DBRS Morningstar Confirms All Ratings on CMLS Issuer Corp., Series 2014-1

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-1 issued by CMLS Issuer Corp., Series 2014-1 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at AA (low) (sf)
-- Class X at AA (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since last review.

At issuance, the transaction consisted of 37 fixed-rate loans secured by 41 commercial and multifamily properties, with a total trust balance of $283.7 million. As of the June 2023 remittance, 25 loans remained in the trust, with an aggregate principal balance of $172.1 million, reflecting collateral reduction of 39.3% since issuance as a result of loan repayments and scheduled amortization. All loans are amortizing and the pool benefits from generally shorter amortization schedules.

The transaction is concentrated by property type, with loans backed by retail and mixed-use properties representing 40.7% and 17.4% of the current pool balance, respectively. The transaction is also concentrated by geography, as loans secured by properties in Ontario and British Columbia represent 67.6% and 7.6% of the pool balance, respectively. Six loans, representing 20.2% of the pool, are on the servicer’s watchlist for declines in occupancy rates and/or debt service coverage ratios (DSCRs). Where applicable, DBRS Morningstar increased the probability-of-default penalties for those loans and select others exhibiting increased risk; however, DBRS Morningstar notes mitigating factors that include recourse provisions for some loans and generally low loan-to-value ratios that have only decreased, considering the amortizing nature of these loans. There are currently no loans in special servicing nor is there defeasance collateral. All loans are scheduled to mature by 2024 and the pool is generally well positioned to secure take-out financing considering a healthy weighted-average (WA) DSCR and WA debt yield of 1.69 times (x) and 13.9%, respectively, based on the most recent financials, compared with the prior year’s WA DSCR and WA debt yield of 1.43x and 11.8%, respectively.

The loan with the highest DBRS Morningstar expected loss, Spring Garden Place (Prospectus ID#5; 6.3% of the pool), is secured by a five-storey mixed-use office building in Halifax. The loan has been on the servicer’s watchlist since 2017 for a low DSCR, which has been well below break-even since 2018, that coincided with a drop in the occupancy rate to 54.3%. In addition, the largest tenant at issuance, The Bank of Nova Scotia (rated AA with a Stable trend by DBRS Morningstar), reduced its footprint to 5.3% of net rentable area (NRA) in 2019 from 24.1% of NRA at issuance. The occupancy rate has improved to 91.5% according to the April 2022 rent roll, compared with the 74.1% in March 2021. This was mainly because of the Province of Nova Scotia executing two new leases for approximately 17,000 sf of space, with an average rental rate of $11.90 per square foot (psf); slightly below the average rental rate of $12.53 psf for the Province of Nova Scotia’s existing in-place leases. The Province of Nova Scotia is the largest tenant at the property, occupying 26.4% of NRA through five separate leases, with staggered expiration dates in 2023 and 2028. There is significant tenant rollover risk as more than 25.0% of tenants have leases that have either expired or will be expiring within the next 12 months. DBRS Morningstar has reached out to the servicer for a leasing update. Per CBRE’s Q1 2023 Canada Office Report, office properties within Downtown Halifax reported average vacancy rates of 18.4%.

Historically, net cash flow (NCF) at the property was depressed because of the low occupancy rate; however, more recently, NCF has seen compression because of an increase in expenses, namely repairs and maintenance, which increased to $1.2 million at YE2021 from $81,199 at YE2020. Despite sustained downward pressure on cash flows, the loan has remained current, indicating that the sponsor remains committed to the asset. Nonetheless, the loan is nonrecourse, a factor when combined with the low in-place cash flows and upcoming tenant rollover, suggests increased risks from issuance. As such, for this review, DBRS Morningstar analyzed this loan with an elevated probability of default, resulting in an expected loss that was more than triple the WA pool expected loss.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X is an interest-only (IO) certificate that references 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 [email protected].

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for Canadian Structured Finance (June 20, 2023;
https://www.dbrsmorningstar.com/research/416101)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].