DBRS Morningstar Confirms All Classes and Assigns Negative Trends to Two Classes of Institutional Mortgage Securities Canada Inc., 2012-2
CMBSDBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates issued by Institutional Mortgage Securities Canada Inc., Series 2012-2 as follows:
-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at AA (low) (sf)
-- Class XC at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)
The Negative trends on Classes F and G reflect the ongoing uncertainty surrounding the resolution of the Centre 1000 loan, which represents 9.0% of the pool and is in special servicing.
All other trends are Stable. Classes D, E, F, and G were initially placed Under Review with Negative Implications in December 2019 due to concerns surrounding the same loan, which had just transferred to special servicing at the time, shortly after the borrower’s bankruptcy protection filing. In March 2020, DBRS Morningstar placed Class XC Under Review with Negative Implications as well. DBRS Morningstar maintained the Under Review with Negative Implications status for those five classes through the following 15 months as the special servicer obtained new information and court proceedings progressed. An updated appraisal as well as the relatively recent sale of a similarly located property in Calgary suggest the increased stress on Classes F and G remains, justifying the Negative trends. The Under Review with Negative Implications status for the five classes has been removed with this review.
The Centre 1000 loan is secured by a Class B office building in suburban Calgary. According to the servicer, the court has granted approval for the receiver to list and sell the property, with a resolution targeted by the end of 2021. The property was appraised at $9.2 million as of August 2020, slightly below the current outstanding loan balance of $9.5 million. While the sponsor provides partial recourse of $3.1 million, the enforceability of that guarantee is unknown given the likelihood the sponsor’s financial situation has significantly deteriorated since issuance and again amid the ongoing Coronavirus Disease (COVID-19) pandemic. As a result of declining market conditions and overall lack of demand for suburban Calgary offices, DBRS Morningstar has assumed a stressed property valuation in its analysis and is projecting a realized loss to the trust upon resolution.
As of the March 2021 remittance, there has been collateral reduction of 56.2%, as 12 of the original 31 loans remain in the trust. Two loans, representing 28.5% of the pool, are defeased. There are currently four loans on the servicer’s watchlist, representing 41.7% of the pool balance, including the largest and fourth-largest loans in the transaction, both of which are secured by multifamily properties in Alberta.
The Cedars Apartments loan (Prospectus ID#1; 17.4% of the pool) is secured by a property in the Acadia neighborhood of Calgary and has recently struggled with minor declines in occupancy and rental revenue, while the Lakewood Apartments loan (Prospectus ID#3; 10.0% of the pool) is secured by a property in Fort McMurray, which has suffered from significant declines in occupancy and rental revenue for several years as the loan has been modified and the borrower has received a forbearance. While the borrower is complying with all terms of the forbearance, the loan has increased credit risk given the borrower’s weakened financial condition and the lack of demand for rental housing in the Wood Buffalo region.
ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
Class XC is an interest-only (IO) certificate that references multiple rated tranches. When determining the rating assigned to Class XC, consideration was given for actual loan, transaction and sector performance where a rating based on the lowest-rated applicable reference obligation 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 Morningstar.
DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#3 – Lakewood Apartments (10.0% of the pool)
-- Prospectus ID#7 – Centre 1000 (9.0% of the pool)
For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 (March 6, 2020), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.
For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.
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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.
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