DBRS Confirms Ratings on Institutional Mortgage Securities Canada Inc., Series 2012-2

DBRS Limited (DBRS) confirmed the Commercial Mortgage Pass-Through Certificates, Series 2012-2 (the Certificates) issued by Institutional Mortgage Securities Canada Inc., Series 2012-2 (the Issuer) as follows:

-- 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)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable, with the exception of Class F and G, for which DBRS has maintained Negative trends to reflect the concerns surrounding the third-largest loan, Lakewood Apartments (Prospectus ID#3, 9.6% of the pool), which is secured by an apartment building located in Fort McMurray, Alberta.

As of the November 2017 remittance, 18 loans remained in the pool with an aggregate principal balance of $151.7 million, representing a collateral reduction of 36.8% since issuance as a result of scheduled loan repayments and amortization. Since DBRS’s last review in March 2017, 11 loans have repaid in full, representing a principal repayment of $52.2 million, or a 21.7% collateral reduction since that time. To date, 15 loans (93.7% of the pool) have reported YE2016 financials, while all remaining loans have reported YE2015 financials. Based on the most recent year-end financials, the transaction had weighted-average (WA) debt service coverage ratio (DSCR) and WA Debt Yield of 1.31x and 11.5% (excluding Lakewood Apartments; 1.41 times (x) and 12.4%), respectively, compared with the DBRS Term DSCR and Debt Yield of 1.36x and 9.2%, respectively. The largest loan in the pool, Cedars Apartments (13.1% of the pool), which reported a YE2016 DSCR of 1.10x, is one of the four loans, representing 41.9% of the pool, currently on the servicer’s watchlist.

The Lakewood Apartments loan transferred to special servicing in February 2016 for imminent default. Ultimately, the loan was brought current in October 2016, and following a monitoring period, the loan was returned to the master servicer in late January 2017. However, the loan recently transferred back to special servicing after the loan failed to repay at the scheduled final maturity date of November 1, 2017. The special servicer has confirmed that the maturity date has been extended by two years, through November 2019, and that all other terms have been maintained from issuance. As part of the extension agreement, the borrower paid the principal balance of the loan down by $2.0 million, with those funds applied with the October 2017 remittance. The loan is also subject to three future principal curtailments of $750,000 each that are to be paid by the borrower through the next 18 months. The loan will remain in special servicing through the extended maturity period.

The property has seen significant performance declines since issuance, which is a direct result of the decline in the energy markets that have significantly affected both the local Fort McMurray and larger Alberta economy in recent years. According to the August 2017 rent roll, the property had an occupancy rate of 73.0% and an average rental rate of $1,649 per unit, compared with the respective figures of 87.0% and $2,092 per unit at issuance. Over the last few years, the property’s occupancy rate has fallen as low as approximately 30% as of December 2015 before generally hovering between 70% and 80% for the last year. The property has experienced some performance uptick with the construction in the area following the wildfires that tore through the area in early 2017, but occupancy and average rental rates still remain well below issuance levels. As of the trailing 12-month period ending June 2017, the servicer reported a DSCR of 0.59x compared with the coverage ratios of 0.45x at both YE2016 and YE2015, 1.04x at YE2014, and the DBRS Term DSCR at issuance of 1.40x.

The loan has full recourse to the sponsors, 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 2017 unaudited financial statements, LREIT reported total assets and total liabilities of $230.7 million and $255.7 million, respectively, resulting in a deficit of $25.0 million. In addition, LREIT reported a loss before discontinued operations of $20.5 million for the nine months ending September 30, 2017. Based on the Q3 2017 updated appraisals, LREIT’s property portfolio was valued at $287.4 million, down from $312.5 million at YE2016, and at this point in time, LREIT’s revolving loan facility from 2668921 Manitoba Ltd. had been drawn to its maximum balance of $30.0 million.

Although the loan was returned to the special servicer for the maturity default, DBRS believes the structured loan modification that includes an initial paydown of $2.0 million, with an additional $2.25 million that will be repaid over the next 18 months, is a positive development given all the challenges the sponsor faces in the depressed economy and sustained cash flow declines within the sponsor’s portfolio. In addition, the sponsor continues to fund debt service shortfalls out of pocket and has remained cooperative with the servicer throughout the two transfers to special servicing. DBRS will continue to monitor the loan for developments through the extended maturity and has applied a highly stressed scenario for the loan in its analysis for this review.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

DBRS has provided updated loan-level commentary and analysis for larger and/or pivotal specially serviced and watchlisted loans in the transaction, as well as for the Top 10 loans where updated performance information from issuance was available, in the DBRS Viewpoint platform. Registration is free. To view these and future loan-level updates provided as part of DBRS’s ongoing surveillance for this transaction, please register or log into DBRS Viewpoint at viewpoint.dbrs.com.

Class XP and XC are interest-only certificates that reference multiple rated tranches. 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 Class XC is warranted, as consideration was given for actual loan, transaction and sector performance where a rating based on the lowest rated notional class may not reflect the observed risk.

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.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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