DBRS Confirms Eight, Downgrades Two Classes of Institutional Mortgage Securities Canada Inc., 2012-2

DBRS Limited (DBRS) has today confirmed the ratings on the following eight classes of Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., 2012-2 (the Issuer):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class XP at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class XC 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 BB (low) (sf) from BB (sf)
-- Class G to B (low) (sf) from B (sf)

DBRS has also assigned Negative trends to Classes F and G.

The rating downgrades and Negative trend assignments reflect DBRS’s concerns surrounding the third-largest loan, Lakewood Apartments (Prospectus ID#3; 8.3% of the pool), which is secured by a multifamily property located in Fort McMurray, Alberta. The loan was transferred to the special servicer in February 2016 for imminent default. When the loan transferred, DBRS placed the Class E, F and G certificates Under Review with Negative Implications and assigned a Negative trend to the Class D certificates. These actions were most recently affirmed in December 2016.

The subject property has experienced cash flow declines over the past few years, driven by general economic difficulty in the Fort McMurray area. The YE2015 debt service coverage ratio (DSCR) was reported at 0.45 times (x), down from the Issuer’s underwritten figure of 1.42x. The borrower, an affiliate of Lanesborough Real Estate Investment Trust (LREIT), has been in discussions with the special servicer regarding stabilization plans and the loan was brought current as of the October 2016 remittance. The loan was transferred back to the master servicer in late January 2017 and has been placed on the servicer’s watchlist for monitoring.

In December 2016, DBRS toured the subject property 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 the property showing further decline from the YE2015 figures. The rent roll dated January 2017 showed an occupancy rate of 80.0% with average rental rates up from the prior year, but still below the averages in place at issuance. Given the sustained downturn in the Fort McMurray economy and 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 as well as the Negative trends assigned to the Class F and G certificates, particularly given the depressed liquidity in the area and the near-term maturity for the subject loan, scheduled in August 2017.

The loan benefits from full recourse to LREIT, Shelter Canadian Properties Limited (SCPL) and SCPL’s parent company, 2668921 Manitoba Ltd. It is noteworthy that, in its YE2016 financial statements, LREIT noted one forbearance agreement as well as 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, the pool had an aggregate balance of approximately $204 million, representing a collateral reduction of 15.1% since issuance as a result of the repayment of two loans (representing 5.5% of the original pool balance) and scheduled loan amortization. Five loans, representing 10.2% of the pool, are secured by fully defeased collateral, which are all scheduled to mature by YE2017. Prior to YE2017, four non-defeased loans, representing 21.2% of the pool, have scheduled maturity dates. These loans include Lakewood Apartments and three other loans that are generally showing healthy performance metrics, with the exception of the smallest, Clyde Avenue Industrial (Prospectus ID#23; 1.51% of the pool), which showed a YE2015 DSCR of 1.03x and is one of six loans on the servicer’s watchlist, collectively representing 21.8% of the pool.

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 rating assigned to Class XC materially deviates from the lower rating 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. The deviation for the notional class 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.