 public servants to serve other departments and agencies. At the property, it accounts for 88.8% of the NRA and 85.0% of the DBRS Base Rent. Other tenants largely include research firms and technology companies. As of the May 2019 rent roll, the collateral was 90.5% physically occupied. However, the remainder of the space will be occupied by PWGSC, which has a lease commencement in May 2020. In addition, the loan is structured with a $210,000 upfront reserve to cover the rent shortfall for that space, prior to lease commencement, as the tenant will be paying an annual rent of approximately $207,000. Rollover throughout the loan term is heavily concentrated in 2027 when six spaces, representing 42.1% of the NRA, are scheduled to expire. The property has a lack of granularity, which may impose a rollover risk.
SPONSORSHIP The sponsorship for the loan is shared between Mark and Ian Shabinski, two real estate investors with decades of experience. They also serve as the owners of Glenview Management Limited, a management company that has been in operation since 1966 with years of experience in developing, renovating and managing properties of all types. There is no recourse to the loan.
The property is self-managed by Glenview Management Limited, the property management firm owned by the sponsors.
Structured Finance: CMBS 30 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEIMA BUILDING – OTTAWA, ON
DBRS ANALYSIS SITE INSPECTION SUMMARY DBRS toured the interior and exterior of the property on May 14, 2019, at 11:30 a.m. Based on the site inspection, DBRS found the property quality to be Average (+).
The collateral is well located on Laurier Avenue West, a prominent and well-trafficked area of the CBD of Ottawa, approximately a kilometre southwest of Parliament Hill. The immediate surrounding area is complementary to the subject, primarily consisting of a mix of mid-rise office and retail uses, while the south side of the subject is bordered by multi-residential properties. The subject is easily accessible via multiple arterial routes, including Wellington Street and the Trans-Canada Highway, and is well served by a network of streets and Ottawa’s public transportation system. Additionally, there is as an abundance of restaurants, retail development and community facilities located throughout the neighbourhood.
The subject is an 11-storey office building with a brick facade, indicative of a typical Class B office from the late 1970s. The building facade appeared to be in good condition and is comparable in vintage to the surrounding buildings. Immediately on the east side of the subject is a service road that leads to the rear of the property on Gloucester Street where the surface parking lot and the single-level parking garage are located. Although property signage is not easily visible from the main street, it is noticeable at a closer distance above the front doors, which leads into the building lobby. The lobby features adequate common area seating, complemented by potted plants, with a tenant directory situated near the security desk. The building is serviced by four elevators and two stairwells, with a washroom available on the south side of the lobby.
DBRS toured the ground-level office space and multiple office spaces on the above-ground portion of the building. The ground-level tenant, Atkinson Schroeter Design Group Inc., representing 1.5% of the NRA, recently signed a ten-year lease that commenced in January 2019. The tenants’ reception area, meeting room and individual offices were visually appealing, accented by vibrant decor and modern finishes. The office area had a contemporary layout, which was consistent with most of the other spaces in the building. In addition, DBRS toured several spaces on the second, third and eighth floors leased by the federal government tenant, PWGSC, which contributed $1.4 million, or approximately $11.00 psf, to a large-scale renovation of the property that was ongoing at the time of the site inspection. The renovations went toward meeting the federal government’s new Government of Canada Workplace 2.0 Fit-up Standards format that includes creating open, flexible and dynamic work spaces. This is achieved by modifying the physical aspects of the work space to create an overall collaborative work environment. As DBRS observed, this included reducing cubicle space on each floor and increasing the amount of meeting space in the common areas. In addition, many of the kitchen and lunch room
Structured Finance: CMBS 31 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEIMA BUILDING – OTTAWA, ON facilities featured modern furniture and updated stainless steel appliances. DBRS noted that the updated tenant spaces were generally in excellent condition.
In addition, DBRS also toured the ninth floor, which was completely vacant and in shell condition at the time of the inspection. Management noted that PWGSC will be taking occupancy of the space in May 2020 on a five-year lease, representing 9.5% of the NRA, with $485,000 budgeted for ceiling, light, carpet and duct work, to name a few improvements, for the tenant’s build-out. The loan is structured with a $210,000 upfront reserve to cover the rent shortfall until lease commencement. There was another smaller vacant space located on the eighth floor, approximately 550 sf, which was being utilized as a leasing office. The property manager noted that they intend to market this space at a later date to an independent professional(s) who would not require a lot of space for business needs.
Overall, DBRS noted that the building was in good condition for its original age and well maintained with no notable deferred maintenance observed.
DBRS NCF SUMMARY
NCF ANALYSIS
2015 2016 2017 2018 Issuer NCF DBRS NCF NCF Variance
GPR $4,257,224 $3,040,890 $2,960,002 $2,925,055 $1,888,766 $1,888,766 0.0%
Recoveries $2,258,225 $2,078,746 -7.9%
Other Income $74,095 $85,665 $1,096 $3,376 $116,886 $109,855 -6.0%
Vacancy (94,438) (108,570) 15.0%
EGI $4,331,319 $3,126,555 $2,961,098 $2,928,431 $4,169,438 $3,968,797 -4.8%
Expenses $2,100,954 $2,374,735 $2,207,913 $2,422,224 $2,455,803 $2,420,886 -1.4%
NOI $2,230,365 $751,820 $753,185 $506,207 $1,713,635 $1,547,911 -9.7%
Capex $42,308 $36,667 -13.3%
TI/LC $25,357 $60,696 139.4%
NCF $2,230,365 $751,820 $753,185 $506,207 $1,645,971 $1,450,548 -11.9%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $1,450,548, a variance of 11.9% from the Issuer’s NCF. The primary drivers of the variance were expense reimbursements and TI/LCs. DBRS based the expense reimbursement ratio on the appraiser’s estimate of 90.9%, adjusted by the DBRS blended vacancy factor of 5.6%, which was a blend of the DBRS vacancy per cent of 5.0% and 10.0% for government and office space, respectively. The Issuer applied TI/LCs of $0.17 psf, while DBRS applied $0.41 psf, based on DBRS estimates for government and office space types, which have lower-than-average in-place TIs at the subject. In addition, DBRS applied a leasing cost adjustment to provide credit for the upfront general leasing reserve of $290,000. The credit was provided over a five-year term as opposed to the ten-year loan term, as it is unlikely to draw down the reserve during the first five years given that the remaining term of the government leases is at least eight years.
DBRS VIEWPOINT The subject is a Class B office building located in the downtown core of Ottawa, which is 88.8% leased to a federal government tenant. The tenant has invested considerably in modernizing the space, specifically to meet the federal government’s new work space format. Although the tenant does not possess any renewal options with all of its leases scheduled to expire between April 2020 and March 2028, ahead of loan maturity in June 2029, the capital commitment
Structured Finance: CMBS 32 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEIMA BUILDING – OTTAWA, ON of the tenant and the generally higher renewal probability of government tenants decrease the likelihood that the tenant will vacate upon lease expiry. Additionally, it would be difficult for the tenant to find space of a similar scale given the limited availability in the market, as the overall availability rate was 4.8% with average net asking rents of $18.04 psf within the Ottawa downtown submarket, according to the Colliers International Q1 2019 Ottawa Office Market Report. The vacancy rate was reported at 7.3% with average net asking rents of $17.95 psf for office properties within the Ottawa CBD submarket, according to CBRE’s Ottawa Office Marketview Q1 2019. Ottawa, Canada’s capitol, is the headquarters of the federal government of Canada, and most of its agencies’ offices are located in the city. As the federal government of Canada is the largest employer within Ottawa, it is unlikely that it would look elsewhere to move its various agencies. The current site appears to be a good fit for the federal government tenant, particularly as it has been fitted to the new work space format via renovations. Further increasing the likelihood of renewal is the fact that the average rent of $12.80 psf is considered below market for Class B space, which reported average net asking rents of $16.16 psf for Class B office properties within the Ottawa CBD submarket, according to CBRE’s Ottawa Office Marketview Q1 2019.
The loan demonstrates mid-term default risk as evidenced by DBRS Term DSCR of 1.14x, which is below 1.15x, a threshold indicative of a high likelihood of mid-term default.
DOWNSIDE RISKS –– The government tenant space, which represents 88.8% of the NRA, will rollover during the loan term, and the tenant does not possess any renewal options, which poses considerable refinance risk.
STABILIZING FACTORS –– The tenant has invested over $1.4 million of its own capital in renovations and appears to be committed to the space. The federal government of Canada typically has high renewal probabilities on its space. In addition, the loan is structured with a $290,000 general leasing reserve held throughout the loan term.
Structured Finance: CMBS 33 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Gateway Boulevard Retail Edmonton, AB
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $19.8 Loan psf/Unit $273 Percentage of the Pool 4.4% Loan Maturity/ARD July 2025 Amortization COLLATERAL SUMMARY 25.0 Years DBRS Property Type Anchored Retail Year Built/Renovated 1994/2004,2013 Issuance DSCR 1.45x City, State Edmonton, AB Physical Occupancy 100.0% Issuance LTV SF 161,431 Physical Occupancy Date January 2019 58.7% Balloon LTV This loan is secured by the borrower’s fee interest in Gateway Boulevard Retail, a 46.3% 161,431 sf commercial property in Edmonton. Originally constructed in 1994 but DBRS Property Type redeveloped and expanded in 2013, the adjusted costs for the entire property was Unanchored Retail reportedly over $71.0 million. Gateway Boulevard Retail is composed of two two-storey DBRS Property Quality buildings and a freestanding CIBC building situated across a 9.2-acre property. This Above Average subject loan represents the A-2 note of the full $49.0 million whole loan. Loan proceeds Debt Stack ($ million) were utilized in 2015 to take out a $37.0 million construction loan facility, to fund a Trust Balance $4.0 million holdback reserve to cover revenue shortfall at the time associated with $19.8 tenants that are still in a rent-free period and to return approximately $8.0 million of Pari Passu cash equity to the loan sponsor. The $4.0 million holdback has since been released, $24.2 and all tenants are currently in place and pay rent. B-Note $0.0 Mezz As of January 1, 2019, the property was 100.0% leased to 21 tenants, including one $0.0 tenant, Finesse Home Living, that is an affiliate to the borrower. The tenant roster Total Debt indicates mixed tenancy types, including a fitness centre, a furniture store, restaurants, $44.1 a pharmacy, medical offices, general merchandise and services shops and second-floor offices. Tenant rollover throughout the first eight years of the loan term is nominal; Loan Purpose Refinance however, the largest rollover exposure occurs near loan maturity in 2024 when leases, Equity Contribution/ representing 31.2% of the NRA, are scheduled to expire. (Distribution) ($ million) ($14.6)
Structured Finance: CMBS 34 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GATEWAY BOULEVARD RETAIL – EDMONTON, AB
TENANT SUMMARY
% of DBRS UW Appraiser's % of Total DBRS Tenant SF Total NRA Base Rent PSF Market Rent PSF Base Rent Lease Expiry
LA Fitness 44,939 27.8% $24.20 $25.00 23.7% January 2030
Finesse Home Living 23,681 14.7% $24.24 $25.00 12.9% May 2021
Volcano Restaurant 3,546 2.2% $40.00 $42.00 3.1% October 2024
Other Main Floor Tenants 25,586 15.8% $38.14 $38.00 to $44.00 21.2% Various
Main Floor Subtotal/Wtd. Avg. 97,752 60.6% $28.62 $25.00 to $44.00 60.9% Various
Brookfield Residential 26,810 16.6% $24.24 $25.00 14.1% March 2024
Other Second Floor Tenants 3,576 2.2% $35.15 $28.00 to $30.00 2.7% Various
Second Floor Subtotal/Wtd. Avg. 30,386 18.8% $25.52 $25.00 to $30.00 16.9% Various
Freestanding CIBC 17,786 11.0% $30.53 $32.00 11.8% August 2024
Medical Tenants 15,477 9.6% $24.99 $28.00 to $44.00 8.4% Various
Vacant Space 0 0.0% n/a n/a n/a
Total/Wtd. Avg. 161,431 100.0% $28.47 $25.00 to $44.00 100.0% Various
SPONSORSHIP The sponsor for this loan is Saroukian Holdings Ltd., which has shareholder’s equity of $3.5 million, while property management is provided by sponsor-affiliate SHL Management LTD.
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the initial DBRS site inspection and management meeting held on August 18, 2015, DBRS found the property quality to be Above Average. DBRS revisited the property on June 20, 2018, and continued to hold the view of Above Average property quality.
The two-storey retail-and-office mixed-use plaza encompasses 9.2 acres of land and is well located in the southern part of Edmonton at 4210-4230 Gateway Boulevard and 4211-4219 Calgary Trail Northwest. The subject’s location is part of a commercial district with a strong concentration of restaurants, hotels and service-oriented businesses. The collateral is situated in one of the busiest intersections in Edmonton and benefits from street-front exposure with access to major
Structured Finance: CMBS 35 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GATEWAY BOULEVARD RETAIL – EDMONTON, AB roadways, such as Whitemud Drive, a major east–west highway across the city that connects to Hwy. 2 and Hwy. 216. The subject property compared favourably with the immediate surrounding retail plazas given the unique tenant profile and the newly reconstructed appearance, as the property underwent redevelopment from 2012 to 2014. The plaza is accessible through several points of ingress and egress on Gateway Boulevard Northwest, 42 Avenue Northwest, Calgary Trail Northwest and Whitemud Drive Northwest. The collateral is approximately 23 kilometres from the Edmonton International Airport and fewer than ten kilometres from Edmonton’s downtown core.
The subject’s parking lot was reasonably filled and sufficient to meet the commercial needs of the property. There are a variety of smaller tenants at the plaza, including restaurant, cosmetic and medical tenants, which leads to a diversified stream of rental revenue for the subject. DBRS noted that the interiors of these spaces were well maintained and functional. The largest tenant, LA Fitness, fully utilizes its space and features a whirlpool spa, a basketball court and group fitness classes, among other club amenities. The tenant benefits from strong curb appeal with a prominent front facade facing Calgary Trail Northwest and is considered a premier fitness club. The space of the second-floor office tenant, Brookfield Residential, features attractive interior design furnished with high-end material at the front reception area, while the office area is a combination of functionality and style with contemporary-looking lights, colours and contrasting materials and textures, such as decorative wood trims and beams set against white walls and a white ceiling. The third-largest tenant, Finesse Home Living, an affiliate of the borrower, benefits from visible signage and an appealing exterior. In addition, the free-standing CIBC building has direct exposure to Gateway Boulevard. At the time of the DBRS June 2018 site inspection, the collateral had only one vacant unit, which was an interior medical office space. However, the space was subsequently leased to the ProActive Physiotherapy & Sports Injury Clinic, representing 1.0% of the NRA, with a scheduled lease expiration in June 2026.
Overall, the property appeared to be an attractive mixed-use plaza that is well located in a very busy commercial district.
NCF SUMMARY
NCF ANALYSIS
T-12 T-12 2015 January 2017 January 2018 Issuer NCF DBRS NCF NCF Variance
GPR $4,553,124 $4,613,900 $4,545,560 $4,595,455 $4,595,455 0.0%
Recoveries $2,185,394 $1,815,959 $1,881,316 $1,711,316 $1,676,547 -2.0%
Other Income $152,760 $158,633 $214,126 $203,532 $214,126 5.2%
Vacancy -$227,656 -$140,751 $0 (229,773) (307,788) 34.0%
EGI $6,663,622 $6,447,742 $6,641,003 $6,280,531 $6,178,340 -1.6%
Expenses $2,185,394 $1,828,592 $1,783,350 $1,799,730 $1,795,642 -0.2%
NOI $4,478,228 $4,619,151 $4,857,653 $4,480,801 $4,382,698 -2.2%
Capex $24,215 $32,286 33.3%
TI/LC $39,635 $243,883 515.3%
NCF $4,478,228 $4,619,151 $4,857,653 $4,416,951 $4,106,529 -7.0%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $4,106,529, a variance of -7.0% from the Issuer’s NCF. The primary drivers of the variance are vacancy and TI/ LCs. DBRS applied a vacancy factor of 6.7%, which was blended 5.0% to 10.0% based on space type. For leasing costs, DBRS generally based TIs on the appraiser’s estimate for new and renewal leases, while leasing commissions were based on
Structured Finance: CMBS 36 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GATEWAY BOULEVARD RETAIL – EDMONTON, AB
4.0% and 2.0% for new and renewal leases, respectively. The resulting DBRS total leasing costs were $1.51 psf compared with the Issuer’s $0.62 psf.
DBRS VIEWPOINT The Edmonton retail market remains resilient throughout H2 2018, according to CBRE, and retail sales increased by 1.7% in 2018 compared with the prior year. Overall market vacancy declined to 5.0% in H2 2018 from 5.5% a year ago due to over 423,000 sf of positive absorption. However, CBRE noted that if the Sears space is excluded, the market would have shown positive absorption and declined vacancy. Furthermore, according to CBRE, retail leasing fundamentals are expected to improve due to the improving economy and rising consumer confidence driven by the rising oil price. In addition, cannabis stores, the newest retail category in Alberta, generated $33.0 million in sales in Q4 2018. The vacancy for neighbourhood shopping centres in Edmonton remained very low at 1.6% as of H2 2018, which compares favourably with the overall vacancy of 5.0% for all retail properties. The subject has outperformed the market, as evidenced by the 100.0% occupancy reported in January 2019, an improvement from 96.5% four years ago, a strong indication of stable performance even during depressed oil-price periods.
The property benefits from a stable retail market where, historically, most new product was leased before it was built and market vacancy historically remained low, according to CBRE. In addition, the loan demonstrates strong metrics, as evidenced a moderate issuance appraised LTV of 65.3% and balloon LTV of 46.3%.
DOWNSIDE RISKS –– Significant lease rollover near the loan maturity suggests elevated refinance risk. –– The tenants CIBC and LA Fitness have the right to go dark.
STABILIZING FACTORS AND POTENTIAL UPSIDE –– The tenant mix of fitness facility, eateries, service-oriented tenants and medical offices is commensurate to the recent trend in the retail market and has proven to be well received by shoppers and customers, as evidenced by the improving occupancy over the past three years. Additionally, a leasing reserve of $1.0 million will be collected in the monthly installments of $40,000 commencing three years prior to the loan maturity. –– In the event of a tenant going dark, the leasing reserve will be triggered at $500,000 for LA Fitness and $250,000 for CIBC.
Structured Finance: CMBS 37 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
The Redwoods Retirement I Ottawa, ON
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $19.6 Loan psf/Unit $165,497 Percentage of the Pool 4.4% Loan Maturity/ARD May 2028 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Multifamily Year Built/Renovated 1984/2018 Issuance DSCR 1.38x City, State Ottawa, ON Physical Occupancy 88.5% Issuance LTV Units/SF 208 Physical Occupancy Date Feb-19 64.5% Balloon LTV This pari passu loan is secured by the borrower’s fee interest in The Redwoods, a 53.1% 208-unit retirement residence located in Ottawa, approximately 14.0 kilometres from DBRS Property Type the downtown core. The ten-year fixed-rate loan amortizes over a 30-year schedule. Retirement Whole-loan proceeds of $35.0 million were used to refinance existing debt for the DBRS Property Quality sponsor, who acquired the property in 2016 for $40.0 million. The whole loan was Average funded with an initial advance of $31.0 million and a second advance of $4.0 million, Debt Stack ($ million) then split into two pieces, with the first piece of $15.0 million securitized in the REAL-T Trust Balance 2018-1 transaction and the second piece being the trust amount of $20.0 million. $19.6 Pari Passu Originally constructed in 1984 for traditional multifamily use, the 17-storey property $14.8 was converted into senior housing in 1999. Under the prior ownership, the property B-Note underwent significant renovations from 2013 through 2016, totalling $9.5 million $0.0 Mezz ($45,192 per unit). These renovations included in-suite and common-area upgrades, $0.0 operational systems upgrades and a sprinkler retrofit program. Since acquisition in Total Debt mid-2016, the sponsor continued to renovate the property at a cost of approximately $34.4 $1.5 million ($7,211 per unit), the bulk of which was spent on unit upgrades. As of February 2019, the property had an occupancy and average rental rate of 88.5% and Loan Purpose Refinance $3,642 per unit, respectively. Equity Contribution/ (Distribution) ($ million) The collateral offers three different programs for residences: independent living (IL), ($4.0) assisted living (AL) and respite care (RC). In order to accommodate IL, AL and RC residents, the property has a 24-hour nursing team and an on-site physician’s office with three rotating doctors. Additional property amenities include a large main dining room, an activity room with ample seating, a hair salon, shared garage parking with valet service, a courtyard, a library and computer lounge, on-site laundry facilities and a shared indoor swimming pool. The unit breakdown consists of 108 one-bedroom IL
Structured Finance: CMBS 38 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
THE REDWOODS RETIREMENT I – OTTAWA, ON units, 86 two-bedroom IL units, 11 one-bedroom AL units and one two-bedroom AL unit. All 12 AL units are on the third floor, with a separate activities room and dining room for those residents and staff.
INDEPENDENT LIVING Suite Type Approx. Sq. Ft. Signature Suites No Meals Standard Suites No Meals Bachelor 500 Starting at $2,784 Starting at $2,484 One Bedroom 369-646 Starting at $2,684 Starting at $2,384 Two Bedroom 858-965 Starting at $3,884 Starting at $3,584
ASSISTED LIVING Suite Type Approx. Sq. Ft. Signature Suites Standard Suites Bachelor 500 Starting at $4,099 Starting at $3,799 One Bedroom 369-646 Starting at $3,999 Starting at $3,699 Two Bedroom 951 Starting at $5,449 Starting at $5,149 Source: The Redwoods, brochure, c. 2018.
The Redwoods offers three different unit types in a bachelor suite, a one-bedroom suite and a two-bedroom suite, with three levels of finishes: “standard,” “signature” and a higher-end finish. The one- and two-bedroom suites range from 369 sf to 646 sf and 858 sf to 965 sf, respectively. Excluding the AL units, all rooms are equipped with kitchenettes or full kitchens, private balconies and fireplaces. Additionally, residents receive weekly housekeeping and laundry services, dietary and nutritional consulting and 21 days of room service annually. Standard suites feature carpeted flooring in the living room and bedroom, with vinyl flooring in the kitchen. The bathroom and kitchen in these units feature basic white cabinetry, countertops and appliances. The signature suites feature crown molding, a dishwasher, new paint, upgraded flooring and granite countertops. The higher-end units that have been fully renovated include completely new kitchens and bathrooms and feature granite countertops, wood cabinetry and stainless steel appliances. Both the signature units and the higher-end units come with air conditioning, while the standard units do not.
The property offers IL residents the option to purchase meals à la carte or on a monthly basis. Breakfast is $100 per month ($5.00 per meal), lunch is $165 per month ($7.50 per meal) and dinner is $200 per month ($12.50 per meal). AL residents receive three meals per day, up to 45 minutes of private daily nurse care and consultation and daily housekeeping. All of these services are in addition to all of the IL benefits, which are also included. RC includes basic assistance with daily living, medication supervision and additional nursing care, as well as the same AL and IL benefits. The RC program costs an additional $100 a day for IL patients and an additional $125 a day for AL patients.
SPONSORSHIP The loan’s sponsor is RFA Verdun GP Inc., a subsidiary of the ownership entity Realty Financial Advisors. The company was founded in Toronto in 1996 and has since amassed a portfolio of five properties consisting of over 1,000 units. As of December 2017, the sponsor reported a net worth of $47.0 million. The loan is full recourse to the sponsor.
Property management is provided by Vivacity Residential Property Management Inc. for a contractual fee of 4.5%. It was noted that Realty Financial Advisors holds a 50.0% ownership stake in the property manager.
Structured Finance: CMBS 39 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
THE REDWOODS RETIREMENT I – OTTAWA, ON
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the DBRS management meeting held on June 20, 2018, DBRS found the property quality to be Average.
The senior-care facility is located in the southwest part of Ottawa and sits on a quiet street off Greenback Road, less than 1.0 kilometres from Hwy. 417. The immediate area consists of a mix of mature residential and commercial retail. The subject shares a parking lot that adjoins a multifamily apartment building to the north. The parking garage used by the subject is shared with that property (known as the Green Park Apartments), with maintenance responsibilities shared between the two ownership entities. There is single-family property and commercial property to the south, a public school and a park to the west and multifamily apartments to the east. The driveway leading into the subject building features new signage and landscaping, showcasing the property quite well for prospective residents and visitors. The building’s facade is covered with a mix of dark-brown brick and contained a black awning featuring the “The Redwoods” name above the entryway. The ground floor of the building is dedicated to the common-area amenities, which include a dining room, a reception area, a library and a lounge. The lounge is the largest communal space at the residence and includes ample seating throughout, as well as a fireplace, a piano, a communal television, a bar and a pool table.
Since the 2016 acquisition, the sponsor has invested approximately $1.5 million in capex. Completed projects include suite upgrades, sprinkler retrofits, system upgrades and upgraded transport for residents. At the time of the DBRS visit, there were renovations ongoing for units at the property, with standard units being upgraded with the signature finish package and/or the to-be-named higher-end finish. Signature upgrades are completed at a cost of approximately $10,000 per unit and feature new paint, carpeted flooring to match the walls, crown molding, a new dishwasher and the installation of an air conditioning unit. In addition, countertops are being upgraded to a dark granite in the kitchen and bathrooms, with new vinyl flooring installed in both rooms. The signature units have a good aesthetic and felt inviting with an attractive layout and nice-sized living areas and bedrooms. As noted by the appraiser, the property’s status as a former multifamily property means the units are larger than the typical senior residence, with the full kitchens featured in many units being a unique amenity that is not often offered within this segment.
When touring one of the units renovated to the higher-end finish, DBRS observed a modernized kitchen, with brand-new cabinetry, countertops and stainless steel appliances, which all looked “sharp.” The living room area had light hardwood floors, with carpeting in the bedrooms and a new bathroom featuring brown granite countertops and white cabinetry. According to the property manager, the renovation of these units is completed at a cost of approximately $40,000 per unit. The design is expected to attract residents looking for a more luxury standard of finish. The site contact noted that standard-finish units make up roughly 54.0% of the total units at the property, with ten unit renovations planned for 2018, with the plan of targeting another ten units in 2020. Since the acquisition, it estimated that 40 to 50 units have been renovated to date.
Structured Finance: CMBS 40 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
THE REDWOODS RETIREMENT I – OTTAWA, ON
The basement houses additional amenities, including a gym, a hair salon, a movie theatre, laundry facilities and shared pool access. Recent upgrades to the pool system had been completed at the time of the inspection, with the hot tub under repair during the visit and expected to be back on line in the next few days. The site contact noted plans are in place to renovate a portion of the chapel and theatre area in the basement to create a new staff lounge. In addition, it was noted that there are three promotions currently in place at the subject in order to attract tenants that included one-month of free rent; reimbursement of moving costs up to $2,500; and no rent increases for two years. Overall, staff members seemed readily available to provide tenants with an enjoyable living experience. The property tour was facilitated by the facility’s Executive Director, who has been working at the subject for ten years.
NCF SUMMARY
NCF ANALYSIS
T12 2017 February 2019 Issuer NCF DBRS NCF NCF Variance
GPR $7,493,498 $7,849,694 $9,092,182 $9,092,182 0.0%
Other Income $713,649 $858,255 $858,255 $858,255 0.0%
Vacancy & Concessions (1,345,643) (1,363,827) 1.4%
EGI $8,207,147 $8,707,949 $8,604,794 $8,586,610 -0.2%
Expenses $5,394,253 $5,488,262 $5,475,187 $5,625,626 2.7%
NOI $2,812,894 $3,219,687 $3,129,607 $2,960,984 -5.4%
Capex $72,800 $63,050 -13.4%
NCF $2,812,894 $3,219,687 $3,056,807 $2,897,934 -5.2%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $2,897,934, a variance of -5.2% from the Issuer’s NCF. The primary driver of variance was the total expenses. DBRS applied a 3.0% inflation over the most recent T-12 line items, resulting in an annual assumption of $27,046 per unit compared with the Issuer’s figure of $26,323 per unit.
DBRS VIEWPOINT The subject facility is well located in a quiet neighbourhood, with proximity to Queensway Carleton Hospital and stores such as IKEA, Indigo, Metro and Milestones Grill and Bar. Residents are provided with private shuttle transportation to these local destinations. The area within a 5.0-kilometre radius of the subject is projected to see an increase in the senior population by nearly 14.0% in the next five years, a factor that will bring increased demand for the subject but is also a contributor to the ten new retirement developments in the planning stages for the area, as noted by the appraiser. Occupancy at the subject has improved to a physical occupancy rate of 88.5% per the February 2019 rent roll from an average of 83.1% in 2017. Although the appraiser estimated a stabilized vacancy rate of 7.0%, the Ottawa West area reported an overall vacancy rate of 17.4% for standard and non-standard spaces per the 2018 Canada Mortgage and Housing Corporation (CMHC) Seniors’ Housing Report for Ontario, higher than the 2017 average of 12.1%. Given the new development in the pipeline to accommodate the increase in the senior population within the area, the market vacancy rates will likely be somewhat volatile for the next few years, but the subject appears well positioned to compete. According to the same CMHC Seniors’ Housing Report for Ottawa, bachelor/private rooms with meals included reported an average rate of $3,251 per month as of July 2018, down from $3,390 per month in July 2017 and above the subject’s current rate of $2,886 per month. While the subject’s rate is below market, the property incorporates only 12 AL rooms of the 208 rooms offered, which may explain the variance between price points, if other properties offer more AL/RC rooms. Though the property was constructed in 1984, the renovations that were completed by the previous owner and post-acquisition by the sponsor have really helped to increase the overall appeal of the property. The variety of unit types and finishes allows
Structured Finance: CMBS 41 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
THE REDWOODS RETIREMENT I – OTTAWA, ON the subject to cater to a variety of clientele, and the mid-market rental rates will be attractive alternatives to the higher rents likely commanded by newer projects that are realized over the next few years. In addition, the property’s amenity package includes à la carte and monthly meal service options, a unique offering within the submarket. The DBRS Term DSCR of 1.31x, with a DBRS Debt Yield of 8.3% is generally healthy, suggesting the property cash flows can withstand temporary occupancy disruptions as the sponsor continues to complete unit renovations or market vacancy rate spikes for short periods when new supply is delivered.
WEAKNESSES –– According to the appraiser, there are ten developments in the planning stages that, if realized, would add significant new supply within a 10-kilometre radius of the subject over the next few years.
MITIGANTS –– DBRS concluded a vacancy rate of 15.0%, given the current submarket vacancy rate of 17.4%; however, as of the February 2019 rent roll, economic vacancy was only 11.5%. To the extent that vacancy increases to a level equal to the CMHC- projected 17.4%, the DSCR would still be above 1.20x. The previous owner and the sponsor have invested significant funds toward unit renovations, completed to various standards to appeal to a variety of residents and budgets and improve the overall appeal for the subject within the market. –– The subject’s mid-tier price point (as described by the appraiser) will likely be a draw for potential tenants unable to commit to the higher price point commanded by the newer facilities expected to come on line in the near to medium term.
Structured Finance: CMBS 42 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Résidence Monseigneur Bourget Lévis, QC
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $19.4 Loan psf/Unit $124,177 Percentage of the Pool 4.3% Loan Maturity/ARD January 2029 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Senior Housing Year Built/Renovated 1989/2017 Issuance DSCR 1.41x City, State Lévis, QC Physical Occupancy 94.2% Issuance LTV SF 156 Physical Occupancy Date March 2019 71.8% Balloon LTV This loan is secured by the borrower’s fee simple interest in the Résidence Monseigneur 57.9% Bourget, a 156-unit senior living property located in Lévis, Québec, situated southwest DBRS Property Type of Québec City, Québec, on the southern bank of the Saint Lawrence River. The ten- Retirement year loan is full recourse to the sponsor and amortizes over a 30-year schedule. Loan DBRS Property Quality proceeds of $19.5 million were primarily used to refinance $18.8 million of existing Average debt to the sponsor. Debt Stack ($ million) Trust Balance The collateral comprises four interconnected buildings, constructed in phases in 1989, $19.4 1997, 2006 and, more recently, between 2017 and 2018, when an additional wing was Pari Passu added to the collateral, increasing the room count by 38 units to accommodate excess $0.0 demand. Since 2017, the borrower has invested approximately $11.0 million ($70,500 B-Note per unit) in capex, which was mostly attributed to the property’s expansion but also $0.0 Mezz other projects such as the installation of a new sprinkler system, renovations of the long- $0.0 term-care unit and common areas and the visual harmonization of all common areas Total Debt property-wide. Property amenities include the main dining room, resident lounges $19.4 and laundry facilities, a pharmacy, a hairdresser, a library and a chapel. Residents are also offered à la carte services, including meals, drug management, personal hygiene, Loan Purpose Refinance laundry, phone/Internet connections and personal care. Equity Contribution/ (Distribution) ($ million) Although the property offers both independent living (IL) and assisted living (AL) $0.8 programs, most of the units are leased to autonomous retirees requiring minimal assistance. Of the 156 units, 139 are leased to IL residents and 15 are leased to AL residents, while the remaining two units are used to house the hair salon and pharmacy. The long-term-care unit was added in 2010 and is located on the third floor, separate from the other units. By unit type, the property offers 30 studio IL units, 100 one- bedroom IL units, nine two-bedroom IL units, 11 studio AL units and four one-bedroom
Structured Finance: CMBS 43 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
RÉSIDENCE MONSEIGNEUR BOURGET – LÉVIS, QC
AL units. Prior to expansion, the property averaged an occupancy rate of 97.9% between 2014 and 2016. Post-renovation (which ended in March 2018), the property occupancy rate fell to 76.9%; however, most of the newly constructed units were pre-leased prior to completion and occupancy rebounded to 94.2% by May 2018. As of the March 2019 rent roll, the property had an occupancy and average rental rate of 94.2% and $2,383 per unit, respectively.
SPONSORSHIP The loan’s sponsor is an experienced senior-home operator who owns and manages two retirement properties in Québec, including the subject. The sponsor previously launched a public company specializing in senior homes in 2000 that was taken private in 2005. The loan is full recourse to Résidence Monseigneur (MGR) Bourget Inc. and the sponsor, Serge Pelletier, who reported a net worth of $14.3 million as of October 2018.
DBRS ANALYSIS SITE INSPECTION SUMMARY DBRS toured the interior and exterior of the property on May 15, 2019, at 11:00 a.m. Based on the site inspection and management tour, DBRS found the property quality to be Average.
The senior living facility is located in Lévis, approximately 5.0 kilometres (km) by ferry or 35.0 km by car from the downtown area of Québec City. Situated on the southwest corner of the Rue Monseigneur-Bourget and Rue Saint-Joseph intersection, the property is positioned on two of the larger thoroughfares in the community; however, the immediate area consists of a mature residential neighbourhood, which appeared to be relatively quiet, featuring plenty of green space and parks nearby. Around the corner from the subject is a church adjacent an elementary school and a shipyard less than a kilometre northeast of the subject. Although the nearest commercial areas are out of walking range for most residents (roughly 2.0 km), the owner mentioned that a shuttle service is offered in addition to local transit, which has a stop located on the north door of the property along Rue Saint-Joseph.
The main entrance is situated on the east side of the property, featuring a small lobby, concierge and office space. Although the interior of the entrance area was aesthetically pleasing and functional, DBRS did note that the drop-off area outside had a very prominent incline, which might complicate travelling for some of the tenants given the average age of 88 at the property, per the owner’s estimate. The 52 parking spaces are positioned at the south end of the property; however, the owner mentioned that most of the spaces were used by staff. On the west side of the property was a large patio, with a nice view and a number of furniture pieces. The exterior of the property was attractive, featuring concrete foundations and walls that had a plaster finish; each unit featured a small balcony.
Structured Finance: CMBS 44 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
RÉSIDENCE MONSEIGNEUR BOURGET – LÉVIS, QC
DBRS began the tour of the property at the main entrance and walked through all four buildings, including the amenities and five different units. The property was in good condition, and although the buildings were built in four different phases over a span of roughly 40 years, there was not a significant difference in the finish from building to building. The owner noted that during the most recent renovation, which focused on the construction of the fourth building and the renovation of common areas, there was also a significant effort to harmonize the look of the buildings — primarily by repainting the entire interior, replacing floors in common areas, renovating the kitchen and dining room and creating a new main entrance. During the inspection, the owner was in the process of converting one of the common rooms into a theatre room, but this appeared to be a relatively small project. The owner discussed that there had been interest in adding another level to one of the buildings; however, the permit had recently been denied and there was not much interest to revert the decision in the near future. Given the recent amount of capex, the owner noted no further projects were planned within the near term.
As noted above, DBRS toured five units, four IL units of different layouts and one AL unit. The IL units viewed were spacious, allowing for walking room and natural light throughout. The rooms were finished with painted drywall and hardwood flooring. Upon taking occupancy, units come unfurnished (aside from those that have a washer and dryer) but do provide a simple kitchenette setup with cabinetry, countertops and a sink. Although styles varied moderately by colour and finish, the quality was good and comparable throughout. Of the four IL units viewed, two tenants installed their own stoves, while all had fridges with an assortment of other appliances. Those who had no stoves were creative with their spaces, installing chairs or other appliances in the countertop cutouts. Depending on the number of inhabitants occupying the unit, furniture arrangements differed, but most had room for a living-room-type setup along with an office/library arrangement. According to the owner, most of the residents opted into their meal plan for two meals a day (which are not included in the base rent), as the kitchen generally serves about 300 plates per day. Each floor provides two laundry rooms, which are shared among residents. The long-term care unit was located on the third floor and had its own dining area, common room and office. According to the owner, there are always at least two staff on site to operate the care unit. Individual AL units were basic but large and furnished with equipment to deal with the individual resident’s needs.
DBRS NCF SUMMARY
NCF ANALYSIS
Issuer DBRS NCF 2015 2016 2017 2018 NCF NCF Variance
GPR $2,961,728 $2,962,244 $3,141,941 $4,294,524 $4,473,695 $4,473,695 0.0%
Vacancy & Concessions (56,500) (104,703) (370,580) (778,659) (269,340) (335,527) 24.6%
EGI $2,905,228 $2,857,541 $2,771,361 $3,515,865 $4,204,355 $4,138,167 -1.6%
Expenses $1,722,956 $1,766,596 $2,043,999 $2,458,234 $2,487,805 $2,598,392 4.4%
NOI $1,182,272 $1,090,945 $727,362 $1,057,631 $1,716,549 $1,539,776 -10.3%
Capex $31,200 $47,550 52.4%
NCF $1,182,272 $1,090,945 $727,362 $1,057,631 $1,685,349 $1,492,226 -11.5%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $1,492,226, a variance of -11.5% from the Issuer’s NCF. The main drivers of the variance are a combination of vacancy, the management fee and all other expenses. DBRS assumed a vacancy factor of 7.5%, below the submarket rate of 9.4% but above the Issuer’s rate of 6.0%, resulting in a variance of -$66,187. The NRI utilized by DBRS exceeds the T-12 period ending in December 2018 by 17.7%; however, the unit count recently increased, and the property has historically operated with low vacancy, stabilizing after the recent expansion due to strong demand and a significant amount of
Structured Finance: CMBS 45 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
RÉSIDENCE MONSEIGNEUR BOURGET – LÉVIS, QC pre-leasing activity. The lender applied a management fee of 4.0%, while DBRS utilized a 5.0% management fee. Operating expenses and utilities were based on the T-12 period ending December 2018 inflated by 3.0%.
DBRS VIEWPOINT The subject is a Class B senior living facility comprising 90% IL units and 10% AL units for semi-autonomous seniors. Located in a quiet neighbourhood overlooking Québec City, the property is in line with the aesthetic appeal of comparable rental properties, offering similar amenities but operating above market due to the recent addition of new units. As part of the renovation, 38 units were added with a refurbishment property-wide to amenities and common areas at a cost of approximately $11.0 million ($70,500 per unit), which has yielded a large growth in rental rates of approximately 10.0%. Despite fluctuating vacancy during the construction period, the property was able to stabilize quickly given the strong demand in the market, with 85.0% of the units pre-leased prior to completion. Per the March 2019 rent roll, the subject reported an average rental rate of $2,055 for studio IL units; $2,370 for one-bedroom IL units; and $2,725 for two-bedroom IL units. According to the 2018 Canada Mortgage and Housing Corporation Seniors’ Housing Report for Québec City, the South Shore submarket reported average rental rates for comparable unit types of $1,512 per unit; $1,893 per unit; and $2,372 per unit, respectively. Overall, DBRS believes that the location is well suited for the property, which benefits from stable market dynamics. DBRS considers leverage to be moderate given the balloon LTV ratio of 57.9%.
DOWNSIDE RISK –– There are two senior retirement facilities within 5.0 km and another two within 20.0 km of the subject property that directly compete with the collateral.
STABILIZING FACTORS AND UPSIDE POTENTIAL –– Per the November 2018 appraisal, the subject generally outperforms its competitive set, which reported rental rates ranging from $1,217 to $1,909 for studio IL units; $1,470 to $2,310 for one-bedroom IL units; and $2,364 to $2,750 for two-bedroom IL units. In addition, the sponsor is a repeat CMBS borrower in Canada, as well as an experienced operator, and provides full recourse to the loan. The sponsor’s recent capital commitment to the asset in the form of expansion and refurbishment is proof that market demand can support all of the existing assets in the area.
Structured Finance: CMBS 46 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Westwood Terrace Multi-Family Fort Saskatchewan, AB
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $17.2 Loan psf/Unit $115,450 Percentage of the Pool 3.9% Loan Maturity/ARD September 2020 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Multifamily Year Built/Renovated 2008/NAP Issuance DSCR 1.37x City, State Fort Saskatchewan, AB Physical Occupancy 94.0% Issuance LTV Units/SF 151 Physical Occupancy Date March 2019 68.0% Balloon LTV The loan is secured by the borrower’s fee simple interest in Westwood Terrace Multi- 65.9% Family, a 151-unit (including two units occupied by on-site property management staff ) DBRS Property Type apartment located in Fort Saskatchewan, Alberta, which is located approximately 35.0 Multifamily kilometres northeast of Edmonton. The five-year loan is full recourse and amortizes DBRS Property Quality over a 30-year schedule. Loan proceeds of $18.7 million were used to purchase the Average + subject. The borrower acquired the property for $24.9 million. Debt Stack ($ million) Trust Balance The four-storey multifamily complex, which was constructed in 2008, was 94.0% $17.2 occupied as of the March 2019 rent roll. Situated on a 3.14-acre site, it holds 151 Pari Passu units, which consist of 91 one-bedroom units and 60 two-bedroom units. The subject $0.0 was originally developed as a condominium project but used as a rental property B-Note after completion of the construction. Amenities at the property include a 120-stall $0.0 Mezz underground parking structure plus 135 surface stalls and a fitness centre. There is also $0.0 a community park located adjacent to the subject that is frequented by residents. All Total Debt units feature a full appliance array that includes a refrigerator, a stove, a microwave, $17.2 a dishwasher and a washer/dryer package. Loan Purpose Acquisition The property is situated in the southwest portion of the city of Fort Saskatchewan, Equity Contribution/ which is situated on the east bank of North Saskatchewan River along Hwy. 21, which (Distribution) ($ million) provides direct access to the Edmonton CBD. The city of Fort Saskatchewan reported $6.2 a population of 25,533 in the 2017 municipal census, an increase of 3.9% over 2016 and a total growth of 34.0% since 2011. Fort Saskatchewan is part of Alberta’s Industrial Heartland (AIH), which is the largest industrial area in Western Canada comprising 533.0 square kilometres of land joined by five municipalities. AIH is dedicated to hydrocarbon processing and attracts investment in the chemical, petrochemical and oil and gas industries to the region. By July 2015, $13.0 billion had been invested in
Structured Finance: CMBS 47 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WESTWOOD TERRACE MULTI-FAMILY – FORT SASKATCHEWAN, AB new industrial projects. The largest completed project to date is the Shell Scotford Upgrader, located approximately 11.0 kilometres northeast of the city of Fort Saskatchewan. Other major employers in the Fort Saskatchewan area include Dow Chemical, Sherritt International and Agrium. Additionally, driven by recent population growth, the commercial service sector has grown significantly. Major international and national retailers with stores in Fort Saskatchewan include Walmart, The Home Depot, Canadian Tire, Safeway and Sobeys.
According to the Canada Mortgage and Housing Corporation (CMHC) 2018 Rental Market Report for the Edmonton CMA, the 2018 market vacancy within the Fort Saskatchewan submarket, where the subject is located, was 8.6%, down from 11.1% a year ago. This is the first time since 2014 that CMHC reported a vacancy decline in the Fort Saskatchewan submarket; however, the level was still significantly higher than the 2014 level of 2.5%. As of the March 2019 rent roll, the physical vacancy of the subject, including two units occupied by on-site property management staff, was 6.0%, which is lower than the submarket level. Also according to the March 2019 rent roll, the one-bedroom units have an average rent of $1,204 and two-bedroom units have an average rent of $1,464. The property’s average rent of $1,334/unit is in line when compared with the CMHC averages of $1,339/unit.
SPONSORSHIP The sponsorship for the loan is shared between investors Ernest Lang, Jeffrey A. Gunther, James Huth and Geoff Reed. The loan has full recourse to all four sponsors, who are high-net-worth real estate investors with experience ranging from 15 years to 25 years. The borrowing entity for the loan is WWT Management Inc., a corporation that owns real estate and cash investments totalling $23.8 million. The property is self-managed.
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the DBRS site inspection and management meeting conducted on May 14, 2019, DBRS found the property quality to be Average (+).
The property is well located in Westpark, which is residential neighbourhood approximately 35 kilometres northeast from the Edmonton CBD. The area benefits from easy access to an Edmonton commuter thoroughfare in Hwy. 21 and local commercial development generally clustered around the highway. The immediate surrounding area comprises primarily low-density multifamily properties, including condominiums and rental apartments. Downtown Fort Saskatchewan, where both local elementary and high schools are located, is approximately 6.0 kilometres north of the subject on Hwy. 21. A neighbourhood retail plaza is located within walking distance from the subject and houses a Shoppers Drug Mart, a grocery store, a Tim Hortons and several other restaurants.
Structured Finance: CMBS 48 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WESTWOOD TERRACE MULTI-FAMILY – FORT SASKATCHEWAN, AB
At the time of the DBRS site inspection, all two-bedroom units were leased and occupied; however, three one-bedroom units were vacant, although one was already leased, and the tenant would be moving in the next day. DBRS toured two vacant one-bedroom units and one occupied two-bedroom unit. DBRS noted that these units were spacious and featured functional layout. The open-concept kitchens showed well with attractive cabinets and black appliance packages that were in very good condition overall. All units have stacked washers and dryers. Living rooms and bedrooms are generally carpeted, with vinyl tile in kitchen and bath areas. The property amenities include a small fitness centre as well as indoor and outdoor parking. The property manager advised that plans had been discussed to add a social area that could include a gazebo in the common outdoor space at the property, but nothing had been finalized to date. According to the property manager, the property is currently offering concessions to new tenants in the form of the 13th month rent free if they sign a minimum 13-month lease.
Overall, DBRS noted that the property site and building common areas were clean and well maintained.
DBRS NCF SUMMARY
NCF ANALYSIS
Issuer DBRS NCF 2016 2017 2018 NCF NCF Variance
GPR $2,252,508 $2,166,057 $2,276,165 $2,334,386 $2,369,261 1.5%
Other Income $79,954 $107,310 $71,901 $71,901 $71,901 0.0%
Vacancy & Concessions -$90,570 (226,961) (229,960) 1.3%
EGI $2,332,462 $2,273,367 $2,257,496 $2,179,326 $2,211,202 1.5%
Expenses $937,451 $911,295 $813,931 $829,307 $915,609 10.4%
NOI $1,395,011 $1,362,072 $1,443,565 $1,350,019 $1,295,593 -4.0%
Capex $30,200 $37,750 25.0%
NCF $1,395,011 $1,362,072 $1,443,565 $1,319,819 $1,257,843 -4.7%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $1,257,843, a -4.7% variance from the Issuer’s NCF. The main drivers of the variance are operating expenses. DBRS generally inflated the 2018 reported expenses figures by 3.0%. In addition, DBRS increased total controllable expenses to $2,000 per unit, which is the DBRS minimum requirement for properties that have an in-place average monthly rent above $1,000 per unit.
DBRS VIEWPOINT The subject benefits from its location within a growing market that has experienced significant population growth since 2011 and its proximity to employment centres located within the Edmonton CMA. Despite Alberta’s constrained economic growth in the past few years due to delayed pipeline projects and slower-than-expected oil-price recovery, the property has demonstrated relatively stable financial performance since the loan origination in late 2015, as evidenced by the reported NOI of $1.40 million, $1.36 million and $1.44 million in 2016, 2017 and 2018, respectively. Although historical T-12 occupancy data is not available, the property occupancies were reportedly 90.1% in August 2017 and 94.7% in April 2018 and 94.0% in March 2019. As the provincial economy continues to improve and is expected to lead national growth in the next couple of years, according to The Conference Board of Canada, the property cash flow is expected to retain stable. Additionally, the loan benefits from full recourse to four well-capitalized and experienced real estate investors, who are required to retain minimum cash equity of $6.0 million during the loan term. Furthermore, the loan demonstrates reasonable DBRS metrics, as evidenced by the DBRS Term DSCR of 1.37x and Going-In and Exit Debt Yields of 7.31% and 8.21%, respectively.
Structured Finance: CMBS 49 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
WESTWOOD TERRACE MULTI-FAMILY – FORT SASKATCHEWAN, AB
DOWNSIDE RISKS –– The property is located in Alberta where the economy is mostly vulnerable to the volatility of the oil and gas industry.
STABILIZING FACTORS –– The property has endured Alberta’s economic downturn in the past few years and remained fairly well occupied throughout. Additionally, the loan is full recourse from four well-capitalized sponsors.
Structured Finance: CMBS 50 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Leamington Walmart Leamington, ON
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $17.0 Loan psf/Unit $88 Percentage of the Pool 3.8% Loan Maturity/ARD December 2028 Amortization COLLATERAL SUMMARY 30.0 Years DBRS Property Type Anchored Retail Year Built/Renovated 1999 Issuance DSCR 1.46x City, State Leamington, ON Physical Occupancy 97.2% Issuance LTV Units/SF 192,943 Physical Occupancy Date May 2019 62.9% Balloon LTV The loan is secured by the borrower’s fee simple interest in Leamington Walmart, 51.1% a 192,943 sf grocery-anchored retail property located in Leamington, Ontario, DBRS Property Type approximately 50 kilometres southeast of Windsor, Ontario. As of May 2019, the subject Anchored Retail was 97.2% occupied and is anchored by a Walmart Supercentre (Walmart) and shadow- DBRS Property Quality anchored by a non-collateral Canadian Tire. Loan proceeds of $17.1 million, along with Average $9.9 million of cash equity, facilitated the acquisition of the property at a purchase Debt Stack ($ million) price of $27.0 million. The loan has a term of ten years and amortizes over a 30-year Trust Balance schedule. The property is part of a portfolio sale of six Walmarts with two other loans, $17.0 Saint-Hyacinthe Walmart and Trenton Walmart, secured in this transaction. Pari Passu $0.0 The anchored retail centre, which was constructed in 1999, consists of four buildings B-Note and is situated across a 17.37-acre site with 1,096 parking spaces available. The $0.0 Mezz property was previously owned and managed by RioCan Real Estate Investment Trust $0.0 (RioCan REIT). Total Debt $17.0
Loan Purpose Acquisition Equity Contribution/ (Distribution) ($ million) $9.9
Structured Finance: CMBS 51 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEAMINGTON WALMART – LEAMINGTON, ON
TENANT SUMMARY
% of DBRS % of Total DBRS Investment Tenant SF Total NRA Base Rent PSF Base Rent Lease Expiry Grade? (Y/N)
Walmart 105,183 54.5% $8.08 42.1% November 2024 Y
A&P - Food Basics 46,204 23.9% $14.00 32.0% December 2020 Y
Mark's 7,836 4.1% $12.50 4.8% September 2024 Y
Dollar Tree 6,998 3.6% $18.00 6.2% April 2022 N
Ardene 5,973 3.1% $15.00 4.4% July 2024 N
Maurices 5,002 2.6% $12.00 3.0% May 2025 N
Pet Value 3,662 1.9% $16.00 2.9% August 2024 N
Subtotal/Wtd. Avg. 180,858 93.7% $10.67 95.5% Various N
Other Tenants 6,612 3.4% $13.75 4.5% Various N
Vacant Space 5,473 2.8% n/a n/a n/a n/a
Total/Wtd. Avg. 192,943 100.0% $10.47 100.0% Various N
The tenant roster at the subject largely consists of national retailers, including the largest two tenants, which are well-known general retailers/grocers and collectively represent 78.5% of the NRA. The largest tenant, Walmart, is an investment-grade corporation that has a dominant franchise of discount general goods across the globe. Walmart has over 11,000 stores worldwide with over 400 locations across Canada and reported approximately $485 billion in annual sales. The tenant represents 54.5% of the NRA and 42.1% of the DBRS Base Rent. In addition, this location includes a grocery component. The second-largest tenant is A&P’s Food Basics (Food Basics), a grocery super chain owned by METRO INC. (rated BBB with a Stable trend by DBRS) that has over 130 locations across Ontario. Food Basics occupies 23.9% of the NRA and represents 32.0% of the DBRS Base Rent. The remaining tenants are granular and do not represent more than 5.0% of the NRA. Rollover throughout the loan term is heavily concentrated in 2020 and 2024 when Food Basics and Walmart are scheduled to expire; however, both tenants have renewal options available. Walmart has 16 five-year renewal options at its current rental rate of $8.08 psf, and Food Basics has four five-year renewal options at market rent. Northern Reflections, a women’s apparel store, occupies 1.6% of the NRA with a lease expiration of July 2019 and is the only tenant paying percentage rent of 10.0% of gross sales in lieu of base rent. The most recent reported sales figure was dated April 2017 at $293,680, or $97.63 psf, and discussions regarding a lease renewal are ongoing.
SPONSORSHIP The sponsors to this non-recourse loan are Robert and Howard Wiseman and Econo-Malls Holdings #25 Inc., which also serves as the borrowing entity for the loan. The sponsors have over 30 years of real estate experience and specialize in retail centres. The sponsors currently own approximately 40 properties, totaling 7.0 million sf, and have a combined net worth of $14.7 million. The property is self-managed by the borrower for a contractual management fee of 4.0% EGI.
Structured Finance: CMBS 52 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEAMINGTON WALMART – LEAMINGTON, ON
DBRS ANALYSIS SITE INSPECTION SUMMARY DBRS toured the property and held a management meeting on May 15, 2019, at 12:00 p.m., and based on the site inspection, DBRS found the property quality to be Average.
The collateral is in the rural town of Leamington, located off the shores of Lake Erie and in the heart of downtown Leamington. National retailers such as Shoppers Drug Mart, Canadian Tire, the Liquor Control Board of Ontario, Value Village, Tim Hortons and FreshCo are in the immediate area of the subject property. The subject is visible and accessible from Erie Street, a main arterial thoroughfare, including a signallized intersection enabling easy access from both north- and southbound traffic. At the time of the inspection, approximately half of the parking lot was filled.
The collateral property consists of four free-standing buildings, comprising a mix of brick and concrete block masonry walls. The largest building houses both Walmart and Food Basics and is stretched across the rear of the lot. The only building highly visible from Erie Street houses Mark’s, First Choice Haircutters and Payless Shoesource, which recently vacated ahead of its September 2021 lease expiration. According to the property manager, the tenant vacated shortly after a bankruptcy announcement in February 2019. The management had advised that Popeyes expressed an interest in entering the market and may occupy the vacant Payless Shoesource space, but discussions were only preliminary at the time of the inspection. In the event Popeyes backfills the vacant Payless Shoesource space, the property manager has advised that the unit can be easily brought to shell condition but may require additional work to build out double doors and potentially a wheelchair ramp for the entrance, if requested by Popeyes. Any additional TI to bring the unit to franchise standards will likely be paid by the tenant.
During the site inspection, DBRS inquired about potential conflicts and general competition between the two grocers, Walmart and Food Basics, as both tenants offer discounted groceries and are located on either ends of the property. The property manager had noted that both tenants continue to perform well and have been at the subject since 1999 and 2000. In addition, Food Basics had expressed an interest in expanding its space into the adjacent unit, currently occupied by Maurices, which is good indication that the Walmart is not overshadowing Food Basics. It is uncertain whether the expansion will occur in the near term, or at all, considering that Maurices currently has a lease expiration in May 2025. Booster Juice recently took occupancy at the subject and held its grand opening in March 2019. The build-out work for Booster Juice was conducted by RioCan REIT. Adjacent to Booster Juice is a vacant unit that was previously occupied by Bulk Barn. Bulk Barn relocated less than a kilometre from the subject, down Erie Street. It is uncertain when Bulk Barn vacated, and the property manager has noted that no prospective tenants have shown interest in the space.
Structured Finance: CMBS 53 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEAMINGTON WALMART – LEAMINGTON, ON
Overall, the property was well maintained and in good condition. There are no significant capex projects scheduled for the near term. With the acquisition of the property, the borrower has maintained the on-site property manager on a three- year contract, as he has managed the property for many years.
DBRS NCF SUMMARY
NCF ANALYSIS
2015 2016 2017 Issuer NCF DBRS NCF NCF Variance
GPR $2,158,713 $2,165,858 $2,083,064 $2,101,789 $2,129,265 1.3%
Recoveries $1,026,300 $956,105 $1,051,782 $1,091,782 $1,060,209 -2.9%
Other Income $0 $1,873 $283 $283 $0 -100.0%
Vacancy (105,089) (122,276) 16.4%
EGI $3,185,013 $3,123,836 $3,135,129 $3,088,764 $3,067,198 -0.7%
Expenses $1,118,355 $1,157,668 $1,173,019 $1,234,237 $1,273,834 3.2%
NOI $2,066,658 $1,966,168 $1,962,110 $1,854,528 $1,793,364 -3.3%
Capex $136,990 $162,775 18.8%
TI/LC $164,460 $159,638 -2.9%
NCF $2,066,658 $1,966,168 $1,962,110 $1,553,078 $1,470,951 -5.3%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $1,470,951, a variance of -5.3% from the Issuer’s NCF. The primary drivers of the variance were expense reimbursements and capex. DBRS based the expense reimbursement ratio on the appraiser’s estimate. The Issuer applied capex of $0.71 psf, while DBRS applied $0.84 psf, which is based on the engineer’s inflated estimate with an adjustment to remove a portion of the roofing cost covered by Walmart per its lease terms.
DBRS VIEWPOINT The property is well located in an established area of Leamington located off a major road and is easily accessible to Hwy. 3 and Hwy. 401. The tenant roster is composed of a diverse tenant mix catering to local demographics, providing access to two grocers, low- to medium-cost retailers and food and lifestyle services. Despite the recent departure of Payless Shoesource, the early discussions with Popeyes regarding the vacant space is a positive sign of general demand for this location. In addition, Walmart will continue to generate high traffic to the property as it is the only Walmart Supercentre in the immediate area.
The loan benefits from substantial cash equity as the sponsor recently acquired the asset as part of a larger portfolio, contributing 36.7% of equity to purchase the property. Along with the subject property, the Saint-Hyacinthe Walmart and Trenton Walmart properties, secured in this transaction, were acquired as well at a combined purchase price of $59.9 million for the three properties. In addition, the property benefits from the sponsors’ experience in managing retail properties.
The loan demonstrates strong metrics, as evidenced by a moderate issuance appraised LTV of 62.9% and balloon LTV of 51.1%.
Structured Finance: CMBS 54 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
LEAMINGTON WALMART – LEAMINGTON, ON
DOWNSIDE RISKS –– There is significant rollover risk, as Walmart and Food Basics, collectively representing 78.4% of the NRA, are scheduled to expire during the term of the loan.
STABILIZING FACTORS –– Walmart and Food Basics have been at the subject since 1999 and 2000, respectively, and have renewal options available. In addition, Walmart is the only Walmart Supercentre in the immediate area, and Food Basics expressed an interest in expanding its footprint at the subject, which signifies the tenant’s commitment to the property.
Structured Finance: CMBS 55 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Gross Medical Office Oshawa Oshawa, ON
Loan Snapshot Seller RBC Ownership Interest Fee Simple Trust Balance ($ million) $16.3 Loan psf/Unit $189 Percentage of the Pool 3.7% Loan Maturity/ARD June 2024 Amortization COLLATERAL SUMMARY 25.0 Years DBRS Property Type Office Year Built/Renovated 1915/2003-2005 Issuance DSCR 1.73x City, State Oshawa, ON Physical Occupancy 100.0% Issuance LTV Units/SF 86,450 Physical Occupancy Date January 2019 54.3% Balloon LTV The loan is secured by the borrower’s fee simple interest in Gross Medical Office 47.3% Oshawa, an 86,450 sf office complex located in the Oshawa, Ontario, downtown core, DBRS Property Type approximately 52.2 kilometres east of Toronto. As of January 2019, the collateral was Office 100.0% occupied, with Oshawa Clinic (88.4% of the total NRA) representing the largest DBRS Property Quality tenant. The five-year loan is partial recourse and amortizes over a 25-year schedule. Average The purpose of the transaction is to retire the existing $16.3 million commercial Debt Stack ($ million) mortgage-backed security loan that was previously securitized in the REAL-T 2014-1 Trust Balance transaction. The previous loan was an $18.7 million sale-leaseback acquisition loan $16.3 for a ten-year lease term to the borrower, who initially acquired the property for the Pari Passu purchase price of $27.4 million. $0.0 B-Note The medical office complex was constructed in 1915 and renovated between 2003 $0.0 Mezz and 2005. The buildings were constructed in phases in 1915, 1960 and 1988 before $0.0 undergoing an extensive renovation between 2003 and 2005. The property comes Total Debt with 200 parking spaces (with a ratio of 2.31 spaces per 1,000 sf ). $16.3
Loan Purpose Renewal Equity Contribution/ (Distribution) ($ million) $0.0
Structured Finance: CMBS 56 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GROSS MEDICAL OFFICE OSHAWA – OSHAWA, ON
TENANT SUMMARY
% of DBRS Base % of Total DBRS Investment SF Total NRA Rent PSF Base Rent Lease Expiry Grade? (Y/N)
Oshawa Clinic 76,430 88.4% $11.77 65.3% April 2024 N
Dr. Kwan 3,600 4.2% $13.76 3.6% April 2023 N
CHS Pharmacy 2,600 3.0% $130.77 24.8% June 2022 N
Clinic Eye Wear 220 0.3% $168.88 2.7% November 2021 N
Subtotal/Wtd. Avg. 82,850 95.8% $16.01 96.4% Various N
Gamma Dynacare 3,600 4.2% $13.76 3.6% December 2019 N
Vacant Space 0 0 n/a n/a n/a n/a
Total/Wtd. Avg. 86,450 100.0% $15.91 100.0% Various N
Gross Medical Office Oshawa is one of the largest private medical offices in Canada and consists of four medical office buildings spread across a 2.7-acre property. The buildings include an eight-storey central clinic area alongside two wings of two storeys and three storeys, respectively; a specialized sleep test center; a physiotherapy clinic; and a separate single- storey office building. The property is serviced by a main surface parking lot that accommodates up to 200 vehicles. The subject property is occupied by five tenants and is currently fully occupied. In addition to the Oshawa Clinic, which occupies a total of 76,430 sf (88.4% of the NRA) with the current lease set to expire at the end of the loan term, the collateral tenants include Gamma Dynacare (Dynacare; 4.2% of the NRA), CHS Pharmacy (3.0% of the NRA); Clinic Eyewear (0.3% of the NRA); and Dr. Kwan (4.2% of NRA). There is minimal rollover as approximately 4.5% of the NRA has leases that expire prior to the end of 2021. Dynacare and the Clinic Eyewear have upcoming lease expirations in December 2019 and November 2021, respectively.
Oshawa is a city with an estimated population of 170,095 (City of Oshawa, May 2019), situated along the Lake Ontario shoreline. The city is located about 50 kilometres away from downtown Toronto and classified as part of the eastern Greater Toronto Area. Oshawa used to be known as an “automotive city,” as General Motors of Canada Limited (GM), Autoplex and GM’s regional engineering centre were located in Oshawa. In the last ten years, GM reduced its workforce to 2,500 employees from 8,300 employees as of January 2019, accounting for just 3.6% of all employment in Oshawa. Top area employers currently include the Ontario Ministry of Finance (2,710 employees); Lakeridge Health Oshawa (2,342 employees); and Concentric (1,000 employees). Within Oshawa, the collateral is situated on King Street, a major city thoroughfare, and is easily accessible from Hwy. 401, which is 2.3 kilometres south of the subject. The immediate neighbourhood features Tribute Communities Centre, which is directly adjacent to the subject, while the newly constructed courthouse is just one block north of the subject. Furthermore, there is a 146,000 sf Costco and an additional 170,000 sf of additional retail, anchored by No Frills and The Beer Store. The hospital Lakeridge Health Oshawa is also located 1.8 kilometres north of the subject.
SPONSORSHIP The sponsor for this loan is King Oshawa Medical Holdings Inc., a single-purpose entity established solely for this loan transaction. The indemnities for this loan are Gross Medical Opportunities Fund LP, formally known as Gross Medical Income & Gross Fund 1 LP, as well as Mark Gross and Sheldon Gross, each offering personal guarantees of 12.5%.
Property management is provided by Clinic Buildings (1979) Ltd. for a contractual management fee of 3.5% of EGI.
Structured Finance: CMBS 57 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GROSS MEDICAL OFFICE OSHAWA – OSHAWA, ON
DBRS ANALYSIS SITE INSPECTION SUMMARY Based on the DBRS site inspection conducted at 2:00 p.m. on May 8, 2019, DBRS found the property quality to be Average.
Once in downtown Oshawa, it is not hard to find the subject property, as Gross Medical Office Oshawa occupies a large portion of land within the heart of the city centre. Driving down King Street, it becomes apparent that the collateral is well located along a very busy commercial street adjacent to a small retail plaza featuring a small pharmacy. The pharmacy in the retail plaza competes directly with CHS Pharmacy within the subject property; however, it was noted in an earlier DBRS site inspection that both pharmacies are able to co-exist and have been in operation for many years given the high traffic of customers in the medically focused area. With over 60 doctors located throughout the facility, it is apparent why CHS Pharmacy chooses to pay a rental premium for its space inside Gross Medical Office Oshawa, when it could operate just as effectively immediately outside the property for much lower rent: Presumably, the collateral pharmacy benefits from increased demand by offering even greater convenience to patients already inside the medical centre who need prescriptions filled after their appointments.
The collateral’s main building comprises three distinct yet adjoined sections: the eight-storey tower; the two-storey east wing (which includes the optometry, cardiology, radiology, ophthalmology and psychiatry divisions); and the three- storey west wing (the neurology division and family practice). The main entrance to the building is located at the rear of the building facing the 200-space parking lot, which was quite busy at the time of the property tour. The parking lot sits directly across the street from the Tribute Communities Centre, which can house up to 7,600 people for concerts and events and is home to the Oshawa Generals, a junior ice hockey team. The first floor of the main building features a walk-in clinic, a pharmacy next to the elevators, an eyeglass retailer and a reception area for the building. Each floor in the main tower consists of a shared common waiting room area, which is typically shared by four to five doctors per floor, with their own personal reception area. Some doctor’s offices are equipped with a washroom, while others share public washrooms. On the eighth floor, a new tenant, Amplifon, a hearing clinic, recently took occupancy and was given a newer build-out that featured new light-grey carpet in the communal waiting room, 30 new fabric-seat chairs and a neutral wall colour. At the time of the site inspection, the maintenance manager was unaware of the typical TI allowance for new tenants, but informed DBRS that a $1,500 furniture stipend is typically offered to new tenants. Though all floors look maintained, the furniture and common space are outdated, with the majority of the spaces not having been renovated in the last ten to 15 years. Overall, the building is a brown-brick vintage building with the east wing covered in vines, which positively adds to the exterior esthetic. The interior of the east wing houses a large optometry area with many optometrists sharing equipment. In addition, this houses the facilities’ doctors’ lounge, which features a modern kitchen with stainless steel appliances, granite countertops and a large open common area with seating for 50. A portion
Structured Finance: CMBS 58 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GROSS MEDICAL OFFICE OSHAWA – OSHAWA, ON of the east wing houses Dynacare, which specializes in blood tests. It is worth noting that Dynacare has an upcoming lease expiration on December 2019, but at the time of the site inspection, it was fairly busy and appeared to have new light green signage throughout its space.
The remaining three collateral buildings reside across the street from the main building. The sleep centre and physiotherapy building are two-storey buildings located adjacent to each other, while the single-storey office building is situated at the back. The sleep centre and physiotherapy buildings were converted from residential homes. This works extremely well for the sleep centre, as its sleep testing quarters reside in previous residential bedrooms. The office building behind the property, which is primarily occupied by Oshawa Clinic’s corporate office, also contains two sleep centre rooms on days when the sleep centre is fully occupied. The additional specialized buildings help promote the idea of the collateral as the city’s one-stop shop for all health-care-related needs.
Overall, DBRS considers the collateral very functional as a medical office.
NCF SUMMARY
NCF ANALYSIS
2017 2018 Issuer NCF DBRS NCF NCF Variance
GPR $1,316,550 $1,365,258 $1,502,932 $1,444,433 -3.9%
Recoveries $1,341,929 $1,464,900 $1,260,900 $1,352,242 7.2%
Other Income $756,784 $773,635 $773,635 $773,635 0.0%
Vacancy (150,293) (144,443) -3.9%
EGI $3,415,263 $3,603,793 $3,387,175 $3,425,867 1.1%
Expenses $1,355,943 $1,465,109 $1,484,222 $1,502,706 1.2%
NOI $2,059,320 $2,138,684 $1,902,952 $1,923,161 1.1%
Capex $86,450 $76,310 -11.7%
TI/LC $38,875 $144,301 271.2%
NCF $2,059,320 $2,138,684 $1,777,628 $1,702,550 -4.2%
The DBRS NCF is based on the North American Commercial Real Estate Property Analysis Criteria. The resulting DBRS NCF was $1,702,550, a variance of -4.2% from the Issuer’s NCF. The primary driver in the variance was leasing costs. DBRS generally based TIs off the 2014 underwriting, which is based off the appraisers estimates for new leases and renewals, while leasing commissions were based off 5.0% and 2.5% for new and renewal leases, respectively. The resulting DBRS total leasing cost was $1.67 psf compared with the Issuer’s figure of $0.45 psf. DBRS was not given an updated appraisal as the Issuer noted it was not required due to the loan being a renewal.
DBRS VIEWPOINT Medical office properties typically enjoy higher occupancy than other office properties in Canada primarily due to stable tenancy, as doctors tend to stay in the same location to accommodate their existing patients. The subject property as a medical office building benefits from its prime location in the downtown core of Oshawa where there are currently seven major residential developments, with the potential for over 1,300 units to be developed within blocks of the subject. Oshawa’s Director of Economic Development noted that 6,000 to 8,000 new residents are expected to move into the city’s downtown core within the next ten to 15 years. In addition, the subject’s major tenant, Oshawa Clinic, is one of Canada’s largest multi-specialty medical group practices, with five locations and more than 140 doctors. Given its concentration at
Structured Finance: CMBS 59 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
GROSS MEDICAL OFFICE OSHAWA – OSHAWA, ON the subject, its near-70 years of operating history at the premises, the future developments in the area and the expected population growth, the subject will continue to perform for the near future.
DOWNSIDE RISKS –– The tenancy is concentrated, with the Oshawa Clinic representing 88.4% of the NRA and 65.3% of the DBRS rental income. –– All leases expire prior to the loan term.
STABILIZING FACTORS AND UPSIDE POTENTIAL –– The tenant has been at the property since 1948. In addition, there is one five-year renewal option. The lease facilitates more than 60 doctors at the subject property, providing various medical care and services; therefore, the source of revenue for Oshawa Clinic is actually considered more diverse and stable, which in turn increases the tenant’s likelihood of fulfilling its lease obligations to the landlord. –– There is a monthly leasing reserve of $14,285.71 that is collected every month for 56 months.
Structured Finance: CMBS 60 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Transaction Structural Features
Sequential Pay: The transaction is of a sequential-pay pass-through structure.
Credit Risk Retention: This transaction is required to comply with the risk retention requirements of Section 15G of the U.S. Securities Exchange Act of 1934, as amended (the U.S. Exchange Act), as they relate to commercial mortgage-backed securities (the U.S. Credit Risk Retention Rules). RBC will act as the risk-retaining sponsor and will elect to satisfy its risk retention requirements through the purchase by a third-party purchaser of an eligible horizontal residual interest, which is anticipated to comprise the Class D-2, Class E, Class F, Class G and Class H Certificates (collectively, the HRR Certificates). RFA CMBS Limited (RFA CMBS) will be contractually obligated to retain these Classes of Certificates for a minimum of five years after the Closing Date, subject to certain permitted exceptions provided for under the risk retention requirements of Section 15G of the U.S. Exchange Act as they relate to CMBS. During this time, RFA CMBS will agree to comply with hedging, transfer and financing restrictions that are applicable to third-party purchasers under the U.S. Credit Risk Retention Rules.
Operating Advisor: First National Financial LP (FNLP; rated BBB with a Stable trend by DBRS) will serve as the Operating Advisor under the PSA. The Operating Advisor will have certain review and reporting responsibilities with respect to the performance of the special servicer and in certain circumstances may recommend to the holders of the offered certificates that the special servicer be replaced.
The Operating Advisor Fee Rate will accrue at a rate of 0.25% per annum. The Operating Advisor is entitled to a fee to be paid on each Distribution Date (as defined in the PSA) (1) prior to the occurrence of an Operating Advisor Consultation Period (as defined in the PSA), with respect to each Specially Serviced Mortgage Loan and any related REO Loan (as such terms are defined in the PSA), an amount equal to one-12th of the product of (a) the Operating Advisor Fee Rate and (b) the Stated Principal Balance (as defined in the PSA) of such Specially Serviced Mortgage Loan or REO Loan, and (2) after the occurrence and during the continuance of an Operating Advisor Consultation Period, with respect to each mortgage loan and any related REO Loan, in an amount equal to one-12th of the product of (a) the Operating Advisor Consultation Fee Rate and (b) the Stated Principal Balance of the Mortgage Pool (as defined in the PSA).
Servicer Advances: Subject to the terms of the PSA, the master servicer will be obligated to make advances in respect of delinquent payments of principal (other than the principal portion of Balloon Payments) and/or interest on the mortgage loans subject to reduction as a result of appraisal-reduction amounts and certain other limitations. The master servicer will also be required to make servicing advances to cover certain costs and expenses relating to the servicing and administration of the mortgage loans and any related mortgaged property and/or REO Property, except with respect to the REAL-T 2018-1 Serviced Pooled Interests and any related REO Property, which are serviced by the REAL-T 2018-1 master servicer and the REAL-T 2018-1 special servicer in accordance with the REAL-T 2018-1 PSA and for which the REAL-T 2018-1 master servicer is responsible for making such servicing advances. All such advances in respect of any of the mortgage loans, Whole Loans and any REO Property and reimbursement of such advances will be made in accordance with the provisions of the relevant PSA and the participation agreements, as applicable.
Neither the REAL-T 2019-1 master servicer nor the REAL-T 2019-1 Backup Servicer and Reporting Agent will be required to make any P&I Advance in respect of any of the companion interests that do not form part of the Mortgage Pool.
Controlling Class Rights: The majority owner of the transaction’s Control Eligible Certificates has the right to elect the Controlling Class Representative (CCR). DBRS understands that it is expected that a wholly owned subsidiary of RFA Partners Inc. (RFA) will purchase the HRR Certificates and may purchase certain other Classes of Certificates and that such purchaser will be the initial CCR. DBRS notes that RFA is also the CCR under the REAL-T 2018-1 PSA.
Structured Finance: CMBS 61 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
The Control Eligible Certificates are Classes D-2, E, F, G and H.
At any time, the Controlling Class will be the most subordinate Class of Control Eligible Certificates that has a certificate balance (taking into account any applicable appraisal-reduction amounts to notionally reduce the certificate balance of such class) at least equal to 20.0% of the original certificate balance. If none of the Control Eligible Certificates has the required certificate balance, the most senior Class of Control Eligible Certificates will be the Controlling Class. The Controlling Class on the Closing Date will be the Class H Certificates.
During the Subordinate Control Period, the CCR will have certain approval rights and rights to direct and consult with the special servicer regarding certain major decisions in respect of the mortgage loans. The CCR, at any time during the Subordinate Control Period, will have the right to replace the special servicer, subject to the satisfaction of certain conditions.
An affiliate of RFA is the sponsor of The Redwoods Retirement loan (the CCR-Related Loan; 4.4% of the pool), which is governed by the REAL-T 2018-1 PSA. To mitigate the risks related to conflicts of interest as a result of the initial CCR’s direct or indirect ownership interest in each CCR-Related Loan, in respect of each such loan, the CCR has conceded its customary consultation and approval rights and will not be entitled to exercise any such rights under the REAL-T 2018-1 PSA.
The Subordinate Control Period will commence when the certificate balance of any Class of Control Eligible Certificates (taking into account any applicable appraisal-reduction amounts to notionally reduce the certificate balance of such class) is at least 20.0% of the original certificate balance of such class.
Special Servicing Fees: Accrue at a per-annum rate equal to 0.25% and will be computed on the basis of the same principal amount and for the same period, respecting which any related interest payment on a Specially Serviced Mortgage Loan or REO Loan is computed.
Satisfaction or Waiver of RACs: This transaction contemplates satisfaction or waivers of the rating agency condition (RAC) when applicable. DBRS currently intends to waive many requests with respect to satisfaction of any loan-level RAC (for instance, with respect to property substitutions) but expects to receive notice upon their occurrence. Loan-level RACs involving changes to recourse provisions or additional debt may not be waived. DBRS will not waive any request for the satisfaction of RAC that may affect any party involved in the operational risk of the transaction (i.e., replacement of special servicer, master servicer, etc.).
Servicing: In connection with the securitization, MFC will be the master servicer and special servicer pursuant to the PSA.
DBRS finds MFC to be acceptable as the master servicer and special servicer for this transaction.
MFC and its affiliates are one of the largest non-bank originators, underwriters and servicers of mortgages in Canada, with approximately $15.4 billion of new mortgages originated in its 2018 fiscal year and approximately $72.8 billion of assets under administration as of November 30, 2018. They operate in three primary business segments: single-family mortgages, commercial mortgages and construction loans. As of April 30, 2019, MFC was servicing approximately 1,896 commercial mortgages with an aggregate principal balance of approximately $9.2 billion. The collateral for such mortgages is located across Canada and includes multifamily, office, retail, industrial and other income-producing properties
MFC originates, sources, underwrites, funds, trades, securitizes, sells and services residential, construction and commercial mortgage products and assets across Canada. MFC provides such services to a wide variety of major Canadian institutions seeking exposure to the Canadian mortgage market. MFC’s commercial servicing platform was the first commercial servicing platform in Canada to be rated by a rating agency. MFC has been servicing mortgage loans in CMBS transactions since 2000.
Structured Finance: CMBS 62 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
MFC intends to retain RBC to perform certain primary and special servicing functions with respect to certain of the mortgage loans under the PSA.
Methodologies
The following are the methodologies DBRS applied to assign ratings to this transaction. These methodologies can be found on www.dbrs.com under the heading Methodologies & Criteria. Alternatively, please contact [email protected] or contact the primary analysts whose information is listed in this report. –– North American CMBS Multi-borrower Rating Methodology –– DBRS North American Commercial Real Estate Property Analysis Criteria –– Rating North American CMBS Interest-Only Certificates
Surveillance
DBRS will perform monthly analytics, surveying the portfolio for delinquencies, prepayments, loan trigger events and corresponding DSCR volatility. DBRS publishes the results of its findings in its monthly surveillance report, summarizing credit issues and the impact on the outstanding ratings of this transaction.
Structured Finance: CMBS 63 PRESALE REPORT — REAL-T 2019-1 JUNE 2019
Notes: All figures are in Canadian dollars unless otherwise noted.
This report is based on information as of June 7, 2019. Subsequent information may result in material changes to the rating assigned herein and/or the contents of this report.
The DBRS group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(CRA, NRSRO affiliate, DRO affiliate). For more information on regulatory registrations, recognitions and approvals, please see: http://www.dbrs.com/research/highlights.pdf.
© 2019, DBRS. All rights reserved. The information upon which DBRS ratings and other types of credit opinions and reports are based is obtained by DBRS from sources DBRS believes to be reliable. DBRS does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, other types of credit opinions, reports and any other information provided by DBRS are provided “as is” and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings, other types of credit opinions, other analysis and research issued or published by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment advice or recommendations to purchase, sell or hold any securities. A report with respect to a DBRS rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS may receive compensation for its ratings and other credit opinions from, among others, issuers, insurers, guarantors and/or underwriters of debt securities. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT http://www.dbrs.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS RATINGS AND OTHER TYPES OF CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON http://www.dbrs.com.
Structured Finance: CMBS 64 Glossary
ADR average daily rate IO interest only P&I principal and interest ARA appraisal reduction amount LC leasing commission POD probability of default ASER appraisal subordinate entitlement reduction LGD loss severity given default PIP property improvement plan BOV broker’s opinion of value LOC letter of credit PILOT property in lieu of taxes
CAM common area maintenance LOI letter of intent PSA pooling and servicing agreement capex capital expenditures LS Hotel limited service hotel psf per square foot CBD central business district LTC loan-to-cost R&M repairs and maintenance CBRE CB Richard Ellis LTCT long-term credit tenant REIT real estate investment trust CMBS commercial mortgage-backed securities LTV loan-to-value REO real estate owned CoStar CoStar Group, Inc. MHC manufactured housing community RevPAR revenue per available room CREFC CRE Finance Council MTM month-to-month sf square foot/square feet DPO discounted payoff MSA metropolitan statistical area STR Smith Travel Research DSCR debt service coverage ratio n.a. not available SPE special-purpose entity EGI effective gross income n/a not applicable TI tenant improvement EOD event of default NCF net cash flow TIC tenants in common F&B food & beverage NNN triple net T-12 trailing 12 months FF&E furniture, fixtures and equipment NOI net operating income UW underwriting FS Hotel full service hotel NRA net rentable area WA weighted average G&A general and administrative NRI net rental income WAC weighted-average coupon GLA gross leasable area NR – PIF not rated – paid in full x times GPR gross potential rent OSAR operating statement analysis report YE year-end HVAC heating, ventilation and air conditioning PCR property condition report YTD year-to-date
Definitions
Capital Expenditure (capex) NNN (triple net) Costs incurred in the improvement of a property that will have a life of more than A lease that requires the tenant to pay operating expenses such as property taxes, one year. insurance and maintenance, in addition to the rent.
DBRS Refi DSCR Net Operating Income (NOI) A measure that divides DBRS stabilized NCF by the product of the loan’s maturity The revenues earned by a property’s ongoing operations less the expenses balance and a stressed refinance debt constant. associated with such operations but before mortgage payments, tenant improvements, replacement reserves and leasing commissions. DBRS Term DSCR A measure that divides DBRS stabilized NCF by the actual debt service payment Net Rentable Area (NRA) The area (sf) for which rent can be charged. NRA includes the tenant’s premises Debt Service Coverage Ratio (DSCR) plus an allocation of the common area directly benefiting the tenant, such as A measure of a mortgaged property’s ability to cover monthly debt service common corridors and restrooms. payments, defined as the ratio of net operating income (NOI) or net cash flow (NCF) to the debt service payments. Revenue Per Available Room (RevPAR) A measure that divides revenue by the number of available rooms, not the number Effective Gross income (EGI) of occupied rooms. It is a measure of how well the hotel has been able to fill rooms Rental revenue minus vacancies plus miscellaneous income. in the off-season, when demand is low even if rates are also low, and how well it fills the rooms and maximizes the rate in the high season, when there is high Issuer UW demand for hotel rooms. Issuer underwritten from Annex A or servicer reports. Tenant Improvements (TIs) Loan-to-Value (LTV) The expense to physically improve the property or space, such as new The ratio between the principal amount of the mortgage balance, at origination improvements or remodelling, paid by the borrower. or thereafter, and the most recent appraised value of the underlying real estate collateral, generally from origination. Weighted Average (WA) Calculation is weighted by the size of each mortgage in the pool. Net Cash Flow (NCF) The revenues earned by a property’s ongoing operations less the expenses associated Weighted-Average Coupon (WAC) with such operations and the capital costs of tenant improvements, leasing commissions The average coupon or interest payment on a set of mortgages, weighted by the and capital expenditures (or reserves). Moreover, NCF is net operating income (NOI) size of each mortgage in the pool. less tenant improvements, leasing commissions and capital expenditures.