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

DBRS, Inc. (DBRS) has today confirmed all classes of the 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)

All trends remain Stable, with the exception of Classes F and G, for which DBRS has assigned a Negative trend to reflect concerns about declining cash flows with near-term maturity for six of the loans in the top 15, including the largest and ninth-largest loans in the pool, as discussed in detail below.

The collateral for this transaction consists of 25 fixed-rate loans secured by 26 commercial properties. The pool has experienced a collateral reduction of 7.9% since issuance because of scheduled loan amortization, with all 25 loans remaining in the pool as of the July 2016 remittance. 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 most recent year-end financial reporting available, the transaction reported a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.60 times (x) and 9.2%, respectively. All loans in the pool were structured with five-year terms and are scheduled to mature in 2017 with 30.7% of the current pool balance due for repayment in the next 12 months.

Cash flow growth since issuance has been healthy for nine of the loans in the top 15, representing 51.0% of the pool balance, with WA net cash flow (NCF) growth over the respective DBRS underwritten (UW) figures of +21.7%, as of the most recent year-end reporting period available for those loans. There are six loans, however, that have shown negative NCF growth from the DBRS UW figures, with a WA decline of -23.0% and a range of -0.9% to -41.7%. The largest loan in the pool, Prospectus ID#1, Centre RioCan Kirkland (14.2% of the pool), shows the sharpest cash flow drop since issuance, driven by declining occupancy at the collateral property. According to the July 2016 remittance, there are seven loans on the servicer’s watchlist, representing 32.2% of the pool. Two out of the six loans on the servicer’s watchlist are flagged for unauthorized second mortgages obtained by their respective borrowers, with the remaining four being monitored for performance-related issues.

The pool has six loans (26.8% of the pool) secured by properties located in Alberta, where a recession is underway as a result of the decline in the oil and gas industry over the past several years. However, none of the properties are located in Fort McMurray, Alberta, where the recession has hit the hardest. Further mitigating the economic risk is the fact that all six loans have shown NCF improvements over the DBRS UW figures and exhibit generally healthy refinance metrics, with a WA DBRS Refinance DSCR of 1.26x and WA DBRS Exit Debt Yield of 9.25%.

The largest loan on the watchlist, Centre RioCan Kirkland, is secured by a 320,020 square foot (sf) power centre comprising seven single-storey multi-tenant buildings located in Kirkland, Québec, approximately 30.5 miles west of Montréal. The property is shadow-anchored by a Famous Players movie theatre and is 50% recourse to the loan sponsor, RioCan Real Estate Investment Trust (RioCan). As of April 2016, RioCan is rated BBB (high) with a Stable trend by DBRS. The loan is on the servicer’s watchlist due to elevated vacancy at the property over the past few years, which has resulted in a DSCR decline to 1.69x at YE2014 and 1.42x at YE2015 from 2.27x at YE2013. The second-largest tenant, Business Depot (11.3% of the net rentable area (NRA)), vacated in December 2015, preceded by several other smaller tenants that brought occupancy down to 71.0% at YE2015 from 80.0% at YE2014 and 89.0% at issuance. The borrower has indicated that the vacant spaces at the property are proving challenging to fill in the face of increased supply in the area, resulting in reduced revenue and a steady decline in DSCR.

According to the June 2016 rent roll, occupancy has fallen to 62.6%, with three tenants (8.5% of the NRA) vacating in the past six months. In addition to Business Depot, La Vie en Rose (4.5% of the NRA; expired June 2016), Addition-Elle (3.7% of the NRA; expired June 2016) and Sirens (2.7% of the NRA; expired January 2016) have also vacated. According to the servicer, the borrower is in active discussions with various tenants to occupy spaces at the property ranging from 3,728 sf to 25,000 sf, with nothing signed to date. The RioCan website lists ten units (22.4% of the NRA) as vacant and available for lease, but it is unclear if those listings represent all of the available space at the property. With department stores and regional malls located closer to Montréal, the customer base at Centre RioCan Kirkland is somewhat limited to the property’s immediate surrounding area, with the closest competitor, CF Fairview Pointe Claire, located 6.5 kilometres northeast and closer to the Montréal central business district. Although the YE2015 DSCR was 1.42x, with further declines on the horizon, the loan benefits from the 50.0% recourse guarantee and strong sponsorship and management in RioCan, the largest real estate investment trust and operator of retail properties in Canada. However, given the sustained occupancy declines and the property’s continued tenancy loss, DBRS has modelled an increased probability of default to reflect the increased risk for this loan.

The Dundee Grande Allee Office loan (Prospectus ID#10; 4.6% of the current pool balance) is secured by a 92,711 sf multi-tenant Class B office building in Québec City, Québec. The loan has full recourse to Dream Office Real Estate Investment Trust (formerly known as Dundee Real Estate Investment Trust), which, as of February 2016, is rated BBB (low) with a Stable trend by DBRS. The guarantee remains in place following a September 2015 acquisition of the subject by Groupe Mach Inc., which purchased the property as part of a portfolio sale. The allocated purchase price of $12.0 million represents a significant decline from the issuance value of $22.0 million. As part of the transfer of ownership, which was approved by the servicer, the new ownership agreed to a head lease for 30,706 sf (33.1% of the NRA) through May 2017 – three months ahead of the scheduled August 2017 maturity.

This loan was placed on the servicer’s watchlist because of a low DSCR of 0.80x at YE2014, down from 1.02x at YE2013. The YE2015 analysis was not available as of DBRS’s review. Ongoing performance decline since issuance is the result of declining occupancy at the property, with levels falling as low as 59.7% as of YE2013 before improving to 69.4% as of the September 2015 rent roll on file with the servicer. The largest tenant at the property is Cain Lamarre Casgrain Wells, occupying 22.0% of the NRA through May 2017. According to Altus Insite, the property currently has 16 units, representing 42.4% of the NRA, that are listed as vacant and available for lease. Although the subject is well located along a primary corridor, the submarket has been soft for the past several years. Given the sustained occupancy decline and lack of significant leasing traction since the property’s sale in 2015 at a purchase price well below the issuance value, DBRS has modelled a significantly increased probability of default to capture the increased risks associated with this loan.

DBRS continues to monitor this transaction in its “Monthly CMBS Surveillance Reports,” 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. 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.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.