DBRS Morningstar Confirms Ratings on All Classes of Institutional Mortgage Securities Canada Inc., Series 2014-5

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-5 issued by Institutional Mortgage Securities Canada Inc., Series 2014-5 as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. At issuance the trust consisted of 41 fixed-rate loans secured by 55 commercial properties. As of the November 2021 remittance, just seven loans remain in the pool, representing a collateral reduction of 81.5% as a result of loan repayments and scheduled amortization.

No loans are in special servicing but two loans, representing 18.0% of the pool, are on the servicer’s watchlist. These include the Nelson Ridge Pooled loan (Prospectus ID#17; 8.7% of the pool balance), which is a pari passu loan secured by a multifamily property located in Fort McMurray, Alberta, that has been on the DBRS Morningstar Hotlist because of ongoing performance challenges as the area was affected by the downturn of the oil and gas industry. The loan is on the watchlist because the debt service coverage ratio (DSCR) continues to be depressed with the YE2019 DSCR reported at -0.92 times (x), compared with the YE2018 DSCR of 0.47x. Because of the challenges arising from the pandemic, the borrower was granted mortgage relief in the form of interest-only payments from April 2020 to August 2020, with the deferred amounts to be paid at maturity in December 2021. In addition, $1.0 million of principal curtailment initially due in June 2020 was extended and paid over three installments from April 2021 to June 2021. Although the borrower has complied with the forbearance agreement, an extension was recently requested and is currently being reviewed by the master servicer and controlling class representative. As such, it is likely that the loan’s maturity date, along with the repayment of deferred amounts, will be extended similar to the sponsor’s other loans that are secured in the IMSCI 2013-3 transaction.

According to the February 2021 rent roll, the property was 76.0% occupied, which is an improvement from the November 2019 occupancy rate of 69.0% but still below the issuance figure of 94.0%. The loan has exhibited significantly increased risks since issuance, considering the sustained economic stress from the oil and gas industry, compounded by the pandemic, which has diminished the prospects of recovery in the near to medium term. As such, DBRS Morningstar maintained an elevated probability of default (POD) for this loan to significantly increase the expected loss with this review. It is worth noting that the subject trust has a relatively small piece (balance of approximately $5.0 million as of the November 2021 remittance) of the whole loan, and the unrated Class H balance of $5.8 million remains intact with no losses to the trust since issuance.

The second loan on the watchlist is the Burnhamthorpe Square Pooled loan (Prospectus ID#19; 9.3% of the pool balance), which is secured by six office buildings in Etobicoke, Ontario, located approximately 16 kilometres east of the Toronto central business district. This loan is on the servicer’s watchlist because the largest tenant, Canada Bread Company (18.4% of the net rentable area) vacated on its December 2020 lease expiry, resulting in the occupancy rate dropping to 68.4% as per the March 2021 rent roll. The servicer’s commentary noted that $754,796 ($13.09 per square foot) was available in leasing reserves, collected specifically for the space in question. According to several Cushman & Wakefield online postings, approximately 40.0% of space at the property was listed as available for lease. The most recent servicer’s analysis shows the YE2019 net cash flow and, when the reporting period’s effective gross income is reduced by 40.0%, it results in an implied DSCR of 1.23x compared with the YE2018 DSCR of 1.86x and the DBRS Morningstar DSCR of 1.33x. It is worth noting that the borrower did not request any relief during the pandemic despite facing vacancy challenges. Although this is a nonrecourse loan and occupancy has declined, the DSCR is still expected to cover above 1.0x and the loan maturity is scheduled for 2023, allowing the borrower time to stabilize the property. For this review, DBRS Morningstar increased the POD to increase the expected loss in its analysis.

ESG CONSIDERATIONS
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/373262.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#17 – Nelson Ridge Pooled Loan (8.7% of the pool)
-- Prospectus ID#19 – Burnhamthorpe Square Pooled Loan (9.3% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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@dbrsmorningstar.com.

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.

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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