DBRS Confirms All Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3

DBRS Limited (DBRS) confirmed the Commercial Mortgage Pass-Through Certificates Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3 as follows:

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

With this review, DBRS has maintained the Negative trends for Classes F and G to reflect the concerns surrounding three specially serviced loans secured by multifamily properties in Fort McMurray, Alberta, which collectively represent 12.6% of the current pool balance. All other trends are Stable.

As of the March 2018 remittance, 25 of the original 38 loans remain in the pool, with an aggregate principal balance of $134.2 million, reflecting a collateral reduction of 46.4% since issuance as a result of scheduled loan amortization and loan repayments. Since DBRS’s last review in March 2017, ten loans have repaid in full, representing a principal repayment of $82.9 million. To date, 52.8% of the current pool balance has reported YE2016 financials, while 93.2% of the pool reported YE2015 financials. Based on the most recent year-end financials, the transaction had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.37 times (x) and 10.6%, respectively, compared with the WA DBRS Term DSCR and WA DBRS Debt Yield of 1.36x and 9.1%, respectively, for the pool at issuance.

There are no loans on the servicer’s watchlist, and three loans, as previously mentioned, are in special servicing. These loans are Lunar and Whimbrel Terrace Apartments (Prospectus ID#10; 4.5% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11; 4.3% of the pool) and Parkland and Gannet Apartments (Prospectus ID#17; 3.7% of the pool). These loans were previously in special servicing for imminent default before they were sent back to the master servicer as corrected loans in October 2016. However, the loans recently transferred back to special servicing after the borrower failed to repay at the scheduled maturity date in February 2018. The servicer has confirmed that the borrower was granted a forbearance to extend the maturity date to May 2021. In addition to the monthly principal and interest payments, the terms of the forbearance require scheduled principal paydowns each year through the extended maturity date, and as of the March 2018 remittance, the servicer has received a total of approximately $1.7 million in principal paydowns for the three loans. The borrower is required to make five additional principal payments of approximately $330,000 through the next 38 months. By May 2021, approximately $10.6 million of principal will remain outstanding across the three loans, which is equivalent to a trust exposure of $61,358 per unit at the extended maturity date.

The borrower’s inability to secure replacement financing for the three loans is the direct result of the sustained economic declines in the Fort McMurray area and in the larger Alberta economy over the past several years. Property cash flows have been significantly depressed at all three properties as compared with the issuance figures, driven largely by sharp declines in base rental rates.

The loans have full recourse to Lanesborough Real Estate Investment Trust (LREIT) and a partial-recourse guarantee (25.0%) to 2668921 Manitoba Ltd. 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 long-term liabilities of $231 million and $247 million, respectively. In addition, LREIT reported a loss before discontinued operations of $20.5 million. The financial statements also reported that LREIT’s portfolio was valued at $287.4 million, down from $312.5 million at YE2016. Also, LREIT’s revolving loan facility from 2668921 Manitoba Ltd. had achieved its maximum balance of $30.0 million, which comes due in June 2018. Shelter Canadian Properties Limited, an affiliate of 2668921 Manitoba Ltd., had provided unsecured advances to LREIT with a total of $4.5 million as of October 2017. The financial statement points to ongoing concerns with the real estate investment trust’s concentration of investments in Fort McMurray and the continued depression of the local economy, as well as the company’s limited capital and highly leveraged capital structure.

In addition to the full-recourse structure of the loans, DBRS also notes the loans benefit from the structured loan modification that includes significant principal paydown for the loans over the next three years. Also, DBRS notes that 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 loans in its analysis for this review.

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:

-- Merivale Mall
-- Deerfoot Court
-- 895 and 1000 Waverley
-- Airways Business Plaza
-- Lunar and Whimbrel Terrace Apartments
-- Snowbird and Skyview Apartments
-- Parkland and Gannet Apartments

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire commercial mortgage-backed securities 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.