DBRS Confirms All Classes of Institutional Mortgage Securities Canada Inc., Series 2013-4

DBRS Limited (DBRS) has today confirmed the ratings on Commercial Mortgage Pass-Through Certificates, Series 2013-4 (the Certificates) issued by Institutional Mortgage Securities Canada Inc., Series 2013-4 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 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. DBRS does not rate the first loss piece, Class H.

The rating confirmations reflect the current performance of the transaction. The transaction closed in December 2013 and consists of 33 fixed-rate loans secured by 37 commercial properties. Since issuance, the transaction has experienced a collateral reduction of 4.3% as a result of scheduled amortization, with all of the original 33 loans remaining in the pool. The transaction is reporting a weighted-average (WA) debt service coverage ratio (DSCR) of 1.90 times (x) and a WA debt yield of 13.6% based on 97.1% of the loans reporting YE2014 financials. The YE2014 performance metrics for the overall pool compares with the DBRS underwritten (UW) term DSCR and term debt yield at issuance of 1.39x and 9.3%, respectively. The top 15 loans are also performing well with a reported WA DSCR and WA debt yield as of YE2014 of 1.64x and 10.2%, respectively. Additionally, the top 15 loans reported a healthy WA net cash flow growth of 14.8% at YE2014 from the DBRS UW figures.

At the November 2015 remittance, there are two loans on the servicer’s watchlist, representing 4.3% of the current pool balance. The first loan, Prospectus ID#17 Place Toulon, representing 2.2% of the current pool balance, is secured by a 78,717 square foot (sf) Class B office building with ground-floor retail located in Montréal, Québec. At YE2014, the property was 100% occupied. However, the loan has been placed on the watchlist as the space occupied by the largest tenant, McGill University (38.0% of NRA), has gone dark, bringing physical occupancy down to 62.0%. According to the servicer, it is expected that McGill University will continue to pay rent until its lease expiration in April 2017. Altus Insite shows a vacancy rate of 21.6% for the ten Class B office buildings of similar size to the subject within the Downtown-West Montréal market. As of YE2014, the DSCR for this loan was 1.77x, which represents an increase in the DSCR from YE2013 of 1.26x. Removing the revenue for the dark tenant implies an approximate DSCR of 0.80x as based on the reported figures for YE2014.

The second loan on the watchlist is Prospectus ID#18 Torbay Mall, representing 2.2% of the current pool balance. This loan is secured by an 83,175 sf neighbourhood shopping centre located in the City of St. John’s, Newfoundland. The property is separated by two pad sites with Shoppers Drug Mart and Tim Hortons that are on ground leases. Similar to the Place Toulon loan, the space occupied by the largest tenant, SNC-Lavalin (52.3% of NRA; rated BBB with a Stable trend by DBRS), has gone dark. However, it is expected that they will continue to pay rent until their lease expires in February 2018. SNC-Lavalin is an engineering and construction company operating in the mining and metallurgy, oil and gas, power and infrastructure industries. The company has been in a restructuring phase over the past year as it works to cut costs in the midst of falling energy prices. According to the servicer, SNC-Lavalin used the leased space mostly as flex project development space. As of the March 2015 rent roll, the subject was 98.8% leased with average rental rates of $11.73 per sf. The DSCR for the loan at YE2014 was 2.37x, representing an increase from YE2013 of 1.79x. Removing the revenue for the SNC-Lavalin space from the reported YE2014 figures implies an approximate DSCR of 1.25x for this loan.

Both watchlisted loans are a part of the Toulon Roll-Up, which is four separate loans secured by four properties within this transaction. The four loans are cross-collateralized and cross-defaulted and, when combined, make up the largest loan in the pool, representing 10.5% of the current pool balance. The other two loans in the roll-up are Prospectus ID#11 Place Rouanda, representing 3.3% of the current pool balance, and Prospectus ID#13 Yarmouth Mall and Shoppes (Yarmouth), representing 2.9% of the current pool balance. Place Rouanda is a 129,780 sf grocery-anchored shopping centre located in the City of Rouyn-Noranda in northwestern Québec, a market known for its strong mining industry. This loan reports a YE2014 DSCR of 1.15x compared with the DBRS UW DSCR of 1.27x. Yarmouth is a 239,268 sf grocery-anchored shopping centre located in Yarmouth, Nova Scotia. It is the only enclosed shopping centre within the town and as of YE2014, the DSCR for the loan is 2.61x compared with the DBRS UW DSCR of 1.80x. The WA DSCR of the roll-up based on as-is cash flow at YE2014 is 1.98x with a WA debt yield of 11.2%. Even with the elevated risks associated with the watchlisted loans, according to the DBRS adjustments to the in-place cash flow to reflect the potential loss of the respective dark tenants’ rents, the WA DSCR is 1.50x. These loans are sponsored by Toulon Development Corporation, which has been involved with the commercial real estate industry for over 40 years with experience in Eastern Canada and U.S. markets. These loans are non-recourse to the borrower. DBRS will continue to monitor these loans closely and will provide updates when they become available.

At issuance, DBRS shadow-rated one loan as investment grade: Prospectus ID#1 Calloway Courtenay, representing 8.8% of the current pool balance. DBRS confirms with this review that the performance of this loan remains consistent with investment-grade-loan characteristics.

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 and loans on the servicer’s watchlist. The November 2015 Monthly CMBS 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.

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.