DBRS Confirms All Classes of MCAP CMBS Issuer Corporation, Series 2014-1, Changes Trend on Class F to Stable from Negative

DBRS Limited (DBRS) confirmed the ratings on the following classes of 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 X at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable, with the exception of Class G, for which DBRS has maintained a Negative trend, and Class F, for which DBRS has changed the trend to Stable from Negative, as it appears the borrower has produced a viable business plan to refinance the 1177 11 Avenue SW loan (5.3% of the pool), which is currently secured by an office property in Calgary; however, the property is planned to be redeveloped into a multifamily property. The Negative trend on Class G remains to reflect the ongoing concern regarding the 1121 Centre Street NW loan (5.8% of the pool), which is also secured by an office property located in Calgary. The office market in Calgary continues to exhibit prolonged and significant vacancy, reductions in rental rates and an overall lack of liquidity.

The rating confirmations reflect the overall stable performance exhibited since September 2017. As of the August 2018 remittance, 25 of the original 32 loans remained in the pool with an aggregate balance of $166.6 million, representing a collateral reduction of 25.6% since issuance due to loan repayment and scheduled loan amortization. To date, 19 loans (70.2% of the pool) have reported year-end 2017 net cash flows (NCFs), while three loans (21.6% of the pool) have reported year-end 2016 NCFs. The other three loans (8.2% of the pool) remain current and are fully occupied. Based on the most recently reported year-end (YE) financials, the transaction had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.32 times (x) and 9.3%, respectively, compared with the DBRS Term DSCR and debt yield of 1.25x and 8.3%, respectively. In addition, 17 loans (62.4% of the pool) have some form of meaningful recourse for their respective sponsor and/or guarantor.

As of the August 2018 remittance, there was one loan (5.3% of the pool) in special servicing and five loans (18.5% of the pool) on the servicer’s watchlist. Of the five loans on the servicer’s watchlist, three loans (9.0% of the pool) were flagged due to upcoming maturities, while two loans (9.5% of the pool) were flagged for performance-related reasons. To date, all loans are current and the three loans with near-term maturity dates are expected to pay in full upon maturity.

The specially serviced loan, 1177 11 Avenue SW, is secured by a 61,925 square foot (sf), Class B office building located in the Beltline District of Calgary. The loan had an initial maturity date in February 2017; however, following two short-term extensions to allow time for re-tenanting, the loan entered into a two-year forbearance agreement, through August 2019. The property is currently vacant, but Strategic Group (Strategic) – of which the guarantor, Riaz Mamdani, is the CEO – has plans to partner with a large Canadian pension fund as an equity partner for 35% of the asset in order to convert the property into a residential building with ground-floor retail. The deal is expected to close in September 2018, which would result in the full repayment of the loan shortly thereafter.

The second loan on DBRS’s radar is 1121 Centre Street NW (5.8% of the pool), secured by another Class B office property totaling 62,843 sf, situated approximately 6.0 kilometers southwest of the 1177 11 Avenue SW property. Although performance of the asset has historically been stable and the loan also benefits from sponsorship from Strategic, DBRS is concerned with potential refinance risk upon maturity in August 2019. The property is currently 89.7% occupied; however, two tenants, representing 24.8% of the net rentable area (NRA) have lease expirations prior to September 2019, elevating the loan’s refinance risk if the property is to follow submarket trends. Per CBRE’s Q2 2018 MarketView, Class B office properties in the Beltline submarket reported a vacancy rate of 26.7%, relatively unchanged from 26.9% at Q2 2017. While the whole loan amount of $170 per square foot (psf) is below the issuance appraised value of $269 psf, according to Real Capital Analytics, sales comparables within a 1.5-mile radius over the last 24 months have averaged a sale price of $106 psf, indicating the loan’s relatively high leverage in today’s market. The largest tenant at the property, Vepica Ltd. (formerly Excelsior Engineering Ltd; 50.8% of the NRA) does not have a lease expiration until June 2022 and the loan does benefit from a 50.0% recourse guarantee from the sponsor, providing a measure of stability to the loan. As noted above, Strategic has previously partnered with the Canadian Pension Fund, using capital to repay debt obligations, including a loan amount that was in excess of $44.0 million in 2017 and the sponsor has shown its commitment to assets in the Calgary market.

Class X is an interest-only (IO) certificate that references multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche. However, the rating assigned to Class X materially deviates from the lower rating implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviation is warranted as consideration was given for actual loan, transaction and sector performance where a rating based on the lowest-rated notional class may not reflect the observed risk.

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:

-- 8555 Woodbine Avenue & 3000 Highway 7 (Prospectus ID #1, 14.6% of pool)
-- 1 & 20 Royal Gate Boulevard (Prospectus ID #3, 7.9% of pool)
-- 1121 Centre Street NW (Prospectus ID #7, 5.8% of the pool)
-- 1177 11 Avenue SW (Prospectus ID #6, 5.3% of pool)

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.