DBRS Morningstar Upgrades Two Ratings, Confirms Two Other Ratings of Institutional Mortgage Securities Canada, Inc., Series 2013-3

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

-- Class C to AAA (sf) from A (sf)
-- Class D to A (sf) from BBB (sf)

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

-- Class E at BB (sf)
-- Class F at C (sf)

The trends on all classes are Stable, with the exception of Class F as it has a rating that does not carry a trend.

DBRS Morningstar discontinued the rating on Class B as the bond fully repaid as of the January 2023 remittance.

The rating upgrades reflect the significantly increased credit support of the bonds as 16 loans repaid from the trust since the last review, representing a $54.6 million of principal paydown.

As of the January 2023 remittance, four of the original 38 loans remain in the trust with an outstanding trust balance of $17.3 million, reflecting a collateral reduction of 93.1% since issuance.

The remaining loans are on the servicer’s watchlist for upcoming loan maturity and/or reported low debt service coverage ratios (DSCRs). The largest loan, Marche Terrebone (Prospectus ID#8; 41.9% of the pool) has an anticipated repayment date of February 2023 and will likely repay, considering its strong YE2021 DSCR of 1.45 times (x).

The rating confirmations on Classes E and F are tied to the sustained concerns about the three loans secured by multifamily properties in Fort McMurray, Alberta, collectively representing 58.1% of the pool balance. These loans are being monitored for low DSCRs and all have received several loan modifications. The Lunar and Whimbrel Apartments (Prospectus ID#10; 21.2% of the pool), Snowbird and Skyview Apartments (Prospectus ID#11; 20.0% of the pool), and Parkland and Gannet Apartments (Prospectus ID#17;16.8% of the pool) have had performance declines since the downturn in the oil and gas industry that began in late 2014, with DSCRs reported well below 1.0x for the last several years. Based on the servicer’s commentary, the properties reported October 2022 occupancy rates ranging from 75% to 97%. 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, $4.7 million in curtailment payments have been made since 2018. An additional $1.2 million is expected to be paid by August 2023 as part of the most recent maturity extension, with $600,000 of the amount expected to be paid by February 2023. Once the August 2023 payment is made, the aggregate principal balance across these three loans is scheduled to be reduced to approximately $9.0 million from $10.1 million.

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. DBRS Morningstar maintained its hypothetical liquidation scenario based on a stressed value for each of the collateral properties, which suggested Classes F and 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.

ESG 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 the 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 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 info@dbrsmorningstar.com.

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