DBRS Assigns Provisional Ratings to AREIT 2019-CRE3 Trust

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-CRE3 (the Certificates) to be issued by AREIT 2019-CRE3 Trust:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable. Classes E and F will be privately placed.

The initial collateral consists of 30 floating-rate mortgage loans secured by 31 mostly transitional real estate properties with a cut-off balance totaling $717.9 million, excluding approximately $93.9 million of future funding commitments. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Permitted Funded Companion Participation Acquisition Period, the Issuer may acquire future funding commitments without being subject to rating agency confirmation.

For all floating-rate loans, DBRS used the one-month LIBOR index, which is based on the lower of a DBRS stressed rate that corresponded with the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. The pool exhibited a relatively high weighted-average (WA) As-Is Issuance loan-to-value (LTV) ratio of 78.2%. When the cut-off date balances were measured against the DBRS As-Is net cash flow (NCF), 20 loans comprising 62.2% of the cut-off date pool balance had a DBRS As-Is debt service coverage ratio (DSCR) below 1.00 times (x), a threshold indicative of higher default risk. Additionally, the DBRS Stabilized DSCR for six loans comprising 18.3% of the initial pool balance was below 1.00x, a threshold indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets to stabilize above market levels.

Twelve loans, comprising 51.0% of the cut-off date pool balance, are secured by properties located in areas with a DBRS Market Rank of 6, 7 or 8, which are characterized as urbanized locations. These markets benefit from increased liquidity that is driven by consistently strong investor demand; therefore, such markets tend to benefit from lower default frequencies than less-dense suburban, tertiary and rural markets. Areas with a DBRS Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity; three loans, representing 9.6% of the cut-off date pool balance, are secured by properties located in these areas. Seven loans, representing 46.5% of the cut-off date pool balance, exhibited Average (+) property quality, all of which were within the top ten loans by cut-off date pool balance. Only two loans, representing a combined 5.9% of the cut-off date pool balance, were assigned Average (-) property quality while no loans were deemed Below Average or Poor quality.

The pool is heavily concentrated by property type with ten loans, comprising 37.4% of the cut-off date pool balance, secured by office properties and 11 loans, comprising 35.0% of the cut-off date pool balance, secured by multifamily properties. Additionally, six loans, representing a combined 21.6% of the cut-off date pool balance, are secured by hospitality properties, which typically have higher expense ratios. Hospitality properties additionally exhibit enhanced vulnerability to NCF volatility because of the relatively short-term nature of their respective leases, which can cause NCF to deteriorate quickly in a declining market. Hospitality properties account for the third-largest property concentration in the pool. Loans secured by multifamily properties generally exhibit lower average default frequencies relative to other commercial property types. Additionally, no loans are secured by student-housing multifamily properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Traditional property types, such as office, retail, industrial and multifamily, also benefit from more readily available conventional take-out financing than non-traditional property types, such as hospitality, self-storage and manufactured housing. Furthermore, the WA As-Is DBRS LTV of the hospitality loans is 73.7%, which is substantially lower than the 82.4% WA As-Is DBRS LTV for loans not secured by hotels.

Based on the weighted initial pool balances, the overall WA DBRS As-Is DSCR of 0.64x is generally reflective of high-leverage financing. The assets are generally well positioned to stabilize and any realized cash flow growth would help to offset a rise in interest rates and also improve the overall debt yield of the loans. DBRS associates its loss given default (LGD) based on the assets’ As-Is LTV that does not assume that the stabilization plan and cash flow growth will ever materialize.

DBRS has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsor will not execute its business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS analyzes LGD based on the As-Is LTV, assuming the loan is fully funded.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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 rated entity or its related entities did participate in the rating process for this rating action. DBRS 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606 USA