DBRS Morningstar Upgrades Two Classes, Maintains Three Classes of MCAP CMBS Issuer Corporation, Series 2014-1 Under Review with Negative Implications
CMBSDBRS Limited (DBRS Morningstar) maintained the Under Review with Negative Implications status for three classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-1 issued by MCAP CMBS Issuer Corporation, Series 2014-1 as follows:
-- Class E at BBB (low) (sf), Under Review with Negative Implications
-- Class F at BB (sf), Under Review with Negative Implications
-- Class G at B (sf), Under Review with Negative Implications
DBRS Morningstar also upgraded the following classes:
-- Class C to AAA (sf) from A (high) (sf)
-- Class D to AAA (sf) from BBB (sf)
Classes C and D have a Stable trend, while Classes E, F, and G do not carry a trend.
DBRS Morningstar also discontinued the ratings on Classes A, B, and X. Classes A and B have been fully repaid, and DBRS Morningstar has withdrawn the rating on Class X as the transaction is now winding down.
The ratings for Classes E, F, and G remain Under Review with Negative Implications as a result of ongoing concerns surrounding the resolution for the 1121 Centre Street NW loan (Prospectus ID#7, 36.1% of the pool), which is in special servicing. In December 2019, the loan sponsor, Strategic Group LLC (Strategic Group), submitted an application filing under Canada’s Companies’ Creditors Arrangement Act (CCAA), which affected the property and 49 others within the sponsor’s 171-property portfolio.
The outlook for this loan, which is secured by an office property in Calgary, will likely be the subject of additional economic stress amid the Coronavirus Disease (COVID-19) outbreak that has pushed oil prices even lower. DBRS Morningstar upgraded Classes C and D based on the respective classes’ in-place credit support and relative stability of the remaining loans in the transaction as the deal winds down.
The 1121 Centre Street NW loan is secured by a 62,843 sf office property in Calgary, which has reported stable historic performance since issuance; however, recent developments suggest cash flows will decline in the coming year. The former second-largest tenant, BGC Engineering Inc. (19.9% of the net rentable area (NRA)), vacated in June 2018, reducing the property’s occupancy temporarily to 68.0%; however, the occupancy rate has since recovered to 79.4% per the December 2019 rent roll. While there has been some recent positive leasing momentum, significant challenges remain marketwide in regards to falling rental rates and rising vacancy rates, which will likely drive a longer lease-up period and require significant capital investment to attract tenants. Several newer tenants at the property have signed leases at noticeably lower rates, with the average rental rate dropping to $12.40 psf, compared with $14.17 psf in February 2018. The decline in rental rates combined with free rent periods for two tenants (representing 14.8% of the NRA) through June 2021 are factors contributing to the likely depressed cash flows throughout 2020.
The special servicer has confirmed the application for CCAA protection was denied, and the court has ordered a receivership for all affected properties, including 1121 Centre Street NW. The special servicer has advised that it is in the process of determining a resolution strategy as of March 2020. Given the sharp declines in cash flows and generally difficult market for office properties from both a tenant-demand and investor-demand perspective, DBRS Morningstar believes the as-is value has sharply declined from issuance. Given the current economic environment, particularly in the face of a relatively new threat in the coronavirus, the loss severity at resolution could be significant. The loan has recourse to the borrowing entity (Strategic Group via Centre Eleven Limited Partnership) and to Riaz Mamdani for the full amount of the outstanding debt.
The office market in Calgary continues to exhibit prolonged vacancy rate spikes, reductions in rental rates, and an overall lack of liquidity. With recent declines in the oil market, market fundamentals are not likely to rebound in the foreseeable future. For further information on this loan, please see the DBRS Viewpoint platform, for which information has been provided, below.
At issuance, the trust was secured by 32 loans at an original trust balance of $224.0 million. Per the March 2020 remittance, five loans remain in the trust, with a current balance of $25.4 million, representing a collateral reduction of 88.7% since issuance because of loan repayment and scheduled loan amortization. Outside of the 1121 Centre Street NW loan, the four remaining loans are performing as expected, with strong occupancy and cash flow growth since issuance. The 175 rue de Rotterdam (Prospectus #15, 21.0% of the pool) and 5498 Boulevard Henri-Bourassa Est (Prospectus #32, 5.2% of the pool) loans benefit from having strong or investment-grade tenants, respectively, with leases extending past loan maturity. The transaction benefits from 89.2% of the pool having some form of meaningful recourse.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#7 – 1121 Centre Street NW (36.1% of the 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 most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.
Notes:
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.
For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.
DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Ratings
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.