DBRS Places Two Classes of Institutional Mortgage Securities Canada Inc., Series 2013-4 Under Review with Negative Implications

DBRS Limited (DBRS) has today placed two classes of the the Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., Series 2013-4 Under Review with Negative Implications as follows:

-- Class F at BB (sf), Under Review with Negative Implications
-- Class G at B (sf), Under Review with Negative Implications

There is no trend for these rating actions

DBRS has taken these actions because of concerns and uncertainty surrounding the fourth-largest loan, Nelson Ridge, which was recently transferred to the special servicer in February 2016 because of imminent default. The loan is one piece of a $31.0 million pari passu note with an issuance balance of $23.0 million secured in this transaction and $8.0 million in the IMSCI 2014-5 transaction. The whole loan also includes subordinate debt of $4.5 million.

The Nelson Ridge loan (Prospectus ID#4) represents 7.0% of the current pool balance as of the March 2016 remittance and is secured by three four-storey apartment buildings consisting of 225 two-bedroom units located in Fort McMurray, Alberta. The servicer advises that the property was 45.8% occupied as of January 2016, which is a decrease from the YE2014 occupancy of 88.0%. As of March 2016, the property management and one of the sponsors, Shelter Canadian Properties Limited (SCPL), listed an asking rental rate of $1,300 per unit on its website, which is a significant decline from the August 2013 rental rate of $2,300 per unit. According to Canada Mortgage Housing Corporation, as of October 2015, the Wood Buffalo Municipal Region reported an average vacancy rate for two-bedroom units of 30.7%, which is an increase from the October 2014 rate of 10.6%. Also, the average rental rate for the Region was reported at $1,841 per unit, a decrease from the October 2014 rate of $2,118 per unit. According to a January 2016 report published by the Alberta government, 25,000 jobs were lost in Alberta’s oil and gas sector between December 2014 and October 2015, while the construction sector, a closely related industry in the province, saw 18,000 jobs lost for the same period. The decline in market performance was anticipated as the condition of the Canadian energy sector has weakened in recent years.

According to Lansborough Real Estate Investment Trust’s (LREIT, one of the three sponsors) YE2015 financial statements, LREIT reported total assets of $278.5 million and total liabilities of $281.4 million, resulting in a deficit of $2.9 million. In addition, LREIT reported a loss before discontinued operations of $96.0 million and a cash deficiency from operating activities of $6.5 million. The cash flow difficulties have developed in a time of low oil prices and the resulting declining economic environment in Western Canada, where the firm’s real estate holdings are heavily concentrated. LREIT published a March 2016 press release stating that the YE2015 net operating income is not sufficient to fund its debt service obligations; therefore, LREIT defaulted on several mortgage loans not secured in this transaction, with an outstanding balance of payments owing of approximately $1.3 million. LREIT is also deferring interest payments on the revolving loan issued by 2668921 Manitoba Ltd. (Manitoba Ltd., one of the three sponsors) amounting to approximately $200,000 and property management payments owed to SCPL of approximately $100,000. With regard to the revolving loan from Manitoba Ltd., the loan was renewed in July 2015 for an additional three years with an expiration of July 2018, and LREIT is able to borrow up to $18.0 million. SCPL has provided concessions pertaining to property management and service fees to allow LREIT to temporarily reduce operating costs. LREIT’s management has undertaken other initiatives to improve its financial stability, including the sale of two properties in 2015 totalling net cash proceeds of $30.8 million, the repayment of an interest-only mortgage loan of $7.5 million funded by advances from Manitoba Ltd.’s revolving loan, the reduction of operating and capital expenditures, as well as the deferral of discretionary expenditures to decrease long-term liabilities. Manitoba Ltd. and SCPL have been cooperative and will continue to provide financial support in hopes of aiding in the stabilization of LREIT’s operations.

The special servicer has not received an updated appraisal for the property to date; DBRS has requested the file be forwarded as received. The appraised value at issuance was $68.8 million; however, DBRS expects the value to have declined significantly given the general economic decline in the area. DBRS does note that the loan benefits from full recourse to three entities, including Manitoba Ltd. and SCPL; however, DBRS also acknowledges the increased risks associated with the declining energy market that could minimize the ability of those entities to cover any shortfall that is likely in the event of a disposition in the near term.

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 March 2016 monthly 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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.