DBRS Confirms Seven, Downgrades Two Classes of Institutional Mortgage Securities Canada Inc., Series 2013-4

DBRS Limited (DBRS) has today confirmed the ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2013-4 issued by Institutional Mortgage Securities Canada Inc., Series 2013-4 (the Issuer):

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

All trends are Stable. DBRS has also downgraded the following ratings:

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

Classes F and G were also assigned Negative trends.
Classes C and D had previously been assigned a Negative trend to reflect the potential impact of the transfer of the Nelson Ridge loan (Prospectus ID#4; 7.1% of the pool) to special servicing in early 2016. The current status of that loan and DBRS’s outlook are discussed below.

These rating actions reflect DBRS’s view that the cash flow declines at the Nelson Ridge property have increased the risk to the Trust for that loan, which is part of a pari passu whole loan with an issuance balance of $31.0 million. The subject trust’s portion had an original balance of $23.0 million and the other note, which had an original balance of $8.0 million, was contributed to the IMSCI 2014-5 transaction. As of the March 2017 remittance, the whole-loan balance was $26.9 million ($119,402 per unit). Whereas the subject loan piece represents a relatively significant portion of the subject trust with 7.1% of the current pool balance, the other piece represents 2.9% of the current IMSCI 2014-5 pool balance, tempering the risk impact for that Trust with the collateral property’s performance declines in recent years.

In March 2016, following the transfer of the Nelson Ridge loan to special servicing, DBRS placed the Class E, F and G certificates Under Review with Negative Implications. That designation had been maintained and was most recently affirmed in December 2016. The loan, which is part of a pari passu whole loan secured by a multifamily property in Fort McMurray, Alberta, was transferred to the special servicer for imminent default in February 2016. The loan had previously been monitored on the servicer’s watchlist for occupancy and cash flow declines related to the downturn in the energy markets that has negatively affected the Fort McMurray and larger Alberta economy in recent years. The loan showed various stages of delinquency between March 2016 and September 2016 and was brought current with the October 2016 payment. The loan was transferred back to the master servicer in late January 2017. As occupancy and rental rates have remained depressed compared with issuance levels over the past several years, DBRS suspects that the loan was brought current with funds from property sales completed over the last year or so by the loan sponsor, Lanesborough Real Estate Investment Trust (LREIT).

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 that showed an in-place net cash flow estimate below the YE2015 figure, which showed a debt service coverage ratio (DSCR) of 1.10 times (x). The January 2017 rent roll showed an occupancy rate of 79% with an average rental rate of $1,472 per unit. Comparatively, at issuance, the property was approximately 94% occupied with an average rental rate of $2,300 per unit. 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 ratings 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 Nelson Ridge loan, scheduled in December 2018. The loan does benefit from full recourse to the sponsor and guarantors. 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, there were seven loans, representing 24.3% of the pool balance, on the servicer’s watchlist. The largest loan on the watchlist is the Nelson Ridge loan while the second-largest loan on the watchlist is Newbold Industrial Park (Prospectus ID#7; 4.1% of the pool). It is not clear why the Newbold loan is on the watchlist as the servicer reports a January 2017 occupancy rate of 76% and a YE2015 DSCR of 1.49x compared with the issuance occupancy rate of 79% and the Issuer’s underwritten DSCR of 1.44x. The watchlist also includes another Fort McMurray loan, Franklin Suites (Prospectus ID#12; 3.2% of the pool). That loan is secured by a full-service hotel and is scheduled to mature in 2023. The YE2015 DSCR was reported at 0.96x with cash flows down with the depressed local economy.

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 Class 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; in this case, the deviation is warranted on the notional class 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.