DBRS Confirms Ratings of MCAP CMBS Issuer Corporation, Series 2014-1

DBRS Limited (DBRS) has today confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2014-1 (the Certificates) issued by MCAP CMBS Issuer Corporation, Series 2014-1 as follows:

-- Class A 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)

All trends are Stable. DBRS does not rate the first loss piece, Class H.

The rating confirmations reflect that the transaction’s current performance remains stable. The collateral consists of 32 fixed-rate loans secured by 40 commercial properties. As of the November 2016 remittance report, all 32 loans remain in the pool with an aggregate outstanding principal balance of approximately $212.4 million, representing a collateral reduction of 5.2% since issuance because of scheduled loan amortization. To date, 30 loans (97.5% of the pool) have reported YE2015 financials. While the two remaining loans (2.5% of the pool) have not yet reported any financials, they are both 100.0% occupied, with no tenant rollover through August 2018. According to YE2015 financials, the pool had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.38 times (x) and 9.7%, respectively, compared with the DBRS underwritten (UW) figures of 1.25x and 8.3%, respectively. No loans have any interest-only periods, and seven loans (20.6% of the pool) are seasoned loans with one to 17 months remaining prior to maturity. There is a sponsor concentration, as 11 loans, representing 47.4% of the current pool balance, have related borrowers to one or more loans within the pool; however, these loans all have full or partial recourse to their respective borrowers. Transaction-wide, 22 loans, representing 60.1% of the current pool balance, have either partial or full recourse to their respective borrowers. Based on YE2015 financials, the Top 15 loans (72.5% of the pool) reported a WA DSCR of 1.36x compared with the DBRS UW figure of 1.25x, reflecting a WA amortizing net cash flow (NCF) growth of 12.5% over the DBRS UW figures.

There are six loans with scheduled maturities through YE2017, representing 19.4% of the pool. The DBRS WA Refinance DSCR and WA Exit Debt Yield for these loans is 1.27x and 9.8%, respectively. According to the servicer, the timely repayment or refinance of all of these loans is anticipated at maturity. As of the November 2016 remittance, there are no loans in special servicing and six loans (23.5% of the pool) on the servicer’s watchlist. Four of these loans (12.3% of the pool) were flagged because of near-term maturity, while the remaining two loans, 1 & 20 Royal Gate Boulevard (Prospectus ID#3, 6.5% of the pool) and the Stephenson Building (Prospectus ID#6, 4.7% of the pool) were placed on the watchlist for performance-related reasons; these two loans are highlighted below.

The 1 & 20 Royal Gate Boulevard loan is secured by the fee interest in a 284,135-square foot (sf) flex property consisting of industrial (67.5% of the net rentable area (NRA)) and office (32.5% of the NRA) space located in Vaughn, Ontario. The two-storey structure was originally constructed in 1990 and expanded to its current size in 1996. The subject is composed of four industrial units and seven office units. As of June 2016, the property was 63.3% occupied with an average rental rate of $6.58 per square foot (psf), down from 83.2% occupied with an average rental rate of $6.92 psf in July 2014. Two tenants, Dilesh Bhullar (2.8% of the NRA) and Silicor Materials Inc. (30.1% of the NRA) had lease expirations and vacated as of April 2015 and December 2015, respectively. Ideal Warehouse Innovations Inc. (13.1% of the NRA) recently extended its lease through February 2020. The triple net lease has an initial annual base rental rate of $5.50 psf for the first four years, with contractual increases in years five, seven and nine structured into the agreement. Tenant improvements were provided prior to the tenant’s taking occupancy; however, DBRS was not provided with the cost of the improvements provided by the borrower. Prior to YE2017, two tenants, representing 5.0% of the NRA, will have lease expirations, the larger of the two being Metroland Media Group (3.2% of the NRA), which has a lease expiration in December 2017. According to the servicer, Cushman & Wakefield is actively marketing the property at a net asking rate of approximately $5.50 psf. The servicer reports that there has been interest shown in the space; however, discussions with a previous tenant of interest did not come to fruition. Although no offers are currently outstanding, the borrower has indicated that the 100,000 sf of space previously occupied by Silicor Materials Inc., will be available in units demised to 40,000 sf and 60,000 sf. According to Cushman & Wakefield, as of Q3 2016, industrial properties within the GTA North market had an average rental rate of $5.77 psf and a vacancy rate of 2.7%. The loan has partial recourse (50.0%) to the guarantor and benefits from a $1.95 million letter of credit (LOC) from the Toronto-Dominion Bank, which was provided by the borrower to mitigate rollover. The LOC may be reduced during the loan term, pending the renewal or re-leasing of the rolling and vacant space at market rates, in addition to maintaining a minimum NCF DSCR of 1.25x. As of YE2015, the loan had a DSCR of 1.55x; however, it is expected that the YE2016 figure will decrease given the departure of Silicor Materials Inc. DBRS modeled the loan with a stressed cash flow to recognize the anticipated decline in performance caused by loss in rental revenue.

The Stephenson Building is secured by a 62,843 sf, Class B office property located in the Beltline District of Calgary, Alberta. Originally constructed in 1980, improvements consist of a seven-storey office building containing 2,153 sf of ground floor retail space, as well as a 136-space underground parking garage. The loan was added to the servicer’s watchlist as of July 2016 following significant tenant rollover. At issuance, the property was 100.0% occupied by five tenants, the largest being Krupp Canada (Krupp; (60.3% of the NRA); however, as of July 2015, Krupp elected to downsize its space by one unit (15.0% of the NRA), bringing occupancy down to 85.0%. Krupp was expected to sign a five-year renewal for the remainder of its space (45.3% of the NRA, with a lease expiration in July 2016); however, as confirmed by the July 2016 servicer site inspection, the tenant vacated the premises. According to the servicer, the tenant has relocated to another building in the area as a result of more favourable terms. Following the departure of three smaller tenants (5.1% of the NRA), Alberta Health Services (AHS, (34.6% of the NRA)) remains the sole occupant at the property, paying $19.00 psf with a lease expiring in November 2017. According to the servicer, AHS has expressed interest in expanding its space by a floor or two, while the borrower has put out a proposal to another tenant for three floors; however, both discussions are in early stages. Per Cushman & Wakefield’s Q3 2016 Marketbeat report, office properties located in the Beltline submarket reported an average rental rate of $36.07 psf gross with an average vacancy rate of 18.6% compared with the overall Calgary markets Class B office property rates of $34.10 psf gross and 19.4%, respectively. The property is currently managed and marketed by Strategic Group of Companies (Strategic), which owns, manages, leases and develops commercial properties, with a large concentration of properties located in Calgary and Edmonton. The loan has partial recourse to the guarantor, the CEO and founder of Strategic, who reported a personal net worth of approximately $460 million as of January 2015. As of YE2015, the loan had a DSCR of 0.74x, down from 1.28x at YE2014 and the DBRS UW figure of 1.24x. DBRS has modeled the loan with a stressed cash flow to recognize the loss in rental revenue.

For more information on this transaction and supporting data, please login to DBRS CMBS IReports, www.ireports.dbrs.com. DBRS continues to monitor this transaction monthly, with periodic updates provided in the DBRS CMBS IReports platform.

Notes:
All figures are in Canadian 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 (October 2016), which can be found on our website under Methodologies.