DBRS Morningstar Confirms Ratings on All Classes of Canadian Commercial Mortgage Origination Trust 4

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-4 issued by Canadian Commercial Mortgage Origination Trust 4 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class X at A (high) (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)

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 its last review. As of the June 2023 remittance, 33 of the original 53 loans remaining in the pool, representing a collateral reduction of 31.7% since issuance with a current trust balance of $375.5 million. No loans are delinquent or specially serviced. The pool is concentrated by property type with loans secured by office and retail properties representing 34.1% and 30.4% of the current trust balance, respectively. In general, the office sector has been challenged by low investor appetite and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In the analysis for this review, DBRS Morningstar analyzed loans backed by office and other properties that were showing declines from issuance or otherwise exhibiting increased risk from issuance with stressed scenarios to increase expected losses as applicable. As a result, office properties exhibited a weighted-average (WA) expected loss that was more than double than the pool average.

The Europro Office Portfolio (Prospectus ID#12, #13, and #14, collectively representing 11.1% of the pool) is composed of three cross-collateralized and cross-defaulted loans secured by one Class A and two Class B office properties in downtown Kitchener, Ontario. In the past few years, the portfolio has reported consistent declines in occupancy with the March 2023 rent roll quoting a combined occupancy rate of 64.6%, compared with May 2021 and December 2017 occupancies of 77.9% and 83.2%, respectively. Notably, the Europro Frederick Office saw a decrease in occupancy to 53.9% as of March 2023 from 59% as of March 2022, caused primarily by Easy Education Inc. (8.1% of the portfolio net rentable area (NRA)), which downsized to 26.8% from 43.6% of the building’s NRA. Fortunately, the borrower was able to back-fill a portion of the other vacant units to mitigate the downsizing of Easy Education Inc. Additionally, the fourth- and fifth-largest tenants of the Europro King Street Office, Workplace Safety (4.6% of portfolio NRA) and Igloo Inc (3.8% of portfolio NRA), have leases scheduled to expire in June 2023. A leasing update was requested from the servicer. According to the Colliers Q2 2023 Waterloo Office Market Report, the average vacancy for the downtown Kitchener submarket was 26.2%, which is an improvement over the Q2 2022 figure of 30.9%.

No updated financials have been provided since YE2021 when the portfolio reported a net cash flow (NCF) of $4.8 million (debt service coverage ratio (DSCR) of 1.59 times (x)) compared with the YE2020 NCF of $5.3 million (DSCR of 1.88x). Despite the occupancy declines, the portfolio’s NCF is still slightly above the DBRS Morningstar NCF of $4.0 million (DSCR of 1.33x). These loans have limited recourse where 50.0% of the original loan balance is guaranteed by Cedar Pointe MF Holdings Inc. As a result of amortization, the current loan-to-value ratio (LTV) is 55.5%, compared with the issuance LTV of 65.3%. Considering the soft office submarket, low historical occupancy rates, and a decline in the year-over-year NCF, DBRS Morningstar analyzed this loan with a stressed LTV and an elevated probability of default (POD), resulting in an expected loss that was more than four times that pool expected loss.

As of the June 2023 remittance, there are five loans on the servicer’s watchlist, representing 11.2% of the current pool. The largest watchlisted loan is the Homewood Suites by Hilton (Prospectus ID#6, 4.9% of the pool), which is secured by a 140-key, full-service hotel in Vaughan, Ontario, and has been on the watchlist since November 2020 for low occupancy because of the effects of the Coronavirus Disease (COVID-19) pandemic. Based on the YE2020 financials, the property was 37.4% occupied with an average daily rate (ADR) and revenue per available room (RevPAR) of $114.15 and $42.70, respectively. However, the subject improved with the March 31, 2022, financials reporting an occupancy rate, ADR, and RevPAR of 60.1%, $113.94, and $80.46, respectively. The loan reported an annualized DSCR of 0.55x as of March 31, 2022, which is an improvement from YE2020 when the loan reported a negative NCF, but it is still below break-even. Despite the performance challenges, the loan has remained current and it has full recourse to the sponsors. In addition, the hotel benefits from its proximity to wedding venues and is able to cater to wedding guests. DBRS Morningstar will continue to closely monitor this loan.

ENVIRONMENTAL, SOCIAL, 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 at https://www.dbrsmorningstar.com/research/416784/ (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit 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 the 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 credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit 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 credit rating action.
This is a solicited credit rating.

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

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

The credit 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 v 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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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