Morningstar DBRS Changes Trends on Two Classes of Canadian Commercial Mortgage Origination Trust 5 to Stable from Negative, Confirms All Credit Ratings

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-5 issued by Canadian Commercial Mortgage Origination Trust 5 as follows:

-- 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)
-- Class G at B (low)

Morningstar DBRS changed the trends on Classes F and G to Stable from Negative. All other trends remain Stable.

Since the last credit rating action, one loan that was previously in special servicing, CALM Building (Prospectus ID#10; 4.3% of the pool balance) has been brought current and was returned to the master servicer, the details of which are outlined below. Additionally, six loans have been repaid in full since the prior review, including 100 Dundas London (Prospectus ID#7; formerly 3.9% of the pool balance), which was previously flagged as a credit risk following the loss of the property's largest tenant. The pool's performance has generally remained stable, as evidenced by its weighted-average (WA) debt service coverage ratio (DSCR) of 1.60 times (x) based on the most recent financials, compared with the WA term DSCR of 1.52x at issuance. The transaction continues to deleverage as loans amortize or repay from the pool, resulting in a collateral reduction of 30.2% since issuance. Most loans in the pool benefit from some level of recourse to the sponsor and/or low-to-moderate loan-to-value ratios (LTVs) that continue to decrease. Morningstar DBRS considered this combination of factors, among others, in its decision to change the trends on Classes F and G with this credit rating action.

As of the October 2024 remittance, 28 of the original 35 loans remain in the trust, with an aggregate principal balance of $345.3 million. The transaction is concentrated by property type, with loans backed by industrial, multifamily, and retail properties representing 42.3%, 18.2%, and 18.2%, respectively, of the current pool balance. The transaction is also concentrated by geography, with 16 loans, representing 42.8% of the current trust balance secured by properties in Ontario. No loans are in special servicing; however, three loans, representing 6.8% of the pool balance, are on the servicer's watchlist.

The largest loan on the servicer's watchlist, CALM Building, is secured by a 92,171-square-foot, Class B mixed-use (office, medical office, and retail) property in Québec City. A blanket lien was placed across the borrower's (Group Hout) entire real estate portfolio in February 2023 after a covenant associated with an unsecured operating credit facility was breached. The loan subsequently transferred to special servicing in May 2023 following a series of defaults, including delinquency on principal and interest payments, and real estate taxes. Impact Gestion Immobilière, a Québec City real estate management company, purchased the property for $17.0 million in August 2024, the terms of which included takeback financing, a three-year extension of the loan maturity (to July 2027), and additional funds to be made available for capital and leasing costs associated with stabilizing the property. As part of the loan modification and assumption, the trust realized a loss of approximately $1.3 million, related to the reimbursement of unpaid principal and interest payments and associated expenses, including property tax arrears. As of the October 2024 reporting, the loan has been returned to the master servicer and is current. Occupancy has declined since issuance because several tenants affiliated with the prior sponsor vacated the property. An updated rent roll was not provided to Morningstar DBRS; however, the July 2023 appraisal noted the property was approximately 60.0% leased. According to a Q2 2024 CBRE report, office properties within the Northwest region of Québec City reported average vacancy rates of 11.5%. Although the loan's maturity date in 2027 will provide the new sponsor time to backfill vacant space and work toward stabilization, Morningstar DBRS analyzed this loan with an elevated probability of default penalty and stressed LTV to reflect the low occupancy rate and its expected impact on cash flow. The resulting expected loss was more than five times the pool average.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Class X is an interest-only (IO) certificate that reference 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 01, 2024), https://dbrs.morningstar.com/research/428798.

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

The credit ratings assigned to the Class C, D, and E certificates materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the positive material deviation is uncertain loan evet event risk. As outlined above, a top 10 loan, CALM building, is currently being monitored on the servicer's watchlist. Although Morningstar DBRS' outlook for the underlying collateral has generally improved, the loan is exhibiting increased risk from issuance. The deviations were deemed to be warranted given the junior classes do not provide a significant amount of cushion to insulate against potential losses, should that loan, or any other loans, experience further performance declines.

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@morningstar.com.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

-- Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024), https://dbrs.morningstar.com/research/437761

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.