DBRS Places Three Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3 Under Review with Negative Implications

DBRS Limited (DBRS) has today placed three classes of Commercial Mortgage Pass-Through Certificates Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3 Under Review with Negative Implications as follows:

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

In addition, DBRS has confirmed the remaining classes with Stable trends as listed below:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class X at AAA (sf)

DBRS does not rate the first loss piece, Class H.

DBRS has placed Class E through Class G Under Review with Negative Implications due to the concerns and uncertainties surrounding three loans that were recently transferred to special servicing in February 2016 due to imminent default. The loans are secured by multifamily properties located in Fort McMurray, Alberta, and collectively represent 8.8% of the current pool balance. The details of the loans are discussed below.

At issuance, the transaction consisted of 38 loans secured by 43 properties. As of the March 2016 remittance report, 35 loans remain in the pool as three loans prepaid in January 2016 ahead of the respective loan maturities in 2019. The aggregate outstanding principal balance of the trust is $223.2 million, which represents a collateral reduction of 10.9%. Loans representing 71.0% of the pool are reporting YE2014 financials and one loan, representing 4.1% of the pool has trailing 12-month May 2015 financials. The remaining loans are reporting YE2013 financials. Based on the most recent financials available, the top 15 reported a weighted-average (WA) amortizing debt service coverage ratio (DSCR) of 1.52 times (x) with a WA debt yield of 10.6%. In addition, the top 15 loans experienced a WA net cash flow growth of 12.8% over the DBRS underwritten figures. As of the March 2016 remittance, there are three loans in special servicing and one loan is on the servicer’s watchlist, representing 8.8% and 4.2% of the current pool balance, respectively. The specially serviced loans and watchlisted loan are highlighted below.

The Lunar and Whimbrel Apartments (Prospectus ID#10), Snowbird and Skyview Apartments (Prospectus ID#11) and Parkland and Gannet Apartments loans (Prospectus ID#17) are secured by multifamily properties located in Fort McMurray, Alberta. The loans were transferred to the special servicer in February 2016 due to imminent default as the borrower has requested for temporary relief on their debt obligation. According to the January 2016 rent roll, occupancies at the subject properties ranged from 52.4% to 69.4%, which is a significant decrease from the YE2014 occupancies, which ranged from 76.2% to 85.7%. In addition to the increased vacancy, the average rental rates have declined from the YE2014 levels. Across the three loans, one-bedroom units, two-bedroom units and three-bedroom units reported an average rental rate on a per-unit basis of $1,379, $1,515 and $2,121, respectively, according to the January 2016 rent rolls. In comparison, the YE2014 rent roll reported average rental rates for one-bedroom units, two-bedroom units and three-bedroom units as $1,604, $1,866, and $2,435, respectively. According to Canada Mortgage Housing Corporation, as of October 2015, the Wood Buffalo Municipal Region reported an average vacancy rate of 29.4%, which is an increase from the October 2014 average vacancy rate of 11.8%. Also, the average rental rate for all unit types was reported at $1,761 per unit, a decrease from the October 2014 average rental rate of $2,013 per unit. According to a January 2016 report published by the Alberta government, the oil and gas sector lost 25,000 jobs in Alberta between December 2014 and October 2015, while the construction sector, a closely related industry in the province, lost 18,000 jobs for the same period. The decline in market performance was anticipated as the condition of the Canadian energy sector has weakened in recent years. Consequently, the underlying assets were adversely affected as well as the sponsor’s financial condition given its large exposure to the market.

According to Lansborough Real Estate Investment Trust’s (LREIT, the full recourse sponsor) 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 million and a cash deficiency from operating activities of $6.5 million. LREIT published a March 2016 press release stating 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, which has 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.) amounting to approximately $200,000 and property management payments owed to Shelter Canadian Properties Limited (SCPL) of approximately $100,000. In terms of the revolving loan from Manitoba Ltd., in July 2015, the loan was renewed 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 to aid in the stabilization of LREIT’s operations. This loan also has a partial guarantee of 25% of the loan balance by Manitoba Ltd.

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 $14.8 million for the Lunar and Whimbrel properties, $13.7 million for the Snowbird and Skyview properties and $11.2 million for the Parkland and Gannet properties. DBRS expects the value of the loans to have declined significantly from issuance due to the general economic decline in the area. Given the uncertainty surrounding the strategy and timing of the resolution of the loans, the poor market conditions and the ongoing concern of LREIT’s ability to rebound from its operation shortfalls, the loans were modelled with stressed cash flows to inflate the credit enhancement levels across all rating categories.

The Sherbrooke Street Office loan (Prospectus ID#6, 4.2% of the current pool balance) is secured by a Class B office building in the Le Plateau – Mont Royal borough of Montréal, Québec. This loan was originally placed on the watchlist in September 2014 because the former largest tenant, Aro Inc. (Aro), previously occupying 32.8% of the net rentable area (NRA), exercised its early termination option and vacated the property in May 2015. According to the March 2015 rent roll, the property was 95.9% occupied; however, this figure includes Aro in occupancy. In addition, tenants representing 53.7% of NRA have leases that expired or will be expiring in 2016, including the second- and third-largest tenants – Conservatoire Lasalle (14.5% of NRA, lease expired in May 2015) and College April Fortier Inc. (6.4% of NRA, lease expires in December 2016), respectively. As of March 2016, Altus listed 84,144 square feet (sf) of space as available, which included a portion of Aro’s former space and Conservatoire Lasalle’s space. Occupancy could be as low as 48% when excluding Aro and Conservatoir Lasalle. DBRS has reached out to the servicer for confirmation of the departure of the large tenants and details regarding the leasing activity at the property. According to Cushman & Wakefield, the YE2015 average vacancy for the East End Montréal submarket was at 17.1%, which is an increase from the Q1 2015 level of 15.6%. The YE2015 submarket average rental rate was $26 per square foot (psf), which is above the average rental rate at the property, which as of the March 2015 rent roll, was $15 psf. The YE2014 operating statement analysis report cited an amortizing DSCR of 1.77x, which is an increase from the YE2013 DSCR of 1.76x and DBRS underwritten DSCR of 1.16x. The loan was modelled with an elevated probability of default to reflect the anticipated cash flow decline following the departure of two large tenants. The loan benefits from full recourse to an experienced sponsor with a large portfolio of commercial real estate, specializing in Québec markets. This loan is cross-collateralized and cross-defaulted with two other properties located in Québec.

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.