DBRS Confirms Ratings of Institutional Mortgage Securities Canada Inc., 2012-2

DBRS has today confirmed the ratings of Institutional Mortgage Securities Canada Inc., 2012-2 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 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)
-- Class XP at AAA (sf)
-- Class XC at AAA (sf)

All trends are Stable.

The rating confirmations reflect the pool’s continued stable performance as the transaction has experienced total collateral reduction of 6.18% since issuance due to scheduled amortization and the payoff of the Leslie Street Office (Prospectus ID#15) loan, which represented 5.65% of the pool at issuance. The subject loan was transferred to special servicing in December 2013 due a third-party receiver being appointed in charge of the collateral as a result of a partnership dispute. In May 2014, Leslie Street Office left the pool and the loan was paid off in full due to full recourse.

The transaction is concentrated, as the largest 15 loans represent 77.11% of the current pool balance. As of YE2013, the largest 15 loans reported a weighted-average (WA) debt service coverage ratio (DSCR) of 1.34 times (x), a WA current debt yield of 9.61% versus a WA exit debt yield of 11.36% and saw a WA net cash flow (NCF) growth of 23.22% over the DBRS underwritten WA NCF. As of the July 2014 remittance, there are 30 of the original 31 loans remaining in the pool. There are three loans on the servicer’s watchlist and no delinquent or specially serviced loans. Two of the loans on the servicer’s watchlist are highlighted below.

The Clyde Avenue Industrial loan (Prospectus ID#23, 1.52% of the pool) is secured by a 20,985 square foot (sf) industrial property located in Mount Pearl, Newfoundland and Labrador, approximately 12 kilometres northeast of St. John’s. The loan was placed on the watchlist due to a substantial decrease in occupancy. As of April 2014, the two largest tenants, Bird Design (24,000 sf), which represented 40% of the net rentable area (NRA) and Domtar (9,750 sf), which represented 16.25% of the NRA, vacated their units upon lease expiration and elected not to renew. According to the servicer, the borrower has renovated the 24,000 sf unit significantly to improve marketability and is currently in negotiations for the 9,750 unit with a prospective tenant for a seven-year lease term. As of YE2013 the DSCR had increased to 1.54x from 1.26x in YE2012; however, the near-term performance is expected to decline with the loss of significant rental revenue.

The Hyland Manor loan (Prospectus ID#21, 1.13% of the pool) is secured by a 34-unit multifamily apartment building located in Coquitlam, British Columbia, approximately 20 kilometres east of downtown Vancouver. The loan was placed on the watchlist for a low DSCR due to a decrease in occupancy. As of YE2013 the DSCR declined to 0.74x from 1.08x at YE2012, as a result of occupancy declining to 62% in April 2014 from 79% at YE2012. The occupancy decline seems to be intentional on behalf of the borrower, as they are renovating vacant units in an effort to achieve an increased rental rate. According to the servicer, the borrower will commence leasing upon the completion of the work. DBRS has contacted the servicer regarding renovation plans, the estimated date of completion and the projected rent premium.

Evton Office (Prospectus ID#5) was removed from the servicer’s watchlist in April 2014, but is still being monitored closely by DBRS. The loan is secured by an eight-storey, 67,377 sf, multi-tenant, Class B office building located in Midtown Toronto. In November 2012, the largest tenant at the time, Procom Consultants (Procom), vacated its unit upon lease expiration. Procom formerly occupied 32.6% of the NRA; however, their contracted rental rate was considered below market. The cash flow decline resulted in a DSCR of 0.69x at YE2013, compared to YE2012 when the property was 90% occupied and reported a DSCR of 1.27x. However, according to the June 2014 rent roll, the property was 88% occupied with an average rental rate of $20.00 per sf (psf) compared to the Class B Office Building submarket, in Midtown Toronto, which had a rate of $17.80 psf according to the Collier’s Q2 2014 Office Statistics Report. Although the property still has a 12% vacancy rate compared to the average vacancy rate of 3.2% within the submarket, the property seems to be heading in the right direction with respect to leasing activity. According to the June 2014 rent roll, eight tenants, representing 49.44% of the NRA, have signed new leases or renewed leases in 2014. The largest two tenants represent 26.2% of the NRA, have an average rental rate of $18.50 psf and have leases that do not expire until 2019 and 2024. The loan is sponsored by Evton Real Estate Fund LP, who specializes in an investment strategy of owning, operating and diversifying smaller units with high-rate premiums in mid-size Class B office properties within the area.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction including details on the largest loans in the pool. The August 2014 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North America Surveillance Methodology (November 2012), which can be found on our website under Methodologies.