DBRS Morningstar Upgrades One Rating and Confirms Six Ratings of Institutional Mortgage Securities Canada, Inc., Series 2013-4

DBRS Limited (DBRS Morningstar) upgraded its rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2013-4 issued by Institutional Mortgage Securities Canada Inc., 2013-4 as follows:

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

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

-- Class A-2 at AAA (sf)
-- Class C 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)

The rating on Class X has been withdrawn as the transaction is in its wind-down period with limited cash flow stream remaining on the interest-only (IO) bond given the near-term maturity of the remaining loans. All trends are Stable.

The rating upgrade for Class B reflects the significantly increased credit support for that class as the transaction is in wind down, with all remaining loans scheduled to mature within the next 12 months. The rating confirmations generally reflect the overall stable performance of the transaction since DBRS Morningstar’s last review in November 2022, as well as DBRS Morningstar’s expectation that most of the remaining loans will successfully repay at or within a relatively short time following their scheduled maturity dates. There are, however, three loans, representing 37.9% of the pool, on the servicer’s watchlist that DBRS Morningstar is continuing to monitor as the loans are performing below expectations, with no updates reported on repayment plans.

As of the May 2023 remittance, 11 of the original 33 loans remain in the pool, representing a collateral reduction of 69.6% since issuance, as a result of scheduled loan amortization and loan repayment. Since DBRS Morningstar’s last review, the Franklin Suites loan (Prospectus ID#12), which previously had some performance issues, repaid in full as of January 2023, ahead of its scheduled maturity date, contributing a principal paydown of $7.6 million. One loan, representing 14.6% of the pool balance, is secured by collateral that has been fully defeased. By property type, the pool is most concentrated by retail and office properties, which represent 40.0% and 24.8% of the pool balance, respectively.

The largest loan on the servicer’s watchlist, Burnhamthorpe Square (Prospectus ID#2; 19.4% of the pool), is secured by six multitenanted office buildings in Etobicoke, Ontario. The loan was added to the servicer’s watchlist in August 2021 because of a low debt service coverage ratio (DSCR) after the former largest tenant, Canada Bread Company (8.6% of net rentable area (NRA)), vacated upon lease expiration in 2016, bringing occupancy down to 68.4% as of March 2021. According to the September 2022 rent roll, the property was 66.0% occupied, with approximately seven tenants, representing 11.9% of the NRA, scheduled to expire over the next 12 months; including the second-largest tenant, SGI Canada Insurance (7.0% of the NRA, expiring December 2023). Based on the most recent financials, the loan reported a YE2021 DSCR of 0.84 times (x), compared with the YE2019 DSCR of 1.86x. Although the property has experienced some recent leasing momentum according the servicer’s most recent commentary, there is continued uncertainty related to end-user demand and investor appetite for this property type, increasing the credit risk profile for this loan. The loan initially had a scheduled maturity in July 2023; however, the servicer granted an extension through March 2024.

Nelson Ridge (Prospectus ID#4, 10.6% of the pool), the second-largest loan on the servicer’s watchlist, is part of a pari passu whole loan secured by a multifamily property in Fort McMurray, Alberta. The loan has been in special servicing twice, and, in both cases, it was returned to the master servicer as a corrected loan, generally receiving forbearance, modification, or amendments to either of those agreements as required. The loan is actively under forbearance through December 2023, as the lender has agreed not to enforce any items of existing default. In addition, it appears the loans maturity was recently extended to March 2024; however, the servicer has noted another extension will likely be required.

While the local economy continues to be disrupted by the downturn of the oil industry, property occupancy has recently increased to 92.0% as of March 2023 from 60.0% as of February 2019. While occupancy has increased, the average rental rate has dropped to $1,343/unit as of March 2023 from $1,433/unit as of February 2019. According to Canada Mortgage and Housing Corporation's Historical Rental Market Statistics Summary, the subject was performing slightly above its competitors as the Wood Buffalo submarket reported an average rental rate of $1,301 and vacancy of 12.7% as of October 2022. Given the sustained performance declines, however, coverage is expected to remain below expectations, hovering around break-even. As of the YE2021 financials (most recent received) the loan reported a coverage of 0.68x, when the property was 82.2% occupied. 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.

Although the borrower’s commitment to the watchlisted loans is apparent and has been frequently demonstrated with principal paydown, the sustained cash flows and/or low occupancy figures continue to present increased refinance risks for these loans as they reach maturity. DBRS Morningstar used a hypothetical liquidation scenario for the loans on the servicer’s watchlist based on a stressed value for each of the collateral properties, which suggested that any potential losses, should a default and liquidation ultimately occur within the near to moderate term, would be contained in the unrated Class H.

At issuance, DBRS Morningstar shadow-rated one loan, Calloway Courtenay (Prospectus ID#1, 23.4% of the pool), as investment grade. This assessment was supported by the loan’s strong sponsorship provided by SmartCentres REIT (formerly Calloway REIT). With this review, DBRS Morningstar confirms that the performance of the loan remains consistent with investment-grade characteristics.

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 (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 (March 16, 2023) https://www.dbrsmorningstar.com/research/410912/north-american-cmbs-surveillance-methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only 11 remaining loans. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410913).

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577).

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646).

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499).

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153).

Legal Criteria for Canadian Structured Finance (June 22, 2022;
https://www.dbrsmorningstar.com/research/398729).

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