Morningstar DBRS Confirms Credit Rating on the Mortgage Loan Secured by 1166 Alberni Street; Removes Class from Under Review With Negative Implications

DBRS Limited (Morningstar DBRS) confirmed the credit rating of A (high) (of) with a Stable trend to the Mortgage Loan secured by 1166 Alberni Street. The credit rating was removed from Under Review with Negative Implications, where it was placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American Commercial Mortgage-Backed Securities Single-Asset/Single-Borrower (NA CMBS SASB) portfolio. The review was prompted by Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years. Amid an increase in remote work and hybrid schedules, tenant demand in urban markets, such as those most frequently represented in the NA CMBS SASB space has been the most resilient for those higher quality buildings, which offer extensive amenity packages and are located within areas with proximity to transportation hubs and other nearby draws for commuters and city dwellers alike. These trends are expected to be sustained for the long term and the ripple effects in increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties" published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those respective credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review for the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status. A full detail of the credit rating action and rating rationale is outlined, below.

The Mortgage Loan, which has an outstanding balance of $40.8 million as of April 2024, is scheduled to mature on December 1, 2034, and is secured by 1166 Alberni Street, a 16-storey, 193,572-square-foot Class B office building in downtown Vancouver. The credit rating reflects the stability of the net cash flow provided by the in-place rental income combined with the property's location within the desirable Downtown Vancouver office submarket where the current market vacancy rate for Class B office space is 12.9%, according to CB Richard Ellis Research's Q1 2024 Vancouver Office figures. Morningstar DBRS concluded based on review of leasing data that the property's current occupancy may be in line or slightly better than market.

Morningstar DBRS had previously concluded to a value of $70.0 million for the subject property (loan-to-value ratio (LTV) of 58.3%), which was based on the Morningstar DBRS net cash flow of $4.9 million and a capitalization (cap) rate of 7.0%. With this review, Morningstar DBRS increased the cap rate to 7.25%, resulting in an updated Morningstar DBRS value of $67.6 million (LTV of 60.4%). Additionally, Morningstar DBRS updated its qualitative adjustments to the LTV Sizing Benchmarks, totaling 2.5% for cash flow volatility, 1.0% for property quality, and 2.75% for market fundamentals, because of the property's below-market-level rents, Class B construction, and desirable submarket. In comparison to Morningstar DBRS' last review, qualitative adjustments were 2.5%, 0%, and 5.0%, respectively.

ENVIRONMENTAL, SOCIAL, AND 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 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 Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

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 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for Canadian Structured Finance (June 20, 2023), https://dbrs.morningstar.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://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.