DBRS Confirms All Classes of Institutional Mortgage Securities Canada Inc., Series 2013-4

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

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

All trends are Stable, except for Classes F and G.

The trends on Classes F and G are Negative, which reflects the concerns surrounding Prospectus ID#4 – Nelson Ridge (7.4% of the current pool balance). Both of those classes were downgraded by one notch with the last DBRS review to reflect the increased credit risk surrounding that loan.

As of the March 2018 remittance, there are 31 of the original 33 loans remaining in the pool, with an aggregate principal balance of $281.4 million, reflecting a collateral reduction of 14.8% since issuance as a result of scheduled amortization and loan repayments. As of the March 2018 remittance, loans representing approximately 93.5% of the pool reported YE2016 financials, with a weighted-average (WA) debt service coverage ratio (DSCR) and debt yield of 1.50 times (x) and 10.9%, respectively. In comparison, the pool reported a YE2015 WA DSCR and debt yield of 1.46x and 10.5%, respectively, and at issuance, the WA DBRS Term DSCR and DBRS Debt Yield was 1.39x and 9.3%, respectively. Based on the YE2016 financials, the top 15 loans (74.0% of the current pool balance) reported a WA DSCR of 1.24x, in comparison with theYE2015 WA DSCR of 1.19x and WA DBRS Term DSCR of 1.38x. The bulk of the WA net cash flow decline from issuance is due to significant revenue declines for two properties securing loans in the top 15 located in Fort McMurray, Alberta, where the economy has been struggling with low oil prices for several years.

There are nine loans on the servicer’s watchlist, representing 28.6% of the pool, including the previously mentioned Nelson Ridge loan, which is part of a pari passu whole loan secured by a multifamily property in Fort McMurray. Due to the sustained difficulties in the local economy, the property has shown significant performance declines since issuance. The loan was previously transferred to special servicing for imminent default in February 2016 and was later returned to the master servicer as a corrected loan in late January 2017 after the borrower brought the loan current. The loan benefits from full recourse to Lanesboro Real Estate Investment Trust (LREIT), Shelter Canadian Properties and 2668921 Manitoba Ltd.

As of the July 2017 rent roll (most recent file provided by the servicer to date), the property reported an occupancy and average rental rate of 73.3% and $1,540 per unit, respectively. These figures are generally flat compared with the July 2016 figures, with rental rates generally hovering near those levels for the last few years. Rates are down sharply from issuance, when the property reported an occupancy rate and average rental rate of 89.5% and $2,228 per unit, respectively. Although occupancy improved in the last 18 months, DBRS believes larger concerns (such as the permanent reduction in required workforce within the oil sands region driven by technological advancements and other market factors) will limit the property’s ability to generate cash flow anywhere near the issuance levels in the near to medium term. These factors, coupled with the financial difficulties of the loan’s sponsor, LREIT, suggest that a successful refinance of the loan at the scheduled maturity in December 2018 is unlikely. As such, DBRS assumed a stressed scenario in its analysis for the loan as part of this review and will continue to monitor the loan closely for developments.

Class X is an interest-only (IO) certificate that references multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall; however, the rating assigned to Class X materially deviates 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. The deviation 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.

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

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Calloway Courtenay
-- Prospectus ID#4 – Nelson Ridge
-- Prospectus ID#11 – Place Rouanda
-- Prospectus ID#12 – Franklin Suites
-- Prospectus ID#18 – Torbay Mall

For complimentary access to this content, please register for the DBRS Viewpoint platform at viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS rated transactions.

DBRS notes that the above press release was amended on April 3, 2019, to correct a statement concerning the ratings assigned to the Class X certificates. The amendment was minor and would not impact the understanding of the reader.

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

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.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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