DBRS Morningstar Confirms All Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3; Trends on Four Classes Negative

DBRS Limited (DBRS Morningstar) 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-3 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (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)

Classes X, D, E, F, and G were removed from Under Review with Negative Implications where they were most recently affirmed on September 18, 2020. With these rating actions, Classes X, E, F, and G now carry Negative trends because of the concerns and uncertainty surrounding the two loans now in special servicing as a result of the Strategic Group’s bankruptcy filing in 2019. In addition, the Negative trends are reflective of the increased risks for the three loans backed by apartment properties in Fort McMurray, Alberta. All other trends are Stable.

The rating confirmations and Stable trends on the ratings higher in the capital stack reflect the overall stable performance of those loans not currently in special servicing or backed by properties in Fort McMurray as well as the substantial paydown of the transaction since issuance, which has increased credit support for those bonds. At issuance, the trust was secured by 38 loans at the original trust balance of $250.0 million. Per the February 2021 remittance, 22 loans remain in the trust at the current balance of $91.5 million, representing a collateral reduction of 63.5% since issuance as a result of loan repayment and scheduled loan amortization. Two loans, representing 15.0% of the pool, are in special servicing and five loans, representing 26.4% of the pool, are on the servicer’s watchlist.

The largest loan in special servicing, Deerfoot Court (Prospectus ID#5; 9.0% of the pool), is secured by a 76,000-square-foot (sf) Class B mid-rise office property in Northeast Calgary, approximately nine kilometres from the Calgary central business district (CBD). The loan transferred to special servicing in January 2020 following the borrower’s bankruptcy filing. The borrower is an affiliate of the Strategic Group. The receiver is working to lease vacant space at the property as part of a plan to work toward an eventual sale. The February 2021 rent roll showed a leased rate of approximately 62.0%, down significantly from the occupancy rate of 97.5% at January 2020. The risk of increased vacancy is noteworthy as tenants representing 11.0% of the net rental area (NRA) have leases expiring within the next year. The servicer obtained an updated appraisal dated August 2020 that showed an as-is value of $7.5 million, down from the first appraisal obtained by the special servicer that showed a $9.5 million value as of February 2020 and well below the issuance value of $15.8 million. The value decline is reflective of the challenging market in Calgary, where sustained low oil prices have contributed to significant increases in vacancy rates throughout the city. In its Q4 2020 market outlook, CBRE noted the suburban Calgary office vacancy rate at 22.0%.

The second loan in special servicing, Airways Business Plaza (Prospectus ID#12; 6.0% of the pool), is included in the same bankruptcy filing from the Strategic Group as the Deerfoot Court loan. This loan’s collateral is a 65,000-sf suburban office building, located approximately 13 kilometres south of Calgary International Airport. A receiver is in place at this property and the servicer is pursuing a lease up and eventual sale for this asset as well. As of the February 2021 rent roll, the subject is 70.0% occupied with a minimal 6.0% of NRA rollover risk in the next 12 months. The servicer has obtained two updated appraisals for the property since the transfer to special servicing, with the most recent in August 2020 when the property’s as-is value was estimated at $8.9 million, down from the $10 million valuation in February 2020 and the issuance value of $12.0 million. Based on the most recent appraisal, the loan has an as-is loan-to-value ratio of 62.1%.

The most worrisome loans on the servicer’s watchlist are the three secured by multifamily properties located in Fort McMurray, including Lunar and Whimbrel Apartments (Prospectus ID#10; 5.2% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11; 4.9% of the pool), and Parkland and Gannet Apartments (Prospectus ID#17; 4.2% of the pool). All three properties are located within the Fort McMurray CBD and are of older construction, but all had historically maintained high occupancy rates and rents prior to the ongoing downturn in the oil and gas industry that began in late 2014. The sponsor for all three loans, an affiliate of Lanesborough REIT, has worked with the servicer several times to paper loan modifications that allowed for various forms of payment relief and extensions to the maturity date and, as of the February 2021 remittance, the loan is reported current. Two of the three complexes were affected by area flooding and are currently under repair. The third property, Parkland and Gannet, has remained open and has absorbed some of the tenancy from the other two buildings, ending the year with an occupancy rate of 94.5% as of December 2020. Although the sponsor remains current on its obligations for these loans, the increased risk to the trust from the lower rental and occupancy rates maintained for the last five years is indicative of significantly increased risks from issuance.

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 X is an interest-only (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 info@dbrsmorningstar.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.

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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