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

DBRS Limited (DBRS) has today confirmed the ratings on 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 8.1% since issuance because of scheduled amortization and the payoff of one loan. As of the June 2015 remittance, the transaction consists of 30 loans. According to YE2014 reporting, the pool reported a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.37 times (x) and 9.8%, respectively. The transaction is concentrated as the largest ten loans represent 62.6% of the current pool balance. These loans reported a WA DSCR and WA debt yield of 1.39x and 9.7%, respectively.

There are currently six loans, representing 15.1% of the current trust balance, on the servicer’s watchlist. Four of these loans (11.9% of the trust balance) are secured by multifamily properties and were placed on the watchlist because of low DSCRs caused by increases in vacancy. The largest of the four, Lakewood Apartments (Prospectus ID#3, 8.0% of the current trust balance) is highlighted in greater detail below. The remaining three loans are cross-collateralized and cross-defaulted and are secured by the following multifamily properties: Colonial House (Prospectus ID#25, 1.4% of the current trust balance), St. John’s Apartments (Prospectus ID#31, 1.4% of the current trust balance) and Hyland Manor (Prospectus ID#31, 1.4% of the current trust balance). All are located within the Greater Vancouver Area and are sponsored by the same borrower, Western Investment Properties, LLC. The borrower undertook a renovation project during 2014 totalling approximately $850,000, which temporarily increased vacancy rates at each property; however, according to the April 2015 rent rolls, occupancy has stabilized at 92.3% with an average rental rate of $973 per unit. As of YE2014, the loans had a WA DSCR of 0.86x compared with 1.24x at issuance; however, performance is expected to improve with the recent gains in occupancy.

The Lakewood Apartments loan is secured by a 111-unit condominium apartment building located in Fort McMurray, Alberta. The four-storey property was constructed in 2007 and is situated in the Timberlea area, a portion of the Urban Service Area within the Regional Municipality of Wood Buffalo. The loan was placed on the servicer’s watchlist as of May 2015 because of a low YE2014 DSCR of 1.04x as a result of a decrease in rental revenue. According to the December 2014 rent roll, the property was 79% occupied with an average rental rate of $2,798 per unit compared with 97.3% and $2,092, respectively, at issuance. The local economy is largely driven by the energy industry and, as such, the decline in oil prices has decreased employment rates within the area, which has in turn affected the housing market substantially. According to the Canadian Mortgage Housing Corporation’s Spring 2015 Rental Market Report, Wood Buffalo County had an average rental rate of $1,884 per unit with a vacancy rate of 22.3% compared with $1,969 per unit and 7.0%, respectively, as of April 2014. Historically, occupancy rates decline during the cold season as work within the area is predominately seasonal. As a result, DBRS has modelled the loan with an elevated probability of default to capture the recent performance of the property and the current economic environment within the area.

The Clyde Avenue Industrial loan (prospectus ID#23, 1.52% of the pool) is secured by a 60,000 square foot (sf) industrial property located in Mount Pearl, Newfoundland and Labrador, approximately 12 kilometers northeast of St. John’s, Newfoundland and Labrador. The loan was placed on the servicer’s watchlist because of a substantial decrease in occupancy. As of April and May 2014, former tenants Domtar Corporation (Domtar; 16% of net rentable area (NRA) and Bird Design - Build (40% of NRA) vacated upon their respective lease expirations. According to the December 2014 rent roll, the property was 44% occupied by two tenants, RGR Enterprises Ltd. (24% of NRA with an April 2016 lease expiration) and TFI Transport 2 L.P. (TFI; 20% of NRA with a March 2015 lease expiration). Two new tenants, cumulatively representing 23% of the NRA, began paying rent as of April 2015; however, the servicer has not confirmed if TFI has renewed its lease or vacated upon lease expiration. The borrower has renovated a 24,000 sf unit significantly to improve marketability and is actively marketing the property. As of YE2014, the loan had a DSCR of 0.88x compared with the DBRS underwritten DSCR of 1.21x. The servicer noted that a leasing reserve in the amount of $230,000 was collected prior to loan closing and that a monthly lease reserve of $2,200 was established to combine for $300,000 prior to the expiration of Domtar and Bird Design. DBRS has contacted the servicer regarding leasing updates and reserve amounts.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The June 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.

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

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.

The applicable methodologies are CMBS North American Surveillance (January 2015) and North American CMBS Rating Methodology (June 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