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. As of the October 2022 remittance, 35 of the original 53 fixed-rate loans remained in the trust with an aggregate principal balance of $397.9 million, reflecting a collateral reduction of 27.6% since issuance as a result of loan repayment and scheduled loan amortization. The transaction is composed of a relatively concentrated set of collateral, with the majority of loans backed by office (32.9% of the pool), retail (31.5% of the pool), and industrial (22.7% of the pool) properties.

As of the September 2022 remittance, there were no delinquent or specially serviced loans. There are five loans on the servicer’s watchlist, representing 10.8% of the pool. The largest loan on the servicer’s watchlist, Homewood Suites by Hilton (Prospectus ID#6; 4.6% of the pool), is secured by a 140-key full-service hotel in Vaughan, Ontario, approximately 25 kilometres north of downtown Toronto. The loan was being monitored on the servicer’s watchlist because of a decline in performance amid the pandemic but has improved significantly with a debt service coverage ratio (DSCR) of 1.54 times (x) for the trailing 12 months (T-12) ended March 31, 2022, rebounding from -0.12x at YE2020 and above the YE2019 DSCR of 1.37x.

The Europro Office Portfolio (Prospectus ID#12, #13, and #14, collectively representing 10.5% of the pool) consists of three cross-collateralized and cross-defaulted loans secured by office properties in downtown Kitchener, Ontario. Although the portfolio is not on the servicer’s watchlist, occupancy has been declining precipitously year over year. The most recent rent rolls provided were dated between December 2021 and May 2022 and the portfolio occupancy was reported at 65.8%, a decline from 77.9% in May 2021 and 83.2% at December 2017. The drop in occupancy was mainly due to the departure of Gowlings Canada (7.3% of portfolio net rentable area (NRA)), which vacated upon its lease expiration in September 2021. An additional 10 tenants, collectively representing 34.8% of portfolio NRA, have leases that expired in the last six months or will be expiring in the next 12 months. This includes PWGSC – Canada Revenue Agency (15.8% of portfolio NRA), which is located across all three properties with varying lease expirations between October 2020 and October 2022. DBRS Morningstar has requested a leasing update from the servicer. According to Colliers’ Q2 2022 office market report, properties in the downtown Kitchener office market reported a vacancy rate of 30.9%, increasing from 24.3% in Q1 2021 and 20.2% at Q2 2020, which is likely due to a shift to a hybrid work-from-home model for some companies.

While there has been a significant decline in the portfolio’s occupancy rate since issuance, DBRS Morningstar noted at issuance that the properties were not yet stabilized and were expected to go through a period of volatility given that two of the largest tenants in the portfolio, MCAP (12.9% of portfolio NRA; lease expired in May 2019) and Gowlings Canada, had given notice that they would vacate upon lease expiration. As of YE2021, the portfolio reported a weighted-average DSCR of 1.63x, but when removing Gowlings Canada rental revenue, the implied DSCR was approximately 1.50x and may further decline considering the near-term tenant rollover risk. However, the loan has full recourse to the sponsor, Europro Real Estate, and a corporate guarantee from Cedar Pointe MF Holdings Inc. for 50.0% of the original loan amount. In addition, the borrower acquired these properties as part of a larger acquisition, contributing $45.0 million in cash equity toward the deal, providing a low going-in loan-to-value ratio of 56.8% for the subject portfolio.

The Carlton Government Office loan (Prospectus ID#4; 5.1% of the pool) is secured by a Class B office building in Winnipeg, Manitoba. The subject is 98.5% occupied as of October 2022 and the largest tenant is Manitoba Health (63.5% of NRA). The tenant originally had a lease expiration in May 2021 but exercised its right to overhold at the same rent until June 2022. A renewal proposal was issued that would extend the lease to July 2024 with one five-year renewal option. Per the financials for the T-12 period ended May 31, 2021, the loan reported a DSCR of 1.10x, a decline from 1.36x for the T-12 period ended May 31, 2018. No financials were reported between 2018 and 2021. The drop in net cash flow was driven by a significant increase in utilities at approximately $985,000, compared with the May 2018 figure of $490,000. DBRS Morningstar has requested a leasing update from the servicer as well as insight surrounding the rise in expenses. The loan benefits from full recourse to the sponsor, 2668921 Manitoba Limited, a real estate company owned by Arni Thorsteinson and Susan Glass.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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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