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

DBRS Limited (DBRS Morningstar) confirmed its ratings on 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 AAA (sf)
-- Class X at AAA (sf)
-- Class D at A (high) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)

All trends are Stable. The rating confirmations 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 majority of the loans will successfully repay at or within a relatively short time following their scheduled maturity dates. There are, however, two loans, representing 15.8% of the pool, on the servicer’s watchlist that DBRS Morningstar is continuing to monitor as the loans are performing below expectations and are scheduled to mature in March 2024.

As of the June 2023 remittance, seven of the original 41 loans remain in the trust, with an aggregate balance of $53.8 million, representing a collateral reduction of 82.7% since issuance, as a result of loan repayments and scheduled amortization. Two loans, representing 15.8% of the pool, are on the servicer’s watchlist being monitored for declines in occupancy rates and/or debt service coverage ratios (DSCRs). The pool is concentrated by property type with retail properties representing 73.9% of the pool balance, followed by multifamily properties representing 16.7% of the pool balance.

The largest loan on the servicer’s watchlist, Burnhamthorpe Square (Prospectus ID#19; 9.3% of the current pool balance), is secured by six multitenanted office buildings in Etobicoke, Ontario. This is a pari passu loan with the other piece of the loan secured in the Institutional Mortgage Securities Canada Inc., Series 2013-4 (IMSCI 2013-4) transaction, which is also rated by DBRS Morningstar. The loan was added to the servicer’s watchlist in August 2021 because of a decreased DSCR after the former largest tenant, Canada Bread Company (8.6% of net rentable area (NRA)), vacated upon lease expiration in 2016, bringing the occupancy rate 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’ leases, representing 11.9% of the NRA, scheduled to expire over the next 12 months, including that of 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 0.87 times (x) compared with the YE2019 DSCR of 1.86x and DBRS Morningstar DSCR of 1.33x at issuance. Although the property has experienced some recent leasing momentum, according to 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 has granted an extension through March 2024.

The second loan on the servicer’s watchlist is Nelson Ridge Pooled Loan (Prospectus ID#17; 6.5% of the current pool balance), a pari passu loan that is secured by a multifamily property in Fort McMurray, Alberta. The other piece of the loan is also secured in the IMSCI 2013-4 transaction. 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 November 2023, as the lender has agreed not to enforce any items of existing default. In addition, it appears the loan’s 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, the property occupancy rate 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 rate of 12.7% as of October 2022. Given the sustained performance declines, however, the DSCR is expected to remain below expectations, hovering around break-even. As of the YE2021 financials (most recently received), the loan reported a DSCR 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 the probability of default adjustments 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.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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 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 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 info@dbrsmorningstar.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.

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.

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

DBRS Limited
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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/North American CMBS Insight Model v 1.1.0.0 (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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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 info@dbrsmorningstar.com.