DBRS Confirms All Classes of Canadian Commercial Mortgage Origination Trust 2015-3

DBRS Limited (DBRS) 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:

-- Class A at AAA (sf)
-- Class A-J at AAA (sf)
-- Class B at AA (sf)
-- Class X 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 trend for Class G is Negative due to ongoing concerns surrounding Clearwater Suite Hotel (Prospectus ID#7, 3.9% of the pool balance), which is secured by a hotel property located in Fort McMurray, Alberta.

All other trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The deal closed in September 2015 with an original trust balance of $570.1 million. At issuance, the transaction consisted of 42 fixed rated loans secured by 59 properties. As of the July 2018 remittance, there has been a collateral reduction of 9.5% since issuance due to scheduled loan amortization and the repayment of one loan, with 41 loans remaining in the pool. All but two loans in the pool reported year-end (YE) 2017 financials, reporting a weighted-average (WA) debt service coverage ratio (DSCR) and debt yield of 1.69 times (x) and 10.6%, respectively. Overall, the underlying collateral has seen steady cash flow growth since issuance, when the DBRS Term DSCR and DBRS Debt Yield for the overall pool was 1.41x and 8.3%, respectively. All but one of the top 15 loans reported YE2017 figures and based on the servicer’s analysis, those loans, which represent 61.3% of the pool, reported a WA DSCR of 1.71x, compared to the WA DBRS Term DSCR at issuance of 1.43x for those loans, representing a WA net cash flow (NCF) growth of 17.8% from the DBRS NCF figures derived at issuance.

There are two top 15 loans on the watchlist, Clearwater Suite Hotel (Prospectus ID#7, 3.9% of the pool) and St. James Square (Prospectus ID#11, 2.8% of the pool). Both of these full recourse loans are being monitored for sharp cash flow declines from issuance, but the Clearwater Suite Hotel loan is considered the most problematic given the sustained economic difficulties in the Fort McMurray area over the last several years. Those factors, as well as two separate instances where the collateral property was significantly damaged and needed major repairs (both covered by insurance), have contributed to sustained cash flow declines since issuance. The YE2017 DSCR was reported at 0.21x, down from the already low 0.73x for YE2016 and the DBRS Term DSCR at issuance of 1.15x.

It should be noted that the servicer reports a different DSCR of 0.10x at YE2017 for the other piece of this pari passu loan, contributed to the CMLSI 2014-1 transaction, which is also rated by DBRS. The servicer’s analysis includes adjustments to the reported cash flows for management fees and capital expenditures, which are based on the issuer’s underwritten figures. The subject loan was re-underwritten when contributed to the subject transaction and as such, the DSCR figures do not match across the deals. DBRS has suggested this be adjusted going forward so that both pieces show the same coverage ratio.

DBRS assumed a stressed cash flow scenario for the loan with this review to significantly increase the probability of default. There are positives in place in the sponsor’s recent investment in improvements for the property and the continued funding of debt service shortfalls out of pocket. The loan is full recourse to Temple Hotels Inc., which is majority-owned by Morguard Corporation (rated BBB (low) with a Stable trend by DBRS) and although this structural feature does provide some cushion against the increased risk since issuance, the low cash flow trends for the collateral property support the Negative trend for the lowest rated class as previously outlined.

Class X are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#7 – Clearwater Suites Hotel
-- Prospectus ID#11 – St. James Square

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS rated transactions.

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

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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