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 performance of the transaction which remains in line with DBRS Morningstar expectations. At issuance, the trust consisted of 53 fixed-rate loans secured by commercial properties. As of the October 2021 remittance, 42 loans remain in the pool, representing a collateral reduction of 19.5% caused by scheduled amortization and loan repayments. The transaction is composed of a relatively diverse set of collateral, with the majority of loans backed by retail, office, and industrial properties. There is only one loan, representing 4.4% of the pool, secured by a hotel property. Given the unique stresses for hotel properties amid the Coronavirus Disease (COVID-19) pandemic, this is considered a strength for the transaction.

As of the October 2021 remittance, there were two loans on the servicer’s watchlist, representing 6.5% of the pool, and no delinquent or specially serviced loans. The largest watchlisted loan is The Homewood Suites by Hilton (Prospectus ID#6; 4.4% of the pool balance). The loan is secured by a 140-key full-service hotel in Vaughan, Ontario, approximately 25 kilometres north of downtown Toronto. The loan was on the watchlist because of a decline in occupancy as the subject was affected by the coronavirus pandemic. According to the servicer, the property was unoccupied for a period, but DBRS Morningstar has confirmed that the property is currently open.

According to the trailing three months (T-3) ended August 31, 2021, STR report, the occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) was reported at 65.3%, $123.27, and $80.48, respectively. This is an improvement over the subject’s T-12 ended August 31, 2021, RevPAR of $53.36; however, the property is underperforming when compared to the competitive set as the T-3 RevPAR index was reported at 84.0%. According to the YE2020 financials, the loan reported a debt service coverage (DSCR) ratio of -0.12 times (x), compared to the YE2019 DSCR of 1.37x and DBRS Morningstar DSCR at issuance of 1.55x. Despite the decline in performance, the loan has remained current and the borrower did not request relief during the pandemic. The loan has full recourse to the sponsors, Steve Gupta and Rudolph Peter Bratty, as each individual provides a personal guarantee for 50.0% of the loan amount. DBRS Morningstar increased the probability of default (POD) to increase the expected loss with this review.

There are a few loans in the top 15 that demonstrated a decline in occupancy and/or significant tenant rollover risk, including the Europro Office Portfolio (Prospectus ID#12, 13, and 14, collectively representing 9.9% of the pool), which consists of three cross-collateralized and cross-defaulted loans, secured by office properties in downtown Kitchener, Ontario. As of the May 2021 rent roll, the portfolio occupancy was at 77.9%, a decline over the YE2019 occupancy rate of 90.7%. In addition, tenants representing 12.6% of net rentable area (NRA) have leases that expired or will be expiring in the near term. This includes Gowlings Canada (7.3% of portfolio NRA), whose lease expired in September 2021. While it appears that the tenant remains at the subject, a leasing update was requested from the servicer. According to CBRE’s Q2 2021 office market report, properties in the Waterloo region reported a vacancy rate of 11.1%, which is an increase from the Q2 2020 vacancy rate of approximately 6%. The YE2020 portfolio DSCR was reported at 1.77x, compared to the YE2019 DSCR of 2.14x and DBRS Morningstar DSCR of 1.33x. DBRS Morningstar increased the POD to increase the expected loss with this review.

The Carlton Government Office loan (Prospectus ID#4, representing 4.8% of the pool) is secured by a Class B office building in Winnipeg, Manitoba. The subject is 98.9% occupied as per the June 2021 rent roll. The largest tenant, Manitoba Health (63.5% of NRA) had a lease expiration of May 2021 but the tenant has exercised its right to overhold at the same rent until December 2021. The tenant has been at the property since 2019 and according to the November 2020 servicer’s site inspection report, $1.2 million of capex improvements were recently completed, indicating the borrower’s commitment to the property. The most recent financials provided are dated YE2018, which reported a DSCR of 1.36x, compared to the DBRS Morningstar DSCR of 1.35x. A leasing update and updated financials were requested from the servicer. The loan benefits from full recourse to the sponsor, 2668921 Manitoba Limited, a real estate company owned by Arni Thorsteinson and Susan Glass. DBRS Morningstar analyzed this loan with an elevated POD to increase the expected loss with this review.

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/373262.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 (March 26, 2021), which can be found on dbrsmorningstar.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 dbrsmorningstar.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 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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