DBRS Places Three Classes of Institutional Mortgage Securities Canada Inc., 2012-2 Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the following three classes of the Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., 2012-2 Under Review with Negative Implications:

-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

There is no trend for these rating actions.

DBRS has taken these actions because of the concerns and uncertainty surrounding the third-largest loan, Lakewood Apartments, which recently transferred to the special servicer in February 2016 because of imminent default. As of March 2016 remittance, this is the only loan is special servicing for the pool.

The Lakewood Apartments loan (Prospectus ID#3, 8.3% of the pool) is secured by a four-storey apartment building, which contains 111 units in total, comprising seven one-bedroom units and 104 two-bedroom units. The property is located in Fort McMurray, Alberta, situated in the Timberlea area within the Wood Buffalo Regional Municipality. The loan was originally placed on the servicer’s watchlist in May 2015 because of a low YE2014 debt service coverage ratio (DSCR) of 1.04 times (x). As of the YE2015 financials, performance has further declined to 0.45x and, according to the January 2016 rent roll, the property was 32.0% occupied with an average rental rate of $1,877 per unit compared with 79.0% occupied with an average rental rate of $2,788 per unit as of December 2014. The loan was transferred to the special servicer after the borrower provided notice of its inability to fund ongoing debt service payments and is currently due for March 2016 payments. Performance has deteriorated because of a substantial decline in occupancy, which is primarily a result of the economic difficulties in the region tied to the downturn in the global energy markets. According to the 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 as of October 2015 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, 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 in the same period. The decline in market performance was anticipated as the condition of the Canadian energy sector has weakened in recent years.

The loan has full recourse to the sponsors, Lanesborough Real Estate Investment Trust (LREIT), 2668921 Manitoba Ltd (Manitoba Ltd.) and Shelter Canadian Properties Limited (SCPL). According to LREIT’s YE2015 financial statements, it 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 within this transaction, which have an outstanding balance of payments owing of approximately $1.3 million. LREIT is also deferring interest payments on the revolving loan issued by Manitoba Ltd. amounting to approximately $200,000 and property management payments owed to 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.

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 $34.8 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, but 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.