DBRS Upgrades, Confirms Ratings on Institutional Mortgage Securities Canada Inc., Series 2014-5

DBRS Limited (DBRS) upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2014-5 issued by Institutional Mortgage Securities Canada Inc., Series 2014-5:

-- Class B to AAA (sf) from AA (sf)
-- Class C to AA (sf) from A (sf)
-- Class X to AA (sf) from A (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

DBRS also confirmed the remaining classes as follows:

-- Class A-2 at AAA (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of successful loan repayment and the overall stable performance of the remaining loans in the transaction. As of the January 2019 remittance, 22 of the original 41 loans remain in the pool with an aggregate principal balance of $143.2 million, representing a collateral reduction of 54.2% since issuance. To date, 21 of the 22 remaining loans, representing 97.8% of the pool, have reported year-end 2017 (YE2017) financials. Those loans are reporting a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.65 times (x) and 12.2%, respectively. Based on the most recent reporting, the top 15 loans in transaction have shown a WA net cash flow growth of 3.3% year over year.

There are four loans on the servicer’s watchlist, representing 13.0% of the pool, including the Nelson Ridge Pooled Loan (Prospectus ID#17; 4.8% of the pool), which is part of a pari passu whole loan secured by a multifamily property in Fort McMurray, Alberta. As a result of 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 servicer also granted a forbearance agreement to extend the maturity date from December 2019 to December 2021, subject to additional periodic principal lump-sum payments. The servicer noted that the January 1, 2019, supplemental payment was received. The borrower is required to make additional lump-sum payments on or before the first day of April 2019, August 2019, January 2020 and June 2020.

The loan sponsor, Lanesborough Real Estate Investment Trust (LREIT), which provides 100% recourse, continues to fund debt-service shortfalls out of pocket and remained cooperative with the servicer through the previous two transfers to special servicing. The loan is also 100.0% guaranteed by both 2668921 Manitoba Ltd. (Manitoba) and Shelter Canadian Properties Ltd. (Shelter), Manitoba’s parent company. In its Q3 2018 unaudited financial statements, LREIT reported total assets and total liabilities of $186.0 million and $264.0 million, respectively. LREIT also reported a loss before discontinued operations of $41.0 million. In addition, LREIT’s revolving loan facility provided by Manitoba was amended to increase the maximum balance to $100.0 million from $30.0 million, which is set to mature in December 2019 and is due on demand. Manitoba provided several amendments to the revolving loan facility to increase the maximum balance and further extend the maturity date, illustrating the entity’s commitment to LREIT. As of Q3 2018, LREIT had received $48.9 million of funds. Financial statements point to ongoing concerns with LREIT’s concentration of investments in Fort McMurray and the continued depression in the local economy, its dependence on financing from Shelter and/or Manitoba as well as its limited capital and highly leveraged capital structure.

According to the January 2018 rent roll, the Nelson Ridge property had an occupancy rate and an average rental rate of 64.0% and $1,537 per unit, respectively. Occupancy declined from 73.0% in January 2017; however, the average rental rate remained stagnant at $1,539 per unit. At issuance, the property reported an occupancy rate and average rental rate of 89.5% and $2,228, respectively. Operating performance demonstrates a sharp decline in rental rates, driven by the dropoff in the oil markets since issuance. DBRS believes that larger concerns, such as the permanent reduction in required workforce within the oil sands region caused by technological advancements and other market factors, will limit the property’s ability to generate cash flow anywhere near issuance levels in the near to medium term. DBRS will continue to monitor the loan for developments through the extended maturity and has applied a stressed scenario for the loan in its analysis. The loan has also been placed on the DBRS Hotlist.

There are three other loans on the servicer’s watchlist, representing 8.2% of the current pool balance. One loan, Yonge Street Multifamily (Prospectus ID#31; 2.2% of the pool), was flagged for a low DSCR and lack of reported financials; however, the servicer provided updated figures and this loan should be removed from the watchlist in the near term. The two remaining loans, 146 & 148 Colonnade Industrial (Prospectus ID#22; 3.3% of the pool) and 107 & 111 Colonnade Industrial (Prospectus ID#26, 2.7% of the pool), were flagged for upcoming tenant rollover. The loan securing the 107 & 111 Colonnade Industrial property is expected to be paid in full in April 2019 and the tenants in question at the 146 & 148 Colonnade Industrial property have renewed their respective leases.

Class X is an interest-only (IO) certificate that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#17 – Nelson Ridge Pooled Loan (4.8% 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 most outstanding commercial mortgage-backed security transactions (including non-DBRS rated), as well as loan-level and transaction-level commentary for most DBRS-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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