DBRS Confirms Ratings on CMLS Issuer Corp., Series 2014-1 and Changes Trend on One Class

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-1 issued by CMLS Issuer Corp., Series 2014-1 (the Trust):

-- Class A-1 at AAA (sf)
-- Class A-2 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)
-- Class X at AAA (sf)

The trends on all classes remain Stable, excluding Class G, to which DBRS has assigned a Negative trend because of the weak performance of select loans within the Top 15 and the long-term concerns surrounding the Clearwater Suites loan (Prospectus ID#9, 3.5% of the current pool balance), which is located in Fort McMurray, Alberta.

The transaction’s collateral consists of 36 fixed-rate loans secured by 40 commercial and multifamily properties. As of the July 2016 remittance, the pool had an outstanding principal balance of approximately $269.7 million, representing a collateral reduction of approximately 5.0% since issuance because of scheduled amortization and one loan repayment. The Lethbridge Retail (Prospectus ID#29) loan fully repaid along with the July 2016 remittance, contributing approximately $2.9 million in principal repayment. This loan was secured by a 19,106 square foot (sf) unanchored retail shopping centre located in Lethbridge, Alberta. There are three loans (representing 10.6% of the pool) remaining in the transaction secured by properties (one limited-service hotel and two retail properties) located in Alberta. Excluding the Clearwater Suites loan, both the Manning Crossing (Prospectus ID#4, 5.4% of the pool) and Grand Prairie Retail (Prospectus ID#24, 1.7% of the pool) loans exhibited positive net cash flow (NCF) growths as of YE2015 financials, reflective of an approximate 5.0% increase over the DBRS underwritten (UW) figures, respectively. As of the July 2016 remittance, 32 loans (representing 93.1% of the pool) reported YE2015 NCFs, while the remaining five loans (representing 6.9% of the pool) reported YE2014 NCFs. According to the most recent financials, the deal had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.42 times (x) and 10.1%, respectively, compared with the DBRS UW figures of 1.39x and 9.3%, respectively. Pool-wide, 20 loans (representing 61.1% of the pool) had some form of meaningful recourse to their respective sponsors, including the three loans mentioned above with exposure to Alberta.

As of the July 2016 remittance, there are no loans in special servicing and three loans on the servicer’s watchlist, representing 5.9% of the current pool balance. The largest loan is discussed below.

The Clearwater Suites loan is a 150-unit limited-service hotel located in Fort McMurray, approximately 17 kilometers from the Fort McMurray International Airport within the city’s downtown core. The subject loan represents the $9.5 million A-1 non-controlling pari passu note of the $31.2 million whole loan balance; the $21.7 million A-2 controlling note is secured in the CCMOT 2015-3 transaction, also rated by DBRS. The area has recently sustained widespread damage as a result of a wildfire that broke out in early May 2016. According to an update provided in May 2016, the servicer indicated that the hotel had not been physically affected by the wildfire and, as of June 3, 2016, a press release published by the sponsor, Temple Hotels Inc., confirmed that the property was open and fully operational. The servicer has reported that the property is currently participating in Wood Buffalo’s municipal Urban Infrastructure Rehabilitation Program, which will involve the rehabilitation and/or replacement of water mains, sanitary mains and storm water systems as well as general road and sidewalk resurfacing, mill and overlay, edging and landscape repair. This project commenced in mid-July 2016 and has a target completion date in October 2016.

In addition to issues caused by the wildfire, the property’s performance has shown a steady decline since YE2014 as revenues have been adversely affected by the downturn in the oil industry, upon which the area is heavily reliant for jobs and residents. In November 2015, DBRS confirmed all ratings for the subject transaction, noting that the cash flow declines for the subject property were taken into account with an updated DBRS UW NCF derived in conjunction with the analysis for the CCMOT 2015-3 transaction, which closed in late September 2015. The updated DBRS UW NCF figure declined to $3.0 million from the previous UW figure of $4.1 million, representing a 39.8% decline and a 1.15x DSCR compared with the previous UW coverage of 1.61x. According to the YE2015 financials, cash flows fell even further by the end of the year with a DSCR of 0.86x, down from 1.69x at YE2014. As of December 2015, the property had a year-to-date occupancy rate of 54.1%, an average daily rate (ADR) of $193.89 and a revenue per available room rate (RevPAR) of $104.88, respectively, compared with 70.1%, $212.17 and $148.67, respectively, as of December 2014. As of July 27, 2016, the borrower provided monthly operating metrics with occupancy at 75.3%, ADR at $193.09 and RevPAR at $145.46. Although these operating metrics exhibit improvement from December 2015, it is not DBRS’s opinion that this indicates long-term stability. DBRS believes that there will be a short-term to mid-term benefit to the property as displaced residents and workers in the area will need temporary and transient housing. Sustaining improved occupancy rates, however, will be dependent on the ability of the oil industry to rebound. DBRS has modelled this loan with an elevated probability of default, given the concerns and uncertainties surrounding the long-term stability of the property’s performance.

The pool is relatively concentrated by loan size as the Top 10 and Top 15 loans represent 53.5% and 69.0% of the pool, respectively. Based on the most recent year-end cash flows for the Top 15 loans, the WA amortizing DSCR was 1.45x compared with the DBRS UW figure of 1.41x, reflective of a WA 4.2% NCF growth from the DBRS UW figures. Excluding the Clearwater Suites loan, the Top 15 loans had a WA DSCR of 1.48x, reflective of 5.8% NCF growth over the DBRS UW figures; however, there are six loans in the Top 15, representing 23.3% of the pool, exhibiting NCF declines compared with the DBRS UW figures, ranging from 4.2% to 25.3%. Based on the most recent year-end cash flows for these six loans, the WA amortizing DSCR was 1.22x compared with the WA DBRS UW figure of 1.27x, reflective of a WA NCF decline of 10.8% from the DBRS UW figures. Excluding the Clearwater Suites loan, these five loans had a WA DSCR of 1.27x compared with the WA DBRS UW figure of 1.29x, reflective of a WA 8.6% NCF decline from the DBRS UW figure. For the loans showing cash flow declines that are likely to continue through the near to medium term, stressed cash flow figures were modelled to capture the increased credit risk to the Trust. DBRS has highlighted the Galeries Quatre Saison loan (Prospectus ID#12, 3.4% of the pool) below, which has experienced a -13.4% NCF decline compared with the DBRS UW figure.

The Galeries Quatre Saison loan is secured by a 162,452 sf anchored retail property located in Sherbrooke, Québec, approximately 155 kilometres east of Montréal. Originally built in 1974, the shopping centre was acquired by the borrower in 1977 and was fully renovated in 1984. The subject represents the only enclosed shopping centre within the immediate area. As of the YE2015 financials, the loan had a DSCR of 1.59x, down from the DBRS UW figure of 1.83x. The decline is a result of both a decrease in rental rates and an assortment of existing abatements, which the borrower has historically offered. According to the August 2016 rent roll, the property was 97.8% occupied with an average rental rate of $10.11 psf compared with 96.7% occupied and an average rental rate of $10.38 psf in September 2014. The largest three tenants include Walmart Canada Corp. (37.5% of the NRA), Hart Inc. (Hart; 16.0% of the NRA) and Ardene (5.5% of the NRA) with lease expirations in October 2022, August 2017 and April 2020, respectively. Within the next 12 months, eight tenants, representing 23.6% of the NRA, have upcoming lease expirations. The largest tenant with a near-term lease expiration is Hart, which has been at the property since August 2007. During DBRS’s last annual review in November 2015, DBRS was informed that Dollarama was considering an expansion and would possibly assume a portion of Hart’s space; however, it has been confirmed that Dollarama will not expand. The borrower has indicated that Dollarama will sign a five-year lease extension through 2020, but negotiations regarding the new rental rate are ongoing. No leasing update has been provided for Hart at this point in time. Reitmans Ltd. (2.3% of the NRA) recently signed a one-year lease extension, extending through May 2017. The loan has full recourse to the sponsor, the Toulon Development Corporation (Toulon), which has owned the property since 1977. At issuance, Toulon had a net worth of over $67.0 million. Toulon is a real estate group involved in both the construction and management of commercial real estate with operations in Canada and in the United States for over 50 years.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The July 2016 monthly surveillance report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS at info@dbrs.com.

Notes:
All figures are in Canadian dollars unless otherwise noted.

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

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

The 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.