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

DBRS, Inc. (DBRS) has today maintained the Under Review with Negative Implications status on the following class of Commercial Mortgage Pass-Through Certificates Series 2014-5 issued by Institutional Mortgage Securities Canada Inc., 2014-5:

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

The rating for Class G does not carry a trend.

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). The loan represents the A-2 portion of a pari passu loan, which had an original aggregate balance of $31.0 million. The A-1 piece, which had an original balance of $23.0 million, was included in the IMSCI 2014-5 transaction. The loan was transferred to the special servicer because the borrower advised that debt service obligations could no longer be met, given the cash flow declines at the property, driven by general economic difficulty in the Fort McMurray, Alberta, area. As of the November 2016 remittance report, the loan was brought current after typically running between 30 and 60 days delinquent. DBRS received the borrower’s October 2016 year-to-date unaudited financial statements from the servicer, which reported an operating loss of $1.8 million. The reported loss suggests that the borrower was able to bring the loan current through funds derived from alternative sources; DBRS has requested further confirmation from the special servicer.

Prior to the loan’s transfer to special servicing, the loan was being monitored for property performance declines related to the downturn in the oil industry over the past few years. Following the May 2016 wildfire, which, according to the special servicer, only caused incidental damage to the subject property, occupancy has improved as of the November 2016 rent roll to 80.9%, up from the July 2016 occupancy rate of 72.9%. However, rental rates declined during that period from $2,088 per unit in July to $1,526 per unit in November. According to the Canada Mortgage Housing Corporation, as of October 2015, the Wood Buffalo Municipal Region reported an average vacancy rate of 29.4%; the average rental rate for all unit types was reported at $1,761 per unit.

There has not been an updated appraisal for the property since issuance, as the special servicer declined to order new files until the loan reached 90 days delinquency (which has not occurred to date), in accordance with the Pooling and Servicing Agreement (PSA). While this approach is in line with the guidelines set forth in the PSA, DBRS believes it is uncommon for a servicer to delay ordering an appraisal when existing loan performance issues have the potential to be long term, which DBRS believes to be the case with this loan. The appraised value of the property at issuance was $68.8 million. DBRS expects the values to have declined significantly since that time, given the property’s performance decline in recent years and the general economic difficulty in the area.

The loan has full recourse to Lanesborough Real Estate Investment Trust (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 Q3 2016 financial statements, LREIT reported total assets of $262 million and total liabilities of $263 million, resulting in a deficit of $1.1 million. In addition, LREIT reported a loss before discontinued operations of $10.6 million for the three months ending September 30, 2016, but reported an income of $2.3 million for the nine months ending September 30, 2016. In conjunction with the subject loan’s transfer to special servicing, seven other assets located in Fort McMurray and secured by DBRS-rated commercial mortgage-backed security (CMBS) loans in LREIT’s portfolio were also transferred to special servicing for similar issues. All of these loans are current as of the November 2016 remittance. According to LREIT’s Q3 2016 financial statements, LREIT sold three properties in 2016, including Beck Court, Willowdale Gardens and Elgin Lodge, all of which are apartment buildings or retirement homes respectively located in Yellowknife, Northwest Territories; Brandon, Manitoba; and Port Elgin, Ontario. With these sales, LREIT’s portfolio is almost entirely located in Fort McMurray. The narrative in the financial statement states that property sales were completed to reduce LREIT’s liabilities and fulfill debt obligations. During Q1 2016, 12 mortgages secured by 13 LREIT-owned properties in Fort McMurray were in default, but as per the Q3 2016 financial statement, LREIT was able to reduce and/or defer the debt service payments, as well as to negotiate with lenders to modify the loan terms and/or forbearance agreements. LREIT notes that it will continue to rely on its lenders to provide breathing room in the environment of sustained economic difficulty for the area.

Although the subject loan and other CMBS were recently brought current, with the special servicers indicating that the loans are expected to transfer back to the master servicer following a monitoring period in early 2017, the general outlook for these assets is significantly depressed, particularly given the upcoming maturity for most of LREIT’s CMBS book in the next 18 to 24 months. As the lending environment is essentially frozen in the area, given the general economic decline and no room for significant improvement in sight for the near term, and given LREIT’s generally difficult economic position, finding replacement loans for these properties will be challenging to say the least. As such, it is likely the special servicer will see these and the other CMBS loans again and loan modifications could be necessary. As such, DBRS maintains the bond as previously listed Under Review with Negative Implications to reflect the increased risk and general uncertainty surrounding the subject loan. Given the general lack of concrete information on the status of the loan’s workout and the current financial performance for the collateral property, DBRS has coordinated a trip to Fort McMurray with the special servicer to tour this and other properties secured by DBRS-rated CMBS debt and to gather information about the current performance outlook for both these assets and the market in general. These tours will take place in mid-December, and shortly following that visit, DBRS will bring this and the other related CMBS transactions back up for review to incorporate the information gathered as part of the visit.

For more information on this transaction and supporting data, please log into DBRS CMBS IReports at www.ireports.dbrs.com. DBRS continues to monitor this transaction monthly with periodic updates provided in the DBRS CMBS IReports platform.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are the North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (October 2016), which can be found on our website under Methodologies.

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