DBRS Confirms Eight, Downgrades Two Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3

DBRS Limited (DBRS) has today confirmed the ratings on the following eight classes of the Commercial Mortgage Pass-Through Certificates Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3 (the Issuer):

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

All trends are Stable. In addition, DBRS has downgraded the following two classes in the transaction:

-- Class F to B (sf) from BB (sf)
-- Class G to B (low) (sf) from B (sf)

DBRS has also assigned a Negative trend to Classes F and G.

The rating downgrades and Negative trend assignments reflect DBRS’s concerns surrounding three loans secured by multifamily properties in Fort McMurray: Lunar and Whimbrel Apartments (Prospectus ID#10; 3.2% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11; 3.0% of the pool) and Parkland and Gannet Apartments (Prospectus ID#17; 2.6% of the pool). These loans collectively represent 8.8% of the current pool balance and all three were transferred to special servicing in February 2016 as a result of imminent default. When the loans transferred, DBRS placed the Class E, F and G certificates Under Review with Negative Implications, a status that was most recently affirmed in December 2016.

The collateral properties have been negatively affected by the sustained downturn in the Fort McMurray economy with the YE2015 debt service coverage ratio (DSCR) well below 1.0 times (x) for each loan. The borrower, an affiliate of Lanesborough Real Estate Investment Trust (LREIT), has been in discussions with the special servicer regarding stabilization plans and the loans were brought current as of the October 2016 remittance. The loans were transferred back to the master servicer in late January 2017 and have been placed on the servicer’s watchlist for monitoring.

In December 2016, DBRS toured the subject properties along with the other LREIT owned multifamily assets located in Fort McMurray. These assets were also in special servicing at the time and all are secured across this and three other IMSCI transactions. DBRS and an Issuer representative met with a representative of the sponsor’s management company and, during those meetings and in discussions with other area professionals, DBRS gathered information about the outlook for the local economy and the prospects for improvement, given the construction that is expected to begin in the spring for damage resulting from the wildfires that swept the area in May 2016. Overall, the feedback was tepidly optimistic for some improvement in the near term with the medium- to longer-term outlook harder to gauge before the energy markets begin to show signs of significant recovery.

Following the visit in December, the Issuer provided YE2016 analysis with cash flow estimates for each property showing further decline from the YE2015 figures. Occupancy rates as of the January 2017 rent rolls showed a range of 55.6% to 65.3%, relatively flat from the figures at February 2016. Average rental rates remain well below the issuance figures at each property. Given the sustained downturn in the Fort McMurray economy with only moderate recovery forecast for the near to medium term, it is DBRS’s expectation that property cash flows will continue to be depressed and, as such, a stressed cash flow scenario was applied in the analysis for these rating actions. The resulting analysis supports the rating downgrades and Negative trends assigned to the Class F and G certificates, particularly given the depressed liquidity in the area and the relatively near-term maturity for the Fort McMurray multifamily loans, scheduled in February 2018.

The loans benefit from full recourse to LREIT and a partial-recourse guarantee (25.0%) to 2668921 Manitoba Ltd. It is noteworthy that, in its YE2016 financial statements, LREIT noted one forbearance agreement and four other agreements that had been negotiated with lenders for five outstanding mortgage loans secured by properties in Fort McMurray to reduce the monthly debt service expense for the balance of the mortgage terms.

As of the March 2017 remittance, six loans are on the servicer’s watchlist, representing 20.5% of the pool balance. Three of those loans are the previously discussed LREIT loans while the other three loans, representing 11.7% of the pool, are on the watchlist for occupancy declines at the respective collateral properties. All three of those loans have full recourse to BTB Real Estate Investment Trust.

DBRS has provided updated loan-level commentary and analysis for larger and/or pivotal watchlisted loans as well as for the largest 15 loans in the pool in the DBRS CMBS IReports platform. To view these and future loan-level updates provided as part of DBRS’s ongoing surveillance for this transaction, please log into DBRS CMBS IReports at www.ireports.dbrs.com.

The ratings assigned to Classes E, F and X materially deviate from the lower ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. Specifically for Classes E and F, the deviation is warranted because of the loan-level event risk. As for the notional class, the deviation is warranted as it is less likely to be adversely affected by collateral credit losses supported by historical performance of Canadian CMBS, in which total losses in the sector are less than 0.01% since inception in 1998.

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 principal methodologies are North American CMBS Rating Methodology (January 2017) and CMBS North American Surveillance (December 2016), which can be found on dbrs.com under Methodologies.

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