DBRS Morningstar Maintains Four Classes Under Review with Negative Implications, Confirms Remaining Ratings of IMSCI 2012-2

DBRS Limited (DBRS Morningstar) maintained its ratings on four classes and placed one class of the Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., Series 2012-2 under review as follows:

-- Class XC at A (sf), Under Review with Negative Implications
-- Class D at BBB (high) (sf), Under Review with Negative Implications
-- Class E at BBB (low) (sf), Under Review with Negative Implications
-- Class F at BB (low) (sf), Under Review with Negative Implications
-- Class G at B (low) (sf), Under Review with Negative Implications

DBRS Morningstar also confirmed the ratings of the following classes:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at AA (low) (sf)

Classes D, E, F, andG remain Under Review with Negative Implications to reflect the uncertainty surrounding the resolution of the Centre 1000 loan (Prospectus ID#7, 8.3% of the pool) and the sponsors’ ability to provide partial recourse to cover a portion of the outstanding loan balance. As a result of the increased risk that the bottom-rated bonds may experience interest payment disruption because of this uncertainty, DBRS Morningstar has placed the rating of Class XC Under Review with Negative Implications. All other trends are Stable, with the exception of Classes D, E, F, G, and XC, which have ratings that do not carry trends.

Concerns remain surrounding the resolution for Centre 1000, which is in special servicing after the loan’s sponsor, Strategic Group LLC (Strategic Group), submitted an application filing in December 2019 under Canada’s Companies’ Creditors Arrangement Act (CCAA) that affected the property and 49 others within the sponsor’s 171-property portfolio.

DBRS Morningstar also notes the significantly increased risks from issuance for the Lakewood Apartments loan (Prospectus ID#3, 9.8% of the pool), secured by a multifamily property in Fort McMurray, Alberta, where the sustained decline in oil prices during the past several years has resulted in a significant economic decline for the area.

The outlook for both of these loans secured by properties in the Alberta province, which will likely be the subject of additional economic stress amid the Coronavirus disease (COVID-19) outbreak of 2020 that has pushed oil prices even lower, remains significantly impaired as compared with the issuance analysis. DBRS Morningstar has confirmed ratings and maintained Stable trends on Classes A-1, A-2, and B based on the respective classes’ in-place credit support and the general outlook for the loans in the pool outside of the two previously outlined.

Centre 1000, a 55,668-sf office property in Calgary, Alberta, situated in a suburban area north of the downtown core, has suffered from occupancy declines since issuance amid the significantly reduced demand within the Calgary office sector. Occupancy was reported at 73.0% as of the December 2019 rent roll. While there has been some recent leasing momentum, significant challenges remain in the subject’s falling rental rates and the difficult market conditions that will likely drive a longer lease-up period and require significant capital investment to attract tenants.

The loan was transferred to the special servicer after the CCAA filing, and the special servicer has confirmed the application for CCAA protection was denied and the Court has ordered a receivership for all affected properties, including the subject. The special servicer has advised that a resolution strategy is in the process of being determined as of March 2020. Given the sharp declines in cash flow and generally difficult market for office properties from both a tenant demand and investor demand perspective, DBRS Morningstar believes the as-is value has declined sharply from issuance. With the current economic environment, particularly in the face of a relatively new threat in COVID-19, the loss severity at resolution could be significant. There is a partial recourse guarantee in the amount of $3.1 million in place to Riaz Mamdani, the guarantor and indemnitor, who indirectly controls the borrowing entity, Centre 1000 LP. The servicer’s ability to enforce recourse provisions may be limited amid the economic difficulties for the guarantor.

At issuance, the trust was secured by 31 loans at an original trust balance of $240.2 million. As of the March 2020 remittance, 14 loans remain in the trust at a current balance of $117.9 million, representing a collateral reduction of 50.9% since issuance as a result of loan repayment and scheduled loan amortization. One loan, representing 12.2% of the pool, is fully defeased.

As of the March 2020 remittance, there are five loans, representing 40.4% of the pool, on the servicer’s watchlist; however, three loans, representing 32.9% of the pool, have some form of meaningful recourse to the respective sponsors. The Lakewood Apartments remains on the servicer’s watchlist and in forbearance under an agreement that is structured with a delayed November 2022 maturity date and scheduled lump sum principal payments. The loan has full recourse to LREIT, 2668921 Manitoba Ltd. (Manitoba) and Shelter Canadian Properties Ltd. (Shelter), the parent company of Manitoba. DBRS Morningstar increased the probability of default to reflect the continued increasing risk profile for this loan.

For further information on the filing and exposure across the DBRS Morningstar rated book, please see the December 18, 2019, commentary titled “The Impact of Strategic Group’s Creditor Protection Filing on CMBS Loans” on the DBRS Morningstar website at www.dbrsmorningstar.com.

DBRS Morningstar materially deviated from its principal methodology when determining the ratings assigned to Class C, which deviate from the lower ratings implied by the quantitative results. DBRS Morningstar 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 ratings would consider the material deviation to be a significant factor in evaluating the ratings. The material deviations are warranted given uncertain loan level event risk.

Class XC is an interest-only (IO) certificate that references 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 Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#7 – Centre 1000 (8.3% 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 most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-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 Morningstar 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 Morningstar 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 Morningstar 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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