DBRS Confirms All Classes of Canadian Commercial Mortgage Origination Trust 2012-1

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2012-1 issued by Canadian Commercial Mortgage Origination Trust 2012-1, as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

The trends on all classes are Stable. DBRS does not rate the first loss bond, Class H.

The rating confirmations reflect the continued stable performance of the transaction since issuance. The collateral for this transaction consists of 25 fixed-rate loans secured by 26 commercial properties. According to the July 2015 remittance, the transaction has experienced collateral reduction of 5.7% as a result of scheduled loan amortization. The pool benefits from recourse guarantees on all but two loans in the pool. Eight loans, representing 35.2% of the pool, are sponsored by, and have recourse to, DBRS-rated entities. According to the YE2014 financial reporting, the transaction reported a weighted-average (WA) debt service coverage ratio (DSCR) and WA Debt Yield of 1.6 times (x) and 9.0%, respectively.

According to the July 2015 remittance, there are five loans on the servicer’s watchlist, representing 14.1% of the pool. One of the five loans on the watchlist is being flagged for a non-performance-related issue, and two other loans have full recourse to Dream Office REIT.

The largest loan on the servicer’s watchlist, Dundee Grande Allee Office (Prospectus ID#10, 4.6% of the current pool balance), is secured by a multi-tenant Class B office building in Québec City, Québec. The servicer placed the loan on the watchlist as a result of a low DSCR, which was reported to be 0.8x at YE2014 compared with a 1.02x DSCR at YE2013. The ongoing performance decline since issuance is a result of increasing vacancy at the property as leases representing 53.0% of the net rentable area (NRA) have expired since issuance, with several tenants opting not to renew their respective leases. According to the May 2015 rent roll, the subject was 69.0% occupied; however, according to the sponsor’s leasing website, 7.7% of additional NRA is being marketed as available in December 2015. The largest current tenant is Cain Lamarre Casgrain Wells, occupying 22.0% of the NRA through May 2017. According to Altus Insite, the Québec City office market is soft, as similar surrounding properties report an average vacancy rate of 25.9%, which is an improvement from the 35.8% reported as of September 2014. The subject’s occupancy rate has also increased during this time from 64.3% at September 2014 to 69.0% at May 2015. The subject is well located along a primary corridor and benefits from strong sponsorship, as the loan is full recourse to Dream Office REIT, formerly known as Dundee REIT. Dream Office REIT is currently rated BBB (low) by DBRS.

DBRS is also monitoring the Kensington Crossing loan (Prospectus ID#12, 4.1% of the current pool balance), which is on the servicer’s watchlist for fire damage to the property sustained in late 2012. The non-recourse loan is secured by an anchored retail property in Edmonton, Alberta. The incident, which occurred on December 25, 2012, affected approximately 50.7% of the NRA and displaced eight tenants. Construction took place from March 2014 through to December 2014, with Cora’s Restaurant taking occupancy of its new space in May 2015. The vast majority of the previous tenants affected by the fire have left the centre, while five new potential tenants, representing 70.7% of the new space are negotiating final terms and are expected to move into their potential units beginning October 2015. The largest current tenant is World Health Club, occupying 28.7% of the NRA through May 2028. According to the April 2015 rent roll, the undamaged collateral reported an average rental rate of $21.4 per square foot (psf). The potential average rental rate of the new collateral, occupied by Cora’s and the five potential tenants is $33.10 psf, indicative of potential future cash flow growth. During the cleaning and construction process, the borrower continued to receive business interruption proceeds for 2013 and 2014. With these proceeds, the loan reported a YE2014 DSCR of 1.34x, in line with the DBRS underwritten figure.

Centre RioCan Kirkland (Prospectus ID#1, 13.6% of the pool) is secured by a power centre comprising seven buildings in Kirkland, Québec. The loan has 50% recourse to RioCan REIT (RioCan), currently rated BBB (high) by DBRS. This loan is not on the servicer’s watchlist; however, it is being highlighted for a drop in DSCR from 2.27x at YE2013 to 1.69x at YE2014. The drop in DSCR can be attributed to a decline in base rental revenue and expense reimbursements from increased vacancies. According to the most recent rent roll, dated January 2015, the occupancy rate and average rental rate have decreased from 86.7% and $18.6 psf at issuance to 79.9% and $17.4 psf, respectively. According to the sponsor’s leasing website, the occupancy rate has improved to 84.0%; however, the second-largest tenant, Business Depot, occupying 11.3% of the NRA, is scheduled to expire in December 2015. The largest tenant, Winners, occupies 13.3% of the NRA through January 2022. Despite the recent decline in performance, the loan benefits from strong sponsorship and management in RioCan, the largest REIT and operator of retail properties in Canada.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool and loans on the servicer’s watchlist. The July 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

Notes:
All figures are in U.S dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.