Press Release
DBRS Closes Comment Process on North American CMBS/Real Estate Methodologies
CMBSOn February 15, 2017, DBRS requested comments on its proposed “North American Single-Asset/Single-Borrower Methodology” (the SASB Methodology). The SASB Methodology is a new methodology intended to replace certain appendices of the “North American CMBS Rating Methodology.” Concurrently, DBRS requested comments on “Rating Corporate Real Estate Entities,” as its appendix (which covers Canadian first mortgage bonds) will now also reference the SASB Methodology.
The closing of the comment process was March 8, 2017, and no comments were received. Accordingly, DBRS is publishing both methodologies today in final form.
RATING CHANGES
With respect to the ratings previously covered by the “North American CMBS Rating Methodology,” (and now rated using the SASB methodology), as a result of the use of the updated methodology, in combination with various changes in assumptions, including those made to better align these assumptions with recent market experience, 32 securities within 12 transactions have been upgraded, and the trend on one security in one transaction was moved to Stable from Negative. The remaining 125 securities across 37 transactions have been confirmed.
With respect to the nine DBRS ratings that use the appendix to the methodology, “Rating Corporate Real Estate Entities” (and now the SASB methodology by reference), the use of the updated methodologies, in combination with various changes in assumptions, including those made to better align these assumptions with recent market experience, results in all nine of these ratings being confirmed.
SUMMARY OF METHODOLOGY CHANGES
Per the press release on February 15, 2017, the SASB Methodology addresses the approach DBRS uses to rate (1) one or more real estate assets with a single borrower and (2) highly concentrated pools of commercial real estate (CRE) where there may be more than one borrower and more than one CRE asset. The SASB Methodology is intended to supersede certain appendices in the “North American CMBS Rating Methodology.” Material changes in this methodology include an update to the DBRS Capitalization Rate (Cap Rate) ranges, updates to the DBRS Loan-to-Value (LTV) Sizing Hurdles and the use of DBRS LTV Sizing Hurdles as the primary sizing hurdle.
As a part of this methodology, DBRS has discontinued the use of the DBRS Debt Service Coverage Ratio (DSCR) Sizing Hurdles. DBRS has found the DSCR hurdles to be less relevant and typically not a constraining factor in the majority of its ratings, given that the mortgage loans in the single-asset/single-borrower (SASB) sector typically have an interest-only period combined with very low interest rates or very limited amortization. Therefore, in lieu of the DBRS DSCR Sizing Hurdles, DBRS maintains a minimum DSCR threshold for investment-grade-rated tranches, and absent such a minimum, DBRS may adjust the DBRS Direct Sizing Hurdles to be more conservative.
The updated DBRS Cap Rate ranges are on average 200 basis points (bps) to 400 bps above current prevailing market cap rates and thus allow for some level of future stress should current cap rates increase. DBRS Cap Rates are applied to the DBRS Stabilized Net Cash Flow (NCF) to determine the DBRS Value for CRE asset(s). For the DBRS approach to estimating the DBRS Stabilized NCF for a commercial property, see the “DBRS Commercial Real Estate Property Analysis Criteria.”
As part of this update, DBRS has expanded its DBRS Direct Sizing Hurdles to include levels for non-investment-grade ratings down to the B rating category and has updated the values for the DBRS LTV Sizing Hurdles. The updated DBRS LTV Sizing Hurdles are a function of a quantitative and qualitative analysis of SASB sector performance. DBRS notes that defaults and losses in the SASB sector have been very limited, and thus the DBRS LTV Sizing Hurdles could not be directly derived through statistical analysis of the performance of the SASB sector, given the limited data points for defaults and losses. DBRS did, however, construct a proxy data set by observing the conduit loan-level data and property performance of DBRS-rated conduit loans over $50 million from 1998 to 2015.
Using statistical techniques, DBRS extrapolated the results of this analysis to larger loans and incorporated the results of the analysis into the final determination of the updated DBRS LTV Sizing Hurdle ranges.
For any CMBS interest-only (IO) certificates subject to the SASB Methodology, please refer to the separate press release published on March 15, 2017, that corresponds to the finalization of the “Rating North American CMBS Interest-Only Certificates.”
Regarding the required regulatory disclosures, DBRS expects to publish these on a rolling basis over the next 30 days. Macro assumptions will not be materially different from the past disclosures; however, the sensitivity analysis is expected to change. Please contact DBRS should a regulatory disclosure be needed sooner, and DBRS will make a best effort to accommodate this request and prioritize the publication of the requested regulatory disclosures.
Notes:
DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.
Ratings
225 Liberty Street Trust 2016-225L
BAMLL Commercial Mortgage Securities Trust 2013-WBRK
BAMLL Commercial Mortgage Securities Trust 2014-IP
BAMLL Commercial Mortgage Securities Trust 2016-SS1
BAMLL Trust 2011-FSHN
BBCMS Trust 2015-VFM
BHMS 2014-ATLS Mortgage Trust
BWAY 2015-1740 Mortgage Trust
Bankers Hall LP
Bow Centre Street Limited Partnership
Brookfield Properties (BHT) Ltd. - Bankers Court
CFCRE 2015-RUM Mortgage Trust
COMM 2014-PAT Mortgage Trust
COMM 2014-TWC Mortgage Trust
COMM 2016-667M Mortgage Trust
CSMC Trust 2016-MFF
Calloway REIT (Barrie) Inc. (Barrie South Smart Centre)
Choice Properties Limited (500 Bayly Street East)
Citigroup Commercial Mortgage Trust 2013-SMP
Cosmopolitan Hotel Trust 2016-COSMO
ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.
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Contacts
Erin Stafford
Managing Director - North American Real Estate Ratings
+(1) 312 332 3291
erin.stafford@morningstar.com- Brenda Lum
Managing Director - North American Corporate Real Estate Ratings
+(1) 416 597 7569
brenda.lum@morningstar.com - Kevin Mammoser
Managing Director, North American CMBS - Commercial Real Estate Credit Ratings
+1 312 332 0136
kevin.mammoser@morningstar.com