DBRS Morningstar Downgrades Two Classes of Institutional Mortgage Securities Canada Inc., Series 2013-3

DBRS Limited (DBRS Morningstar) downgraded 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 as follows:

-- Class F to CCC (sf) from B (sf)
-- Class G to D (sf) from B (low) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

The rating on Class X has been withdrawn as two reference classes now have a CCC (sf) and a D (sf) rating. Class E continues to carry a Negative trend; all other trends are Stable.

Since DBRS Morningstar’s March 2021 rating actions for this transaction, two loans that were previously in special servicing, Deerfoot Court (Prospectus ID#5) and Airways Business Plaza (Prospectus ID#12), have been liquidated from the pool as of the September 2021 remittance, resulting in a $5.5 million loss to the trust. The loss took out the full balance of the $5.0 million unrated Class H certificate with the remainder of the loss applied to the Class G certificate.

The Deerfoot Court loan was secured by a 76,000-square-foot (sf) Class B mid-rise office property in Northeast Calgary, located approximately nine kilometres from the Calgary central business district (CBD). The loan transferred to special servicing in January 2020 following the bankruptcy filing by the Strategic Group, the loan sponsor for both loans liquidated with the September 2021 remittance. The property was sold for $4.5 million, resulting in an actual realized loss of $4.7 million (loss severity of 58.4%).

The Airways Business Plaza loan was secured by a 65,000-sf suburban office building, located approximately 13 kilometres south of Calgary International Airport. The property was sold at a price of $5.5 million, resulting in an actual realized loss of $774,592 (loss severity of 16.8%). The combined loss for these two loans was generally in line with DBRS Morningstar’s projections at last review, which assumed a loss scenario for both loans that resulted in a total hypothetical loss of $5.9 million.

The rating confirmations and Stable trends on all but one class reflect the overall stable performance of the pool as shown by the significant paydown since issuance that has significantly increased credit support for the higher rated classes. At issuance, the trust was secured by 38 loans at the original trust balance of $250.0 million. Per the September 2021 remittance, 20 loans remain in the trust at the current balance of $75.7 million, representing a collateral reduction of 69.8% since issuance as a result of loan repayment and scheduled loan amortization. As of the September 2021 remittance, four loans—three of which are backed by multifamily properties in Fort McMurray, Alberta—that represent 21.1% of the current pool balance, are on the servicer’s watchlist. DBRS Morningstar continues to have concerns about the Fort McMurray loans in the pool, driving the Negative trend carried by the Class E certificate.

The three loans secured by multifamily properties in Fort McMurray are Lunar and Whimbrel Apartments (Prospectus ID#10; 6.0% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11; 5.7% of the pool), and Parkland and Gannet Apartments (Prospectus ID#17; 4.9% 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 September 2021 remittance, all three loans reported current.

As of the most recent reporting available, the properties reported occupancy rates between 48.0% and 94.0%, with some properties previously affected by area flooding still under repair as of the most recent servicer updates. Although occupancy rates have improved for some of the properties, cash flows remain significantly depressed from issuance; however, the sponsor’s continued commitment to these and other Fort McMurray loans in other CMBS transactions is noted and is considered a mitigating factor for the 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.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance related data. 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 the North American CMBS Surveillance Methodology (March 26, 2021), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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 [email protected].

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