DBRS Assigns Provisional Ratings to Real Estate Asset Liquidity Trust, Series 2017-1

DBRS Limited (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-1 (the Certificates) issued by Real Estate Asset Liquidity Trust, Series 2017-1:

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

All trends are Stable.

Classes F and G will be privately placed. Class X is notional.

The collateral consists of 60 fixed-rate loans secured by 73 commercial and multifamily properties. The transaction is a sequential-pay, pass-through structure. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, two loans, representing 2.9% of the total pool, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 24 loans, representing 53.2% of the pool, having refinance DSCRs below 1.00x, an indication of elevated refinance risk.

Twenty-seven loans (40.0% of the pool by loan balance) were considered by DBRS to have Strong sponsor strength, and 32 loans (63.3% of the pool by loan balance) were considered to have meaningful recourse to the respective sponsor; all else being equal, recourse loans typically have lower probability of default and were modelled as such. All loans in the transaction amortize for the entire term: 32.9% of the pool by loan balance amortizes on schedules that are 25 years or less, and the remaining loans amortize on schedules that are between 25 years and 30 years. Two top ten loans (13.4% of the pool) were considered to be of Above Average property quality. Higher-quality properties are more likely to retain existing tenants and more easily attract new tenants, resulting in a more stable performance.

The transaction exhibits significant sponsor concentration as evidenced by only 28 sponsors and/or sponsor groups for the pool of 60 loans, and 38 loans (54.4% of the pool balance) have related borrowers to one or more loans within the pool. However, 18 of these loans have meaningful full recourse to the sponsor, and none of the related sponsors were considered by DBRS to be weak or below average in terms of net worth or liquidity. Ten loans, representing 22.8% of the pool, are secured by properties that are leased to a single tenant, and three of these loans are in the top ten. Loans secured by properties occupied by single tenants have been found to suffer from higher loss severities in the event of default. To mitigate, DBRS assumed a higher loss profile for the loans secured by single-tenant assets than it did for the loans secured by multi-tenant assets.

The DBRS sample included 35 of the 60 loans in the pool. Site inspections were performed on 43 of the 73 properties in the portfolio (78.2% of the pool by allocated loan balance). The DBRS sample had an average NCF variance of -4.4% from the Issuer’s NCF and ranged from -17.9% (U-Haul Royal Windsor Drive) to +13.4% (U-Haul Barnet Highway).

The rating assigned to Class X differs from the lower rating implied by the reference rating within the methodology, Rating North American CMBS Interest-Only Certificates. Consideration was given for actual loan, transaction and sector performance where a rating based on the lowest rated referenced notional class may not reflect the observed risk. DBRS considers this difference to be a material deviation from the methodology and, in this case, the rating reflects consideration given to the historical performance of Canadian CMBS, in which the total losses in the sector are less than 0.1% since inception in 1998.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodologies are North American CMBS Multi-borrower Rating Methodology, Rating North American CMBS Interest-Only Certificates and DBRS Commercial Real Estate Property Analysis Criteria, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.