Press Release

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

CMBS
October 08, 2024

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

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

All trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction, which remains in line with Morningstar DBRS' expectations. Overall, the pool continues to exhibit healthy credit metrics as evidenced by the weighted-average debt service coverage ratio (DSCR) of 1.99 times (x), based on the most recent financial reporting available. As of the September 2024 remittance, 23 of the original 38 loans remain in the pool. In total, loan repayments and amortization have reduced the pool balance to $167.4 million, representing a collateral reduction of 52.5% since issuance. Since Morningstar DBRS' prior credit rating action, one loan (4.5% of the original pool balance) was repaid in full at the scheduled maturity date. Despite the significant principal paydown since issuance, which suggested upward pressure on the credit ratings, the largest loan in the pool, Portage Place (Prospectus ID#1; 13.3% of the pool) matured on October 1, 2024, and is currently being monitored on the servicer's watchlist, the details of which are outlined below. In addition, Morningstar DBRS has not received updated loan-level financial reporting, and notes that the transaction's structure includes minimal cushion at the bottom of the capital stack to insulate against any potential losses. To further test the durability of the credit ratings, Morningstar DBRS' analysis also considered a stressed scenario that included a 20.0% haircut to the issuer's underwritten cash flow for each remaining loan in the pool. The resulting analysis suggests a significant amount of cushion against future cash flow volatility remains, further supporting the credit rating confirmations and Stable trends with this review.

Only one loan, representing 7.8% of the pool, has been fully defeased. No loans are in special servicing, but 12 loans, representing 68.9% of the pool, are on the servicer's watchlist; however, just two of those loans, which represent 14.3% of the pool, are being monitored for performance-related concerns.

The Portage Place loan is secured by a 228,358 square foot (sf) retail property in Peterborough, Ontario. The loan was added to the servicer's watchlist with the August 2024 remittance because of a pending maturity date on October 1, 2024. The servicer confirmed that the borrower is considering financing options, and a payoff quote is being prepared. According to the YE2023 servicer-provided reporting, the property was 100.0% occupied and the loan's DSCR was strong at 1.72x. Cashflows have improved year over year, with the property generating $2.9 million of net cash flow (NCF) as of YE2023, a notable increase from both the YE2022 and Morningstar DBRS figures of $2.6 million and $2.1 million, respectively. Although an updated rent roll was not provided, the five largest tenants, which collectively account for 62.9% of net rentable area (NRA) are on long-term leases with the nearest lease expiration (approximately 6.0% of the NRA) in December 2027. Morningstar DBRS analyzed the loan with a conservative probability of default (POD) adjustment, resulting in an expected loss that was more than triple the pool average.

The fourth-largest loan in the pool, Fortier Industrial Portfolio (Prospectus ID#6; 7.5% of the pool), is secured by a portfolio of three industrial properties totalling 308,932 sf 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 DSCR, which was driven by a decrease in expense reimbursements. Although updated reporting was not provided, the portfolio was 97.5% occupied as of January 2023. Based on the most recent financial reporting available, the portfolio generated NCF of $2.3 million as of YE2022 (reflecting a DSCR of 2.17x), an increase from the YE2021 and Morningstar DBRS figures of $1.8 million (DSCR of 1.74x) and $1.5 million (DSCR of 1.41x), respectively. According to the January 2023 rent roll, rollover risk was concentrated throughout 2023, with tenant leases representing approximately 52.3% of the NRA scheduled to roll throughout YE2024. Morningstar DBRS maintained the POD penalty from the prior credit rating action to reflect the decline in the loan's DSCR, elevated rollover risk, and outdated financial reporting, resulting in an expected loss that was more than double the pool average.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Classes X is an interest-only (IO) certificate that reference 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798

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

The credit ratings assigned to the Class E, F, and G certificates materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating 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 rating. The rationale for the material deviation is uncertain loan-level event risk. As outlined above, the largest loan in the pool, Portage Place (Prospectus ID#1; 13.3% of the pool) matured on October 1, 2024, and is currently being monitored on the servicer's watchlist. In addition, Morningstar DBRS has not received updated loan-level financial reporting, and notes that the transaction's structure includes minimal cushion at the bottom of the capital stack to insulate against any potential losses.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

Morningstar DBRS Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024), https://dbrs.morningstar.com/research/437761

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

Ratings

Institutional Mortgage Securities Canada Inc., Series 2016-7
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:AAA (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:AAA (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:AA (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:AA (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:AA (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:A (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:BBB (low) (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:BB (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • Date Issued:Oct 8, 2024
  • Rating Action:Confirmed
  • Ratings:B (sf)
  • Trend:Stb
  • Rating Recovery:
  • Issued:CA
  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.