DBRS Confirms Ratings on Canadian Commercial Mortgage Origination Trust 2015-3 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 2015-3 issued by Canadian Commercial Mortgage Origination Trust 2015-3 (the Trust):

-- Class A at AAA (sf)
-- Class A-J 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 remain Stable, excluding Class G, to which DBRS has assigned a Negative trend because of the long-term concerns surrounding the Clearwater Suites loan (Prospectus ID#7, 3.9% of the current pool balance), which is located in Fort McMurray, Alberta. This loan will be highlighted in detail below.

The rating confirmations reflect the overall performance of the transaction since issuance in September 2015. The collateral consists of 42 loans secured by 59 properties. As of the July 2016 remittance, the pool has experienced collateral reduction of 2.3% since issuance as a result of loan amortization with all of the original 42 loans remaining in the pool. The pool reported a weighted-average (WA) debt service coverage ratio (DSCR) of 1.48 times (x) and a WA debt yield of 8.8% based on 85.4% of the pool that reported YE2015 financials. The WA DBRS Term DSCR and debt yield were 1.41x and 8.3%, respectively.

This transaction benefits from its geographic diversification with properties located in six provinces. The largest concentration of properties are located in Ontario (48.2% of the current pool balance) followed by Alberta (20.8% of the current pool balance). There are six loans secured by properties located in Alberta, including four loans among the largest ten loans of the pool. Including the aforementioned Clearwater Suites loan, the YE2015 WA DSCR and debt yield for these loans were 1.50x and 9.6%, respectively. Despite the economic downturn which has affected the region, the loans within this transaction reported healthy net cash flow (NCF) and occupancies and are located in more urban locations. In addition, 26 loans, representing 50.9% of the current pool balance, have some form of meaningful recourse to their respective sponsors, seven of which were determined to have strong sponsors.

As of the July 2016 remittance, there are no loans in special servicing and one loan on the servicer’s watchlist, representing 3.9% of the current pool balance.

The Clearwater Suites loan is a 150-unit limited-service hotel located in Fort McMurray, approximately 17 kilometres from the Fort McMurray International Airport within the city’s downtown core. The subject loan represents the $21.7 million A-2 controlling pari passu note of the $31.2 million current whole loan balance; the $9.5 million A-1 non-controlling note is secured in the CMLS 2014-1 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 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. When the subject transaction was issued in September 2015, it was noted that the cash flows had declined compared with the issuance of the CMLS 2014-1 transaction in December 2014. As a result, the DBRS underwritten (UW) NCF was updated in conjunction with the analysis for this transaction. The updated DBRS UW NCF for the loan was $3.0 million compared with $4.1 million in December 2014. The updated cash flow is reflective of a DSCR of 1.15x compared with the previous figure of 1.61x. According to YE2015 financials, cash flows declined further as the year-end DSCR was reported at 0.86x. 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 61.1%, $205.95 and $125.86 as of the trailing 12 months at June 2015, respectively. 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.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.