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

DBRS Limited (DBRS) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3:

-- Class A-2 at AAA (sf)
-- Class A-3 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 (sf)
-- Class G at B (low) (sf)

DBRS also maintained the Negative trends on Classes F and G to reflect the increased risks for the three watchlisted loans secured by multifamily properties in Fort McMurray, Alberta, which collectively represent 12.1% of the current pool balance. All other trends are Stable.

As of the February 2019 remittance, 25 of the original 38 loans remain in the pool with an aggregate principal balance of $129.4 million, reflecting a collateral reduction of 48.3% since issuance. 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 1.25x and 10.1%, respectively. When excluding the three watchlisted loans, which have reported depressed cash flows in recent years, the WA DSCR and WA debt yield increase to 1.45x and 11.7%, respectively. At issuance, the pool reported a WA DBRS Term DSCR and WA DBRS Debt Yield of 1.36x and 9.1%, respectively.

There are three loans scheduled to mature in the next 18 months – Merivale Mall (Prospectus ID#2; 14.4% of the pool), which has a maturity date of May 1, 2020; as well as 895 & 1000 Waverly (Prospectus ID#9; 5.2% of the pool) and Walmart Flin Flon (Prospectus ID#24; 3.1% of the pool), which are both scheduled to mature March 1, 2020. Both top 15 loans maturing in the near term are performing in line with DBRS’s expectations at issuance with metrics suggesting that successful refinancing is likely. The smaller loan, Walmart Flin Flon, is secured by a retail property in Flin Flon, Manitoba. The property was built in 2002 and, since construction, has been fully occupied by Walmart Inc. (rated AA with a Stable trend by DBRS), currently in place on a lease through November 2022. At issuance, the loan seller noted that the tenant had 16 five-year renewal options remaining. The loan was cross-collateralized and cross-defaulted with another loan in the pool, Century Business Park 1680 (Prospectus ID #30), which was repaid in January 2016 ahead of the scheduled maturity in December 2019. The Walmart Flin Flon loan is full recourse to the loan sponsor and, as such, DBRS expects the loan to successfully repay at maturity.

As of the February 2019 remittance, there are no loans in special servicing and, as mentioned, there are three loans on the servicer’s watchlist – Lunar & Whimbrel Apartments (Prospectus ID#10; 4.4% of the pool), Snowbird & Skyview Apartments (Prospectus ID#11; 4.1% of the pool) and Parkland & Gannet Apartments (Prospectus ID#17; 3.6% of the pool). All three loans have seen significant performance declines, driven by occupancy and rental rate declines for collateral in multifamily properties located in Fort McMurray. The loans were transferred to special servicing in October 2016 and again in January 2017 and have since been modified to allow for an extension of the maturity dates to May 2021 from May 2018. As part of the extension terms, the sponsor is required to pay down the principal at scheduled intervals. As of the February 2019 remittance, the servicer had received approximately $2.3 million in principal paydowns across the three loans with three additional principal payments of approximately $333,000 due through the remainder of the extended loan term.

The loans are full recourse to Lanesborough Real Estate Investment Trust (LREIT), which continues to fund debt-service shortfalls out of pocket and has remained cooperative with the servicer throughout the previous two transfers to special servicing. The loan is also under a partial-recourse guarantee (25.0%) to 2668921 Manitoba Ltd. (Manitoba). 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 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 Canadian Properties Ltd., Manitoba’s parent company, and/or Manitoba as well as its limited capital and highly leveraged capital structure.

In addition to the full-recourse structure of the loans, DBRS also notes that the loans benefit from structured loan modification, which includes significant principal paydown for the loans over the remaining term. DBRS will continue to monitor the loan for developments through the extended maturity and has applied a stressed scenario for the loans in its analysis. The loans have also been placed on the DBRS Hotlist.

DBRS materially deviated from its “Rating North American CMBS Interest-Only Certificates Methodology” when determining the rating assigned to Class X. 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 material 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 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#1 – Merivale Mall (14.4% of the pool)
-- Prospectus ID#10 – Lunar & Whimbrel Apartments (4.4% of the pool) (DBRS Hotlist)
-- Prospectus ID#11 – Snowbird & Skyview Apartments (4.1% of the pool) (DBRS Hotlist)
-- Prospectus ID#17 – Parkland & Gannet Apartments (3.6% of the pool) (DBRS Hotlist)

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 CMBS 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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