DBRS Morningstar Downgrades Rating on One Class of Canadian Commercial Mortgage Origination Trust 5, Changes Trends on Two Classes to Negative From Stable

DBRS Limited (DBRS Morningstar) downgraded the credit rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2022-5 issued by Canadian Commercial Mortgage Origination Trust 5 as follows:

-- Class G to B (low) (sf) from B (sf)

DBRS Morningstar also confirmed its credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class A-J at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)

The trends on Classes G and F were changed to Negative from Stable. All remaining trends are Stable.

The credit rating downgrade and Negative trends reflect the expected credit deterioration at the bottom of the capital stack since issuance, primarily stemming from the sole specially serviced loan, CALM Building (Prospectus ID#10, 3.6% of the pool balance). DBRS Morningstar also has concerns about 100 Dundas London (Prospectus ID#7, 3.9% of the pool balance), following the loss of the property’s largest tenant.

The CALM Building is secured by a Class B mixed-use property, consisting of office and retail space, in Québec City. While the November 2023 reporting shows the loan on the servicer’s watchlist, the servicer has indicated the loan was transferred to special servicing in May 2023 following a series of defaults, including delinquency on both principal and interest payments and real estate taxes from both 2022 and 2023. The borrower’s real estate portfolio is currently in receivership after a covenant associated with an unsecured operating credit facility was breached, leading creditors to register a lien across the borrower’s real estate portfolio. Raymond Chabot Grant Thornton was appointed as receiver in June 2023 and has engaged CBRE as broker to market the subject property for sale. According to the July 2023 appraisal, the subject was valued at $17.0 million, down from the issuance value of $27.3 million and below the estimated total loan exposure when accounting for outstanding advances and other expenses.

At issuance, the property was 100% occupied; however, several tenants that were affiliated with the sponsor have vacated the subject, with occupancy estimated to be around 60%. Considering the transaction recently closed in December 2022, there is limited financial reporting available. Given the challenged office sector and low investor appetite for that property type, coupled with the significant drop in occupancy and value decline, the credit risk has significantly increased from issuance. For this review, DBRS Morningstar analyzed the loan with a liquidation scenario, resulting in a loss severity in excess of 30.0%. In addition to the credit erosion indicated from the projected loss, the capital structure of the transaction is noteworthy as the more junior tranches carry small balances, providing little cushion to mitigate any additional loss and/or performance volatility for the remaining loans in the pool, thereby supporting the credit rating downgrade and Negative trends.

DBRS Morningstar noted concerns related to the 100 Dundas London loan at issuance, which is secured by a Class A office property in downtown London, Ontario. The former largest tenant, Bell Canada (39.1% of the net rentable area), vacated at its March 2022 lease expiration, resulting in an in-place occupancy rate of 56.0%. The borrower was in discussions with prospective tenants, but it appears that the space continues to be vacant as per the May 2023 rent roll. According to CBRE, the London Office market reported a Q3 2023 vacancy rate of 23.0%. DBRS Morningstar had applied the in-place vacancy in its analysis at issuance, which resulted in a net cash flow variance of 23.0% from the issuer’s net cash flow. As such, the loan’s expected loss was nearly triple the pool’s expected loss.

As of the October 2023 remittance, 34 of the original 35 loans remain in the pool with a trust balance of $471.0 million, representing a collateral reduction of 4.8% since issuance. In terms of the property concentration, loans backed by industrial and multifamily properties represent the largest concentration at 33.4% and 23.3% of the pool balance, respectively, while office loans represent 11.1% of the pool balance. There are no defeased loans or loans on the servicer’s watchlist. Most of the loans in the pool are amortizing throughout the term of the loan and have some form of recourse.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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 dollar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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 (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0 (https://www.dbrsmorningstar.com/research/422859).

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 22, 2023; https://www.dbrsmorningstar.com/research/420982).

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592).

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].