DBRS Confirms Ratings of Institutional Mortgage Securities Canada Inc., Series 2015-6, Stable Trends

DBRS Limited (DBRS) has today confirmed the ratings of the Commercial Mortgage Pass-Through Certificates (the Certificates), Series 2015-6 issued by Institutional Mortgage Securities Canada Inc., Series 2015-6 (the Trust) 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 X at AAA (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class H.

The rating confirmations reflect that the transaction’s current performance remains in line with expectations since issuance in March 2015. The collateral consists of 47 fixed-rate loans secured by 64 commercial properties. At issuance, the transaction had a DBRS weighted-average (WA) debt service coverage ratio (DSCR) and a DBRS WA debt yield of 1.44 times (x) and 9.4%, respectively. To date, no loans have reported updated financials since issuance. Due to the 2015 securitization, financial reporting was not required until YE2015. According to the servicer, these financials can be expected in March or April 2016. As of the January 2016 remittance, the pool has an aggregate balance of approximately $318 million, representing a collateral reduction of approximately 2.2% since issuance due to scheduled loan amortization. The transaction benefits from a concentration of loans secured by high-quality properties as DBRS considers three loans, representing 18.7% of the pool, to be secured by properties with Above Average property quality. The transaction is also concentrated by 16 loans, representing 30.7% of the pool, which are located in either tertiary or rural markets. Furthermore, the Top 10 loans represent 55.6% of the overall pool. Transaction wide, 18 loans, representing 51.8% of the pool, have either full or partial recourse to their respective borrowers.

As of the January 2016 remittance, there are no loans in special servicing and no loans on the servicer’s watchlist. DBRS has highlighted the largest loan below.

The Distillery District Development loan (Prospectus ID#1, 7.7% of the pool) is secured by the borrower’s fee interest in a 391,771 square foot (sf) mixed-use property, located approximately 2.5 kilometers east of the Toronto central business district. The $25 million A-1 (controlling) note is secured in this transaction, while the $30 million A-2 and $18 million A-3 notes are secured in the REAL-T 2015-1 and REAL-T 2015-2 transactions, respectively. The ten-year, $85 million whole-loan is structured with a 25-year amortization period with loan proceeds used to refinance the existing property debt. The property is beneficially owned as a joint venture between DREAM Distillery District Retail LP (DREAM) and Cityscape Group (Cityscape), which is comprised of four smaller affiliated companies. The loan is indemnified and guaranteed to a limited amount of $22.5 million to both DREAM and Cityscape.

The property originally operated as a grist mill, prior to being converted into its use as the Gooderham and Worts Distillery from 1837 through 1990. During the 1990’s, the property was restored to become the largest film location in Canada. The subject property currently operates as a pedestrian-only, mixed use development, which is aligned closely with the local arts, culture and entertainment sectors. As of June 2015, excluding month-to-month tenants, the collateral was 94.0% occupied. The tenants at the Distillery District include a wide variety of unique boutiques, art galleries, restaurants, microbreweries, cafes and bars, as well as music and theatre venues. Additionally, select buildings house upstairs office space, which is primarily leased to tenants in marketing and creative-oriented industries. The two largest tenants include Toronto Artscape occupying 12.6% of the net rentable area through 2018 and the Young Center occupying 12.2% of the net rentable area (NRA) through 2024. Rollover is generally granular throughout the loan term, with the largest rollover occurring through 2016 when 22 tenants, representing 18.6% of the NRA have lease expirations. As such, DBRS has requested a leasing update from the servicer. According to CB Richard Ellis (CBRE’s) Q4 2015 Toronto Office MarketView, demand for Downtown office space picked up in Q4 2015 with overall vacancy reported at 4.7% with 187,768 sf of positive absorption throughout the quarter. The office vacancy in the subject’s Downtown East submarket was 4.9% with a net asking rate of $16.45 psf compared with vacancy of 6.8% with a net asking rate of $20.00 psf at YE2014. The decline in rental rates can be attributed to the new supply of 462,000 sf; however, DBRS recently spoke to a CBRE research analyst covering the submarket and was advised that asking net rents have been positively trending as most of the new supply has been leased up. The in-place office rent at the subject averages approximately $21.60 psf, which is higher than the submarket’s average, primarily as a result of high demand for the subject’s desirable location, as evidenced by the fact that nearly all office spaces at the subject are fully leased.

On February 9, 2016, DBRS walked the property around approximately 12:00 p.m. DBRS found the property to be in good condition, maintaining its opinion of the property at issuance given the historical and architectural significance and the quality of the restoration work, in addition to the desirable location situated within a trending urban area. During the tour, DBRS noted that not all of the space was fully leased; however, the management has previously indicated that this was by choice to maintain its integrity as an arts and culture district. All occupied spaces (excluding one) appeared to be operational with a fair amount of foot traffic given the time of day and the day of the week. DBRS spoke with one tenant, Biltmore Domicile (1.3% of the NRA through December 2019), which indicated that it was expanding its operations with the moving process already underway. Tenants include two art galleries, various office space users, a theatre and a number of retailers and restaurants. Many of these tenants have unique build-outs, with very creative and appealing interior designs showcasing the building’s architectural features. The surrounding area is comprised of the St. Lawrence Market, George Brown College and numerous multifamily condominiums – including the Pan Am Athletes’ Village, which is now in the process of being converted into residential condominiums. At issuance, DBRS underwrote the loan with a term DSCR and Debt Yield of 1.39x and 8.7%, respectively.

At issuance, DBRS assigned an investment-grade shadow rating to three loans, South Hill Shopping Centre (Prospectus ID#2, 6.6% of the pool), U-HAUL SAC 3 Portfolio (Prospectus ID#4, 5.8% of the pool) and Markham Town Square (Prospectus ID#10, 4.1% of the pool). DBRS has today confirmed that the performance of these loans remain consistent with the 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 February 2016 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.

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.

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