DBRS Morningstar Confirms Ratings on Institutional Mortgage Securities Canada Inc., Series 2013-4

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2013-4 issued by Institutional Mortgage Securities Canada Inc., Series 2013-4 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

All trends are Stable except for Classes F and G, which continue to carry Negative trends.

The Negative trends on Classes F and G reflect DBRS Morningstar’s concerns surrounding two loans in the pool: Nelson Ridge (Prospectus ID#4; 9.8% of the pool) and Franklin Suites (Prospectus ID#12; 5.5% of the pool), both backed by properties in Fort McMurray, Alberta. Outside of the above-mentioned loans, which have been negatively affected by the sustained downturn in the oil market and resulting difficulties for the local and larger Alberta economy, the pool has generally performed in line with DBRS Morningstar’s expectations.

As of the November 2021 remittance, 14 of the original 33 loans remain in the pool, representing a collateral reduction of 44.4% since issuance. One loan, representing 10.6% of the current pool balance, is fully defeased. The transaction is highly concentrated by property type as six loans, representing 48.3% of the current trust balance, are secured by retail collateral; office properties back the second-largest concentration of loans, with two loans representing 18.2% of the current trust balance. Additionally, there are five loans, representing 48.8% of the current trust balance, on the servicer’s watchlist. The servicer is monitoring these loans for a variety of reasons, including low debt service coverage ratio, occupancy issues, and the influx of relief requests submitted by the respective borrowers as a result of the Coronavirus Disease (COVID-19) pandemic.

Nelson Ridge (Prospectus ID#4, 9.8% of the pool), the third-largest loan on the servicer’s watchlist, is part of a pari passu whole loan secured by a multifamily property in Fort McMurray. The loan is also on the DBRS Morningstar Hotlist. Because of the sustained difficulties in the local economy, the property has consistently shown significant performance declines through most of the years since issuance. The loan has been in special servicing twice, and, in both cases, it was returned to the master servicer as a corrected loan. The loan has been modified, with the servicer granting a forbearance to extend the maturity date to December 2021 from December 2019, subject to additional periodic principal lump sum payments, which were satisfied. The servicer also granted the borrower’s coronavirus relief request to convert the monthly payments to an interest-only (IO) structure between April 2020 and August 2020. In addition, $1.0 million of principal curtailment was extended from June 2020 and was required to be paid in three installments due on April 2021, May 2021, and June 2021. Although the borrower has complied with the forbearance agreement, an extension was recently requested and is currently being reviewed by the master servicer

The loan sponsor, Lanesborough Real Estate Investment Trust, which provides 100% recourse, continues to fund debt service shortfalls out of pocket and has been cooperative and proactive in working with the servicer to resolve outstanding issues. The loan is also 100% guaranteed by both 2668921 Manitoba Ltd. (Manitoba) and Shelter Canadian Properties Ltd., the parent company of Manitoba.

The Franklin Suites loan is secured by a 75-key, extended-stay hotel in the north end of downtown Fort McMurray. The market’s dependency on the global oil markets has affected the property’s performance since 2015, with additional stress added in new competitive supply constructed in 2018. The hotel has been closed for bookings since March 2020 and remains closed as of December 2021; however, the sponsor has other limited-service hotels in Fort McMurray that have remained open.

After the sponsor requested coronavirus relief, the servicer agreed to allow for reserve funds to cover the monthly principal and interest (P&I) payments for April 2020 through July 2020. A three-month extension was granted in July 2020 to allow the borrower to cover only IO payments while principal would be covered by reserve funds. Full P&I obligations resumed with the November 2020 payment, and the sponsor is required to repay the reserve draws and outstanding principal not paid in 2020 over a 12-month period that began in November 2020. As of the November 2021 reporting, the loan remains current. The loan has full recourse to Temple REIT, which is majority owned by Morguard.

Although the respective sponsors for the Fort McMurray loans in this pool have paid their obligations so far, the property cash flows have been well below issuance for several years, a product of the oil slump that began several years ago. Therefore, the loans have significantly increased risks from issuance, supporting the Negative trends on the lowest-rated classes in the pool.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to Calloway Courtenay (Prospectus ID#1; 16.3% of the pool). With this review, DBRS Morningstar confirms that the performance of this loan 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.

Class X is an interest-only (IO) certificate that references a single rated tranche or 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#2 – Burnhamthorpe Square (14.3% of the pool)
-- Prospectus ID#4 – Nelson Ridge (9.8% of the pool)
-- Prospectus ID#12 – Franklin Suites (5.5% 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 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 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 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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