DBRS Confirms Ratings on Canadian Commercial Mortgage Trust, Series 2013-2

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates issued by Canadian Commercial Mortgage Origination Trust, Series 2013-2 as follows:

-- Class A 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 (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS expectations since issuance. At issuance, the collateral consisted of 42 fixed-rate loans secured by 49 properties. Since then, three loans have prepaid from the trust, and as of the November 2015 remittance, the pool balance was approximately $361.9 million, representing a collateral reduction of 8.1%. Loans representing 98.0% of the pool have YE2014 financials reported. Based on those financials, the pool had a weighted-average debt service coverage ratio (DSCR) of 1.50 times (x) and a weighted-average current debt yield of 9.70%, which is above DBRS underwritten term DSCR of 1.40x and debt yield of 8.6%.

Ten loans, representing 25.4% of the current pool balance, share common sponsorship through affiliates of True North REIT. To account for this increased concentration risk, DBRS applied a penalty to all loans in the pool, thereby elevating the probability of default.

There are four loans, representing 9.9% of the current pool balance, that are scheduled to mature over the near term in 2017. Those loans reported a YE2014 weighted-average refinance DSCR and exit debt yield of 1.53x and 13.7%, respectively, indicating that a successful refinance is likely with those loans moving out of the pool within the expected timeframes at issuance.

As of the November 2015 remittance, there are no delinquent or specially serviced loans; however, one loan, representing 4.7% of the current pool balance was placed on the servicer’s watchlist for reasons further discussed below, along with the largest loan in the pool.

Playfair Residences (Prospectus ID#1, 10.3% of the current pool balance) is secured by two high-rise towers located in Ottawa, Ontario, approximately four kilometres south of Ottawa’s downtown core. The property was 88.5% occupied with an average rental rate of $1,301 per unit, as stated in the May 2015 rent roll. According to the October 2015 site inspection report, the property was 91.5% occupied at the time of inspection, with the inspector noting the property to be in above average condition. Occupancy has been on a declining trend beginning with the YE2014 level of 91.4%, which was down from the in-place level of 95.4% at issuance and the DBRS underwritten level of 95.0%. According to the YE2014 operating statement analysis report, the DSCR was at 1.12x, which is a decrease from the YE2013 DSCR of 1.21x and the DBRS underwritten DSCR of 1.27x. The servicer has stated that the decline in performance is a result of increased vacancy and increased operating expenses incurred as upgrades are being made to the common areas, including the installation of new elevators, balcony glass and lighting. As the DSCR has been trending downward and occupancy remains below underwritten levels, DBRS modeled the loan with higher cash flow volatility to increase the probability of default from the level assumed at issuance.

Gupta Hilton Garden Inn (Prospectus ID#5, 4.7% of the current pool balance) is a 147-key, select-service hotel located in downtown Toronto, less than a kilometre from Dundas Square and Toronto Eaton Centre. This loan was placed on the servicer’s watchlist in March 2015 because the property has been cited by Hilton for potential franchise agreement default. To date, the property has not begun implementation of Hilton’s “Project Grow Scenario I,” prompting the franchisor to provide the borrower with an action plan and an opportunity to cure within a set time frame, currently set for January 2016. The required work standardizes all Hilton Garden Inn hotel lobbies, with a change in the colour scheme and furnishings. The servicer reports that the borrower continues to negotiate with Hilton to finalize a plan for the work, and updates are to be provided as available.

The loan has full recourse to the sponsor, Steve Gupta, the CEO and President of Easton’s Group of Hotels (EGH), which has strong experience in hotel development and management. EGH has a hotel portfolio consisting of 15 hotels operating under the Marriott, Hilton, and InterContinental Hotels Group brands across Ontario and Québec, with ten properties, including the subject, located in the Greater Toronto Area. According to the information provided at issuance, Steve Gupta reported a net worth of approximately $289 million and annual cash flow from hotel operations of $8 million.

As stated in the May 2015 trailing 12 months Smith Travel Research report, the property was outperforming its competitive set. The subject reported an occupancy, average daily rate (ADR) and revenue per available room (RevPAR) of 85.5%, $151.73 and $129.79, respectively. In comparison, the competitive set reported an occupancy, ADR and RevPAR of 73.8%, $143.27 and $105.74, respectively. At the March 2015 fiscal year end, the property reported a DSCR of 1.60x, which is a decline from the March 2014 DSCR of 1.69x and DBRS underwritten DSCR of 1.66x. Despite the relatively minor DSCR decline, DBRS anticipates the property will continue to perform well given the favourable location and strong sponsor experience in hotel development and management. The strong performance metrics and the borrower’s significant net worth provide comfort that the outstanding issues with the franchisor will be resolved in the near term as well. DBRS modeled the loan based on current financial performance, as the loan is scheduled to mature in 2017. Based on the March 2015 net cash flow figures, the refinance DSCR and exit debt yield are 1.29x and 11.6%, respectively, indicating that a successful refinance is likely.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The November 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact DBRS at info@dbrs.com.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.

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