DBRS Confirms Eight Classes and Maintains One Class of Institutional Mortgage Securities Canada Inc., Series 2014-5 Under Review with Negative Implications

DBRS Inc. (DBRS) has today confirmed the following classes of Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., 2014-5:

-- 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)

All trends are Stable

In addition, DBRS has maintained the Under Review with Negative Implications status on the following Class in the transaction:

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

DBRS has maintained Class G Under Review with Negative Implications because of concerns surrounding the Nelson Ridge loan (Prospectus ID #17, 2.9% of the pool), which was transferred to the special servicer in February 2016 because of imminent default. The uncertainty with regard to the loan’s resolution has increased in recent months because of the wildfire activity in Fort McMurray, Alberta, where the property is located. The trust loan represents the A-2 piece of a $31.0 million pari passu note, with the A-1 piece, which had an original balance of $23.0 million, secured in the IMSCI 2013-4 transaction. The whole loan also includes subordinate debt of $4.5 million. This loan is discussed in further detail below.

The transaction collateral consists of 36 fixed-rate loans secured by 50 commercial properties. Over the last 12 months, four loans have repaid from the trust, including Listowel Anchored Retail (Prospectus ID#29), Toronto Industrial (Prospectus ID#30), Toronto Anchored Retail (Prospectus ID#8) and Montreal Office (Prospectus ID#20). Since issuance, five loans have repaid in full, with a collateral reduction of 17.4% for the overall pool since closing.

As of the June 2016 remittance, there are two loans on the watchlist, representing 7.0% of the pool balance, with one loan in special servicing (as previously mentioned, representing 2.9% of the pool balance). There are three loans with maturities scheduled in 2017, representing 8.0% of the current pool balance. One of these loans, Prospectus ID #6, Victoria Office Tower (5.4% of the pool), is a Top Ten loan. The refinance profile is healthy overall, with a DBRS weighted-average (WA) exit debt yield for these loans of 11.7%, and a WA refinance debt service coverage ratio (DSCR) of 1.62 times (x). The loan in special servicing and the two loans on the watchlist are discussed further below.

The Nelson Ridge loan is secured by three four-storey apartment buildings consisting of 225 two-bedroom units located in Fort McMurray. The area is heavily reliant on the oil industry, and the weakened market has affected the performance of the property, leading to decreased cash flows. Furthermore, the property is located in the area where a widespread wildfire broke out in early May 2016, which led to an evacuation of the region through the first week of June 2016. According to the most recent update from the servicer, as of late June 2016, the property has experienced smoke damage and remains vacant. The servicer estimated that repairs to the property could be completed by the beginning of July but advised that a full damage estimate had not been completed to date. According to the servicer, total initial cost estimates range from $15.0 million to $18.0 million for all affected properties (including the subject) in Fort McMurray and owned by Lanesborough Real Estate Investment Trust (LREIT). It has also been noted that an insurance claim can be filed that will cover lost revenue from June 2016 up to the date that tenants are able to move back into their units for a maximum of 24 months. However, as occupancy prior to the wildfires was reported at 48.0% as of YE2015, which represents a significant decline from the prior year when occupancy was 88.0%, lost revenue supplements received as part of any insurance claim are likely to represent a fraction of the revenues in place at issuance. This decrease in occupancy has led to a YE2015 DSCR of 1.10x, down from the YE2014 DSCR of 1.63x and the DBRS underwritten (UW) DSCR of 1.81x.

Although the property could experience a short-term improvement in occupancy rates, as displaced residents will need housing through reconstruction, DBRS believes those improvements would likely be temporary in nature, with long-term performance improvements being dependent on the ability of the oil industry to rebound. The special servicer has not ordered an updated appraisal and reports one will be ordered pursuant to the guidelines prescribed in the pooling and servicing agreement, which call for an appraisal to be ordered once the loan reaches 90 days delinquent. As of the June 2016 remittance, the servicer lists the loan as 60 to 89 days delinquent. The appraised value at issuance was $68.8 million; however, DBRS expects the value to have declined significantly since that time, given the property’s performance declines in recent years and the general economic difficulty in the area.

The loan has full recourse to the sponsors: LREIT, 2668921 Manitoba Ltd. and Shelter Canadian Properties Limited. LREIT’s assets are heavily concentrated in Alberta, and the portfolio has been significantly affected by the downturn in the oil industry. In its Q1 2016 financial statements, LREIT reports total assets of $275.9 million and total liabilities of $286.4 million, resulting in a deficit of $10.5 million. In addition, LREIT reported a loss before discontinued operations of $5.8 million and a cash deficiency from operating activities of $1.5 million for the Fort McMurray properties for the three months ending March 31, 2016. In conjunction with the subject loan’s transfer to special servicing, seven other assets secured by DBRS-rated commercial mortgage-backed security loans in LREIT’s portfolio were also transferred to special servicing for similar issues leading to imminent default. According to LREIT’s Q1 2016 financial statements, all 12 mortgages with an aggregate balance of approximately $194.0 million and secured by 13 LREIT-owned properties in Fort McMurray are in default. LREIT notes that there are plans to negotiate with the respective lenders to restructure the terms. Given the financial difficulty for the sponsor and the anticipated value decline as well as unknowns surrounding the property’s operating status and ability to rebound to historical performance levels, the loan was modelled with a significantly increased probability of default and loss severity, which directly influences the Under Review status for Class G. DBRS anticipates that, given the uncertainty regarding the workout for the subject loan, the Under Review status will remain in place for that Class for an extended period of time. DBRS will monitor the loan closely for developments and will take rating action as necessary.

The largest loan on the servicer’s watchlist is Fengate Industrial Portfolio (Prospectus ID#5, 5.7% of the current pool), which is secured by six industrial properties totalling 290,410 square feet (sf), constructed between 1972 and 1987. All properties are located in the Cambridge, Ontario, area. The loan was added to the servicer’s watchlist in August 2015 because of a drop in occupancy for the portfolio as a whole. Based on the February 2016 rent rolls, combined occupancy was approximately 69.4%, down from 89.0% at issuance. The servicer advises that the borrower (Skyline REIT) has provided a leasing update to show that several renewals have been secured for smaller tenants across the portfolio, but indicates that there are no significant prospects for the vacant spaces, with leasing efforts ongoing. The most recent inspection files, dated October 2015, indicate that there have been two major capital improvement projects completed for various buildings in the portfolio, including the installation of new concrete floor slabs at an estimated cost of $1.0 million and exterior fascia upgrades at an estimated cost of $200,000. The YE2015 DSCR was low at 1.02x, down from the YE2014 DSCR of 1.46x and the DBRS UW DSCR of 1.22x. The loan does benefit from full recourse to Skyline REIT. Given the declining performance of the portfolio and lack of prospects for the vacant space, DBRS modelled the loan with a stressed cash flow to reflect the increased risk to the trust.

The other loan on the servicer’s watchlist, Yonge Street Multifamily (Prospectus ID#31, 1.3% of the current pool) is secured by a mixed-use property located in Richmond Hill, Ontario. The property consists of 18 multifamily units as well as commercial space of 5,526 sf. The loan was added to the servicer’s watchlist in April 2016 because of its YE2014 DSCR of 0.98x (down from the DBRS UW DSCR of 1.29x), which was caused by an increase in vacancy to the commercial tenants in 2014, with the January 2015 rent roll file showing the multifamily units fully occupied and the commercial units 22.1% occupied. According to the servicer, a new daycare tenant, Safari Kid Canada Inc., signed a lease for approximately 66.0% of the previously vacant space as of October 2015, with a free rent allowance through June 2016. A leasing reserve of $300,000 was established at issuance, and the servicer advises that those funds are to be released at the end of the free rent period for the new tenant. DBRS expects cash flows to return to historical levels over the near term and will monitor the loan for developments.

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 June 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.

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.