Fitch Assigns Final Ratings to REAL-T Series 2016-2
The certificates represent the beneficial ownership in the trust, primary assets of which are 47 loans secured by 72 commercial properties located in Canada having an aggregate principal balance of approximately $421.5 million as of the cutoff date. The loans were originated or acquired by Royal Bank of Canada, MCAP Financial Corporation, Macquarie US Trading LLC, and Trez Commercial Finance Limited Partnership.
Fitch reviewed a comprehensive sample of the transaction's collateral, including site inspections on 86% of the properties, by balance, cash flow analysis on 100%, and asset summary reviews on 100% of the pool.
The transaction has a Fitch stressed debt service coverage ratio (DSCR) of 1.13x, a Fitch stressed loan-to-value (LTV) of 105.1%, and a Fitch debt yield of 8.7%. Fitch's aggregate net cash flow represents a variance of 4.4% to issuer cash flows.
KEY RATING DRIVERS
Fitch Leverage: The pool's Fitch DSCR and LTV of 1.13x and 105.1%, respectively, are slightly better than the REAL-T 2016-1 metrics of 1.12x and 110%, but slightly worse than the 2015 through 2016 YTD Canadian transaction average DSCR and LTV of 1.16x and 105.1%.
Less Concentrated Pool: The pool's loan concentration index (LCI) score of 329 and the top 10 concentration of 44.2% (including crossed loans) represent better diversity than recent Canadian transactions; the 2015 through 2016 YTD Canadian transaction average LCI was 374 and top 10 concentration was 53.5%. The pool's sponsor concentration index (SCI) score of 679 represents significant sponsor concentration. The largest sponsor is the Skyline Group of Companies, which is the sponsor of eight loans representing 18% of the pool.
Canadian Loan Attributes and Historical Performance: The ratings reflect strong historical Canadian commercial real estate loan performance, including a low delinquency rate and low historical losses of less than 0.1%, as well as positive loan attributes, such as short amortization schedules, recourse to the borrower, and additional guarantors. For more information on prior Canadian CMBS securitizations, see Fitch Research on "Canadian CMBS Default and Loss Study," dated October 2013, available on Fitch's website at www. fitchratings. com.
Retirement and Hospitality Concentration: The pool has higher concentration of retirement and hotel property types (21.6%), which generally tend to exhibit more cash flow volatility over time and, therefore, have higher default probabilities in Fitch's multiborrower model. The 2015 through 2016 YTD Canadian average concentration of these property types was 13%.
Strong Collateral Quality: The collateral quality of the portfolio is better than typical Canadian transactions, with six properties (21.4% of the pool) receiving grades of 'A-' or better, including the #1 loan, Villagia Retirement Homes (7.1%), and the #9 loan, The Opus Hotel (3.3%).
For this transaction, Fitch's net cash flow (NCF) was 13.3% below the most recent year's net operating income (NOI for properties for which a full-year NOI was provided, excluding properties that were stabilizing during this period). Unanticipated further declines in property-level NCF could result in higher defaults and loss severities on defaulted loans and in potential rating actions on the certificates.
Fitch evaluated the sensitivity of the ratings assigned to REAL-T 2016-2 certificates and found that the transaction displays average sensitivity to further declines in NCF. In a scenario in which NCF declined a further 20% from Fitch's NCF, a downgrade of the senior 'AAAsf' certificates to 'Asf' could result. In a more severe scenario, in which NCF declined a further 30% from Fitch's NCF, a downgrade of the senior 'AAAsf' certificates to 'BBB+sf' could result. The presale report includes a detailed explanation of additional stresses and sensitivities on page 10.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Fitch was provided with Form ABS Due Diligence-15E (Form 15E) as prepared by Deloitte LLP. The third-party due diligence described in Form 15E focused on a comparison and re-computation of certain characteristics with respect to each of the mortgage loans. Fitch considered this information in its analysis and it did not have an impact on Fitch's analysis or conclusions. A copy of the ABS Due Diligence Form-15E received by Fitch in connection with this transaction may be obtained through the link contained on the bottom of the related rating action commentary.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under Related Research below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," (May 2016).
Fitch has assigned the following ratings and Rating Outlooks:
--$141,625,000 class A-1 'AAAsf'; Outlook Stable;
--$219,791,000 class A-2 'AAAsf'; Outlook Stable;
--$10,537,000 class B 'AAsf'; Outlook Stable;
--$13,171,000 class C 'Asf'; Outlook Stable;
--$13,171,000 class D 'BBBsf'; Outlook Stable;
--$5,269,000 class E 'BBB-sf'; Outlook Stable;
--$4,741,000 class F 'BBsf'; Outlook Stable;
--$4,742,000 class G 'Bsf'; Outlook Stable
All currencies are in Canadian dollars (CAD).
Fitch does not rate the $421,477,036 (notional balance) interest-only class X or the non-offered $8,430,036 class H certificates.