DBRS Morningstar Upgrades Credit Ratings on Three Classes of Institutional Mortgage Securities Canada Inc., Series 2016-7

DBRS Limited (DBRS Morningstar) upgraded its credit ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-7 issued by Institutional Mortgage Securities Canada Inc., Series 2016-7 as follows:

-- Class C to AA (sf) from A (high) (sf)
-- Class X to AA (sf) from A (high) (sf)
-- Class D to A (sf) from BBB (high) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The credit rating upgrades reflect the significant principal paydown since the last review (nine loans; 21.5%) and the overall stable performance of the remaining collateral. Based on the September 2023 remittance, 24 of the original 38 loans remain in the trust, representing total collateral reduction of 48.4% from issuance.

One loan, representing 7.5% of the pool, has been fully defeased. There are no loans in special servicing; however, four loans, representing 21.3% of the pool, are on the servicer’s watchlist. The largest loan on the watchlist, Sobeys Brantford (Prospectus ID#4; 8.5% of the pool), is being monitored for outdated financials; however, the property has not exhibited financial stress in the past.

The second-largest loan on the servicer’s watchlist, Fortier Industrial Portfolio (Prospectus ID#6; 7.2% of the pool), is secured by a portfolio of three industrial properties totalling 308,932 square feet in Saint-Hubert, Québec, a city approximately 10 kilometres northeast of Montréal. The collateral consists of three adjacent industrial properties with 12 multi-tenant buildings that were constructed between 1975 and 1988. The loan was added to the servicer’s watchlist in August 2023 for a decline in the debt service coverage ratio (DSCR), which was driven by a decrease in expense reimbursements. The portfolio continues to report a strong occupancy rate of 97.5% per the January 2023 rent roll. Based on the YE2022 financials, the portfolio generated net cash flow of $1.1 million (DSCR of 1.03 times (x)), which is lower than the YE2021 and issuance figures of $1.8 million (DSCR of 1.74x) and $1.5 million (DSCR of 1.47x), respectively.

The three largest tenants collectively represent 16.1% of the net rentable area (NRA) and include Publi-SAC (6.0% of the NRA; lease expiration in July 2026), JAS Filtration Inc. (5.3% of the NRA; lease expiration in December 2023), and Importations Planètes Inc. (4.8% of the NRA; lease expiration in August 2027). The remainder of the rent roll is granular, with no tenant representing more than 4.0% of the NRA. Tenant leases representing approximately 40.0% of the NRA have expiration dates that have either already passed or are coming up in the next 12 months, including the second-largest tenant; however, mitigating factors include the granularity of the rent roll, the collateral’s historically strong occupancy rates, and experienced sponsors, consisting of a joint venture between Abacus Real Estate Investments Ltd. and Romspen Real Estate Equities Ltd. For this review, DBRS Morningstar applied an elevated probability of default (POD) assumption in its analysis, resulting in an expected loss (EL) that was more than double the deal average.

The Duke of Devonshire loan (Prospectus ID#13; 4.5% of the pool) is secured by a 105-unit independent living facility in Ottawa and is owned and operated by Chartwell Retirement Residences (Chartwell; rated BBB (low) with a Negative trend by DBRS Morningstar, most recently confirmed on April 13, 2023). The loan has been on the servicer’s watchlist intermittently since October 2017, primarily for reporting low DSCRs as occupancy rates have declined since issuance. The most recent occupancy rate provided was dated December 2021, which noted a 44.1% figure. The servicer also reports ongoing litigation between the borrower and a vendor that began in January 2018. Additional information has been requested and DBRS Morningstar will continue to monitor this loan for updates. The loan is full recourse to Chartwell and, although the company faces challenges amid the ongoing pandemic, it is noteworthy that the loan has remained current and no financial relief was requested from the servicer to date. For this review, DBRS Morningstar analyzed the loan with an elevated POD assumption, resulting in an EL that was nearly double the pool average.

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/416784 (July 4, 2023).

Classes 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 credit ratings are subject to surveillance, which could result in credit 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).

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

The credit ratings assigned to Classes E, F, and G materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk, primarily tied to select loans that are being monitored on the servicer’s watchlist, as noted above. In addition, as the pool continues to season, there could be risks associated with cash flow volatility and/or adverse selection.

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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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

The credit 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)/North American CMBS Insight Model version 1.1.0.0 (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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for Canadian Structured Finance (June 20, 2023; https://www.dbrsmorningstar.com/research/416101)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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