DBRS Confirms Ratings on Institutional Mortgage Securities Canada Inc., Series 2011-1

DBRS Limited (DBRS) has today confirmed the ratings on the Commercial Mortgage Pass-Through Certificates Series 2011-1 issued by Institutional Mortgage Securities Canada Inc., Series 2011-1 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 (high) (sf)
-- Class E at BBB (sf)
-- Class X at AAA (sf)

All trends are Stable.

The rating confirmations reflect the transaction’s current performance, which remains in line with DBRS expectations at issuance. The collateral for the transaction consists of 16 fixed-rate loans secured by 16 retail properties across five provinces in Canada. As of the September 2015 remittance, the pool had a balance of approximately $191.8 million, representing a collateral reduction of 6.9% since issuance. For the loans that have year-end (YE) 2014 financial reporting available, the weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield were 1.58 times (x) and 11.4%, respectively. This is an improvement from the DBRS underwritten WA DSCR and WA Debt Yield of 1.34x and 9.1%, respectively.

The pool benefits from strong and experienced sponsors as all of the underlying properties are owned by either RioCan Real Estate Investment Trust (RioCan REIT) or Smart Real Estate Investment Trust (SmartREIT), formerly known as Calloway REIT. These entities are rated BBB (high) and BBB, respectively, by DBRS. Additionally, each loan has a full-recourse guarantee provided by its respective sponsor. There are no delinquent or specially serviced loans; however, the smallest two loans, representing 2.0% of the current pool balance, are on the servicer’s watchlist. The third-largest loan and the two loans on the servicer’s watchlist are highlighted below.

Sherbrooke SmartCentre (Prospectus ID#3, 10.0% of the current pool balance) is secured by a 210,000 square foot (sf) power center located in Sherbrooke, Québec. The property is located at the intersection of two major highways, approximately 150 kilometres east of Montréal. The property consists of five buildings that were built between 2005 and 2010. According to the April 2015 rent roll, the property was 100% occupied with the third-largest tenant, Michaels (representing 10.6% of the net rentable area (NRA)), occupying the space formerly leased to Best Buy. Best Buy left the property in February 2013, ahead of its scheduled lease expiration of January 2020. Michaels’ lease commenced in May 2015 and is scheduled to expire in May 2025. The rental rate for Michaels was unavailable as of the date of this press release but has been requested from the servicer by DBRS. Mark’s and Farhat Boutique, representing 5.0% and 0.8% of the NRA, respectively, have leases that will expire or have expired in 2015. The borrower has indicated that Mark’s exercised its renewal option and the lease extension is expected to be executed in the near term. Farhat Boutique left the property at its lease expiration of August 2015; however, the borrower is in discussions with Mark’s to expand and take over the space. This loan has full recourse to SmartREIT.

Cara 107th Avenue Edmonton (Prospectus ID#15, 1.26% of the current pool balance) is secured by a 12,000 sf retail property in Edmonton and at issuance, it was 100% occupied by Swiss Chalet and Harvey’s, representing 73.3% and 26.7% of the NRA, respectively. Both tenants had leases expiring in January 2024 but Swiss Chalet went dark in 2014. According to the servicer, the tenant will continue to pay rent and all operating expenses while the borrower decides if and when to retrofit the location to a new format restaurant. At this time, Cara has not indicated timing or plans to redevelop the site. According to the May 2014 site inspection, Harvey’s was in full operation at the time of inspection; however, two major competitors, Fat Burger Restaurant and DQ Grill & Chill Restaurant, were identified within close vicinity of the subject property. Since the property is located at the intersection of a major arterial route and a major retail node with a new retail and large office campus is located directly across the street, traffic at Harvey’s is not expected to decline. The YE2014 DSCR is unknown since 2014 financial reports were not available as of the date of this press release. The YE2013 DSCR was reported at 1.66x and the loan has full recourse to RioCan REIT. DBRS expects that the YE2014 and YE2015 performance figures to decline until Swiss Chalet or a new tenant resumes operation at the location. DBRS will continue to monitor this loan and provide updates as they become available.

Cara 97th Street Edmonton (Prospectus ID#16, 0.8% of the current pool balance) is secured by a 8,700 sf single-tenant retail property in Edmonton. This loan was placed on the servicer’s watchlist for the same reason as Cara 107th Avenue Edmonton in which Swiss Chalet went dark in 2014 ahead of its lease expiry in 2023. At issuance, it was known that Harvey’s was operating on a month-to-month lease, therefore, Harvey’s rental revenue was excluded in the DBRS underwriting. A new restaurant, Tofu House, took over Swiss Chalet’s space in early 2015 and DBRS has confirmed that the new tenant is in place and open for business. DBRS has asked the servicer for the replacement tenant’s lease terms and is currently awaiting a response. During the period when the space was dark, Swiss Chalet continued to pay full rent and operating expenses. According to the YE2014 operating statement analysis report (OSAR), the YE2014 DSCR was 2.39x, an increase from YE2013 DSCR of 1.56x and DBRS UW DSCR of 1.39x. This loan has full recourse to RioCan REIT. DBRS will continue to monitor this loan and provide updates as they become available.

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