DBRS Confirms All Classes of Institutional Mortgage Securities Canada Inc., 2012-2

DBRS Limited (DBRS) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates Series 2012-2 issued by Institutional Mortgage Securities Canada Inc., 2012-2 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, except for Classes F and G, for which DBRS maintained Negative trends to reflect concerns surrounding the third-largest loan, Lakewood Apartments (Prospectus ID#3; 9.4% of the pool), which is secured by an apartment building in Fort McMurray, Alberta, and is highlighted below.

At issuance, the transaction consisted of 31 fixed-rate loans, secured by 33 commercial properties, with an original trust balance of $240.0 million. Per the October 2018 remittance, 18 loans remain in the pool with a current trust balance of $146.5 million, representing a collateral reduction of 39.0% due to scheduled loan amortization, successful loan repayment and the partial principal curtailment of the previously mentioned Lakewood Apartments loan. Approximately 77.8% of the pool is reporting YE2017 financials, and based on the most recent reporting, the pool reported a weighted-average (WA) debt service coverage ratio (DSCR) and debt yield of 1.30 times (x) and 10.2%, respectively. Six loans (28.2% of the pool) mature in 2019, reporting an exit debt yield of 9.7% and WA BBB Refinance DSCR of 1.24x. The remaining 12 loans (71.8% of the pool) mature in 2021 and 2022. Per the most recent reporting, the top 15 loans (94.9% of the pool) reported a WA DSCR and debt yield of 1.30x and 10.2%, respectively. Fourteen loans (80.4% of the pool) have some form of meaningful recourse to their respective borrowers.

Per the October 2018 remittance, there are eight loans (46.2% of the pool) on the servicer’s watchlist with no loans in special servicing. Lakewood Apartments was originally added to the servicer’s watchlist in May 2015 due to declining cash flow performance resulting from poor economic conditions in the Fort McMurray area. In February 2016, the loan transferred to special servicing due to imminent default; however, it was brought current in October 2016 and was returned to the master servicer in January 2017. The loan was originally set to mature in August 2017; however, it was extended to November 2019 at its current interest rate of 5.75%, as the borrower was required to make a $2.0 million principal curtailment and is currently subject to future principal curtailments totalling $750,000 over an 18-month period beginning in November 2018. The property was also re-appraised in October 2017 at a value of $17.3 million, representing a significant 50.3% decline from the issuance value of $34.8 million.

The loan has full recourse to Lanesborough Real Estate Investment Trust (LREIT), Shelter Canadian Properties Limited (SCPL) and the parent company of SCPL. Per LREIT’s June 2018 financials, LREIT reported an equity deficit of approximately $65.1 million and a loss before discontinued operations (for the six months ended June 2018) of approximately $28.3 million. For the six months ended June 2018, LREIT’s investment properties experienced a $23.5 million decline in fair value.

The loan remains current, and it appears that the borrower has been able to keep the loan current through funds derived from alternative sources; however, recent performance continues to be depressed year over year. According to the July 2018 rent roll, the property was 65.5% occupied at an average rental rate of $1,610 per unit in comparison with the August 2016 figures of 73.0% and $1,649 per unit, respectively, and the November 2016 figures of 83.6% and $1,881 per unit, respectively. As a result, year-end financials have been poor, as the YE2017 and YE2016 DSCRs were 0.57x and 0.45x, respectively, with the YE2018 figure likely to be similar. DBRS believes that the long-term performance of the subject depends on the growth and stability of the energy-market-dependent economy, with short-term occupancy rates and rental rates likely to remain volatile.

Classes XP and XC are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating of Class XP mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall. The rating assigned to Class XC considers 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 – Cedars Apartments (13.3% of the pool)
-- Prospectus ID#3 – Lakewood Apartments (9.4% of the pool)
-- Prospectus ID#7 – Centre 1000 (7.1% of the pool)
-- Prospectus ID#9 – Mont-Tremblant Retail (6.2% of the pool)
-- Prospectus ID#13 – North Sydney Retail (3.9% of the pool)
-- Prospectus ID#20 – Apple Creek Office (2.3% of the pool)

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 CMBS universe, as well as deal and loan-level commentary for all DBRS-rated transactions.

DBRS materially deviated from its principal methodology when determining the ratings assigned to Class XC by its “North American CMBS Surveillance Methodology.” DBRS considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit rating would consider the material deviation to be a significant factor in evaluating the rating. 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.

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

The principal methodology is North American CMBS Surveillance Methodology, 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.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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