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

DBRS Limited (DBRS Morningstar) downgraded the ratings on two classes of Commercial Mortgage Pass-Through Certificates Series 2013-3 issued by Institutional Mortgage Securities Canada Inc., Series 2013-3 as follows:

-- Class E to BB (sf) from BBB (low) (sf)
-- Class F to C (sf) from CCC (sf)

DBRS Morningstar also upgraded the rating on the following class:

-- Class B to AAA (sf) from AA (sf)

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

-- Class A-3 at AAA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (sf)

With this review, DBRS Morningstar also changed the trend on Class E to Stable from Negative. All other trends are Stable, with the exception of Class F as it has a rating that generally does not carry a trend for commercial mortgage-backed securities (CMBS) ratings. DBRS Morningstar also removed its Interest in Arrears designation on Class F.

The rating upgrade for Class B and the rating confirmations for Classes A-3, C, and D reflect the overall stable performance of the pool as illustrated by the significant paydown since issuance that has significantly increased credit support for the most senior classes remaining in the transaction.

As of the July 2022 remittance, 20 of the original 38 loans remained in the trust with an outstanding trust balance of $71.9 million, representing a collateral reduction of 71.3% since issuance. No loans have been defeased to date. There are three loans that are secured by self-storage properties (U-Haul – Queensview, U-Haul – West Surrey, and U-Haul – West Edmonton) that have an anticipated repayment date of December 2023 with a fully extended maturity date of August 2037. The remaining loans in the pool outside of these U-Haul loans are scheduled to mature by February 2024.

There are no loans in special servicing, and there are six loans, representing 45.0% of the pool balance, on the servicer’s watchlist; these loans are being monitored primarily for upcoming maturity dates and/or reported low debt service coverage ratios (DSCRs).

The rating downgrades for Classes E and F are reflective of the increased risks that have been sustained for three loans secured by multifamily properties in Fort McMurray, Alberta, collectively representing 15.4% of the pool balance. The Lunar and Whimbrel Apartments (Prospectus ID#10, 5.6% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11, 5.3% of the pool), and Parkland and Gannet Apartments (4.5% of the pool) have had performance declines since the downturn in the oil and gas industry that began in late 2014. The sponsor for all three loans, 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, with the most recent maturity extensions running through February 2024. With each extension, the borrower was required to make principal curtailment payments and, according to the servicer, $4.1 million in curtailment payments have been made since 2018, while an additional $1.8 million is expected to be paid by August 2023 as part of the most recent maturity extension. Once the August 2023 payment is made, the aggregate principal balance across these three loans is scheduled to be reduced to approximately $9 million from $11.1 million.

As of the most recent reporting available, the properties reported occupancy rates between 86% and 100%, with average rental rates ranging between $1,070 per unit and $1,372 per unit. According to Canada Mortgage and Housing Corporation, multifamily properties in the Wood Buffalo census metropolitan area of Alberta reported an October 2021 vacancy rate of 20.3% and average rental rate of $1,274 per unit, compared with the October 2020 vacancy rate of 13.6% and average rental rate of $1,317 per unit and the October 2019 vacancy rate of 22.4% and average rental rate of $1,362 per unit. All three loans report DSCRs well below 1.0 times and have reported similar coverage ratios for the last several years.

Although the borrower’s commitment to the loans is apparent and has been frequently demonstrated with principal curtailments and debt service funded despite significant shortfalls at the collateral properties, the sustained cash flows well below issuance levels will continue to present significantly increased risks for these loans, particularly given the lack of meaningful recovery in the area markets since the downturn began in 2014. To gauge the bonds most exposed to these risks, DBRS Morningstar analyzed a hypothetical liquidation scenario based on a stressed value for each of the collateral properties that suggested Classes E and F would be the most exposed to reduced credit support and/or losses should a default and liquidation ultimately occur within the near to moderate term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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