DBRS Morningstar Downgrades One and Upgrades Two Ratings of Institutional Mortgage Securities Canada Inc., Series 2012-2

DBRS Limited (DBRS Morningstar) downgraded its rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2012-2 issued by Institutional Mortgage Securities Canada Inc., 2012-2 as follows:

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

DBRS Morningstar also upgraded its ratings on two classes as follows:

-- Class C to AAA (sf) from AA (low) (sf)
-- Class D to AAA (sf) from BBB (high) (sf)

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

-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)

The rating on Class XC has been withdrawn as one reference class now has a CCC (sf) rating. Class F continues to carry a Negative trend. All other trends are Stable, excluding Class G, which has a rating that does not carry a trend.

The rating upgrades and confirmations 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 November 2022 reporting, three of the original 31 loans remain in the trust with an outstanding trust balance of $18.3 million, reflecting a collateral reduction of 92.4% since issuance as a result of loan repayments, scheduled loan amortization, and proceeds from the liquidation of one loan. Since DBRS Morningstar’s previous review, eight loans have repaid in full (30.9% of the issuance trust balance), including the $21.9 million note of the Cedars Apartments loan (Prospectus ID#1).

The three remaining loans are current but are being monitored on the servicer’s watchlist for upcoming loan maturity and/or reported low debt service coverage ratios (DSCRs). These loans have all received loan modifications and/or maturity extensions, with extended maturities between November 2022 and January 2023.

The rating downgrade on Class G and the Negative trend on Class F are reflective of the uncertain resolution of the remaining loans in the pool, most notably Lakewood Apartments (Prospectus ID#3, 43.2% of the trust). The loan is secured by a 111-unit multifamily property in Fort McMurray, Alberta, which has had performance declines since the downturn in the oil and gas industry that began in late 2014. The sponsor, 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, which was in November 2022. With each extension, the borrower was required to make principal curtailment payments and, according to the servicer, $4.6 million in curtailment payments have been made since 2017. According to the servicer, another forbearance extension is currently being discussed.

According to the most recent servicer report, the property was 84.0% occupied in August 2022, an increase over the November 2021 rate of 76.0% but well below the rate of 97.0% at issuance. 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 subject’s average rental rate of $1,484 per unit according to the April 2022 rent roll. As of YE2021, the loan reported a DSCR of 0.65 times (x), the seventh-consecutive year of reporting a coverage below break-even.

Although the borrower’s commitment to the loan is apparent and has been frequently demonstrated with principal curtailments and debt service funded despite significant shortfall at the collateral property, the sustained cash flow is well below the issuance level and will continue to present significantly increased risk for this loan, particularly given the lack of meaningful recovery in the area markets since the downturn began in 2014. To gauge the bonds most exposed to this risk, DBRS Morningstar analyzed a hypothetical liquidation scenario based on a stressed value the collateral property that suggested Class G 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.

The largest loan in the pool, Mont-Tremblant Retail (Prospectus ID#9, 43.7% of the pool), is secured by the fee interest in a 49,616-square-foot (sf) anchored retail property in the Northern Laurentian Mountains in Mont-Tremblant, Québec. This area is a popular tourist destination, attracting visitors with its local ski resorts and numerous year-round outdoor activities. The loan has been on the servicer’s watchlist since July 2016 for low DSCR, decreasing occupancy, and concerns with tenant rollover. Following the initial Coronavirus Disease (COVID-19)-related forbearance, the servicer has approved three additional loan modifications, converting the loan to interest only (IO) through October 2022 and extending the loans maturity through January 2023 to allow the borrower to further stabilized occupancy and attempt to obtain permanent term financing.

As of the August 2022 rent roll, the property reported an occupancy rate of 70.0%, a decline from the December 2021 rate of 83.8% following the departure of White Wave Sportswear Inc. (10.0% of the former net rentable area (NRA)) upon its lease expiration in September 2022. Two tenants, representing 23.7% of the NRA, are scheduled to expire in the next 12 months, including the largest tenant, CISSS des Laurentides (18.5% of NRA, expiring in October 2023). The tenant is subject to an automatic lease renewal at a base rent of $17.50 per square foot (psf), should the tenant fail to present a written notice at least three months prior to the expiration date. As of YE2021, the loan reported a net cash flow (NCF) of $0.4 million (a DSCR of 0.53x), an increase from the YE2020 figure of $0.3 million (a DSCR of 0.35x), but still well below the DBRS Morningstar NCF derived at issuance of $0.9 million (a DSCR of 1.16x). The loan is sponsored by Brookline Developments, which provides 25% recourse for this loan.

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 (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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.

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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