DBRS Morningstar Upgrades Four Classes of Institutional Mortgage Securities Canada Inc., Series 2015-6

DBRS Limited (DBRS Morningstar) upgraded its ratings for four classes of Commercial Mortgage Pass-Through Certificates, Series 2015-6 issued by Institutional Mortgage Securities Canada Inc., Series 2015-6 as follows:

-- Class C to AA (sf) from AA (low) (sf)
-- Class D to A (high) (sf) from BBB (high) (sf)
-- Class E to A (low) (sf) from BBB (low) (sf)
-- Class F to BBB (low) (sf) from BB (sf)

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X at AA (low) (sf)
-- Class G at B (sf)

All trends are Stable.

These rating actions reflect the overall stable performance of the remaining loans in the pool and the significantly increased credit support of the transaction since issuance. As of the February 2021 remittance, 39 of the original 47 loans remain in the pool, with an aggregate trust balance of $218.8 million, representing a collateral reduction of approximately 32.7% since issuance. In addition, the pool benefits from three loans that have been fully defeased, representing 17.5% of the pool, including one loan in the largest loan in the pool, Distillery District (Prospectus ID#1, 9.6% of the pool), which was defeased in November 2020. Although the transaction as a whole has had significantly increased credit support since issuance, there is a reporting lag for this and other transactions that generally include loans which require annual reporting only for the underlying properties. This means most loans in the subject pool have most recently reported updated financials as of YE2019 and given the Coronavirus Disease (COVID-19)-related events of 2020 and 2021 thus far, DBRS Morningstar did also consider the potential for performance declines in the analysis for this review.

As of the February 2021 remittance, there are no delinquent or specially serviced loans in the pool. Four loans, representing 9.2% of the current pool balance, are on the servicer’s watchlist. Two of those loans are being monitored for performance-related issues while the other two have been granted modifications in response to the respective borrowers’ requests for pandemic-related relief. The largest loan on the servicer’s watchlist has been showing pronounced performance declines since 2017, as further discussed below, and the uncertainty with regard to that loan was a primary driver for the tempering of rating actions for those bonds lowest in the capital stack for this review. The transaction is concentrated by property type, with 50.3% of the current trust balance secured by retail properties and 12.3% of the current trust balance secured by multifamily properties. In addition, 10.9% of the current trust balance is secured by self-storage properties.

The largest loan on the servicer’s watchlist, Comfort Inn & Suites Airdrie (Prospectus ID#9, 4.9% of the pool) is secured by a 103-key limited-service hotel in Airdie, Alberta, which is approximately 30 kilometres north of Calgary. The hotel was originally constructed in 2009. The franchise agreement expires in 2031, well past the loan’s maturity date of May 2022. The impact of the downturn in the oil and gas sectors has been seen in lower revenues for the property as compared with the issuance figures, and those trends have been ,compounded by the additional stress brought amid the coronavirus pandemic. As of the most recent reporting the collateral had a YE2019 debt service coverage ratio (DSCR) of 0.36 times (x), a slight decline from the YE2018 DSCR of 0.45x. A trailing 12-month ended July 31, 2020, Smith Travel Research report was provided which recorded an occupancy rate, average daily rate, and revenue per available room of 37.8%, $93.97, and $35.54, respectively.

The servicer initially approved a loan modification in May 2018 that allowed for a 24-month interest-only (IO) period that expired in December 2020. The IO period was subsequently extended through February 2022, and as of the February 2021 reporting the servicer reports the loan is current on the modified debt service obligation; however, the master servicer subsequently modified the loan again extending the IO period to February 2022. Although the sponsor’s commitment to the loan appears stable, with ongoing communication and collaboration with the servicer to address the outstanding issues, the prospects for substantial improvements in operating metrics are quite slim and the loan will likely face significant challenges at maturity in 2022, a primary driver for the tempering of upgrades and Positive trend assignments for the lowest-rated bonds in the transaction, which would be more exposed to any losses associated with this loan.

The Kennedale Plaza loan (Prospectus ID#28, 1.5% of the pool) is secured by a 18,000-square-foot neighbourhood retail strip centre in Edmonton and was added to the servicer’s watchlist in May 2020 when the borrower requested mortgage relief because of disruptions from the coronavirus pandemic. The borrower is owned by a general partnership that includes Riaz Mamdani of the Strategic Group, which pulled a significant portion of its properties into a Companies’ Creditors Arrangement Act filing in late 2019. The subject property was not affected by that filing. The subject loan has been the subject of a modification, however, in response to the borrower’s coronavirus relief request that allowed for a deferral of principal and interest payments between May and July 2020, with a repayment period that began in August 2020. The servicer recently confirmed the borrower is in compliance with the terms of the modification. As of the November 2020 rent roll, the subject property was 100.0% occupied and the loan reported a YE2019 DSCR of 1.69x, up slightly from the YE2018 DSCR of 1.55x.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to three loans: South Hill Shopping Center (Prospectus ID#2, 8.2% of the pool), Markham Town Square (Prospectus ID#8, 2.7% of the pool), and U-Haul SAC 3 Portfolio (cross-collateralized with 10 loans, 6.8% of the pool). With this review, DBRS Morningstar confirms that the performance of these loans remains consistent with investment-grade loan characteristics.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes D, E, F, and G, as the quantitative results suggested a higher rating on the classes. The material deviations are warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist, particularly the Comfort Inn & Suites Airdrie loan, as previously outlined.

Class X is an IO certificate that references multiple rated tranches. When determining the rating assigned to Class X, 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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

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 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 [email protected].

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.dbrsmorningstar.com or contact us at [email protected].

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