DBRS Morningstar Confirms All Classes, Assigns Negative Trends to Two Classes of AREIT 2019-CRE3 Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-CRE3 (the Certificates) 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)

DBRS Morningstar assigned Negative trends to Classes E and F, given the elevated risk profile of multiple loans in the transaction. The pool consists of six hospitality properties, comprising 21.6% of the pool balance and including two loans in the top 10, which have been negatively affected by the ongoing Coronavirus Disease (COVID-19) pandemic. Four of the six loans have received some form of loan modification or forbearance and may face additional headwinds in the execution of stated business plans at issuance due to the effects of the pandemic. The remaining classes in the transaction have Stable trends.

In its analysis of the transaction, DBRS Morningstar applied probability of default (POD) adjustments to loans with confirmed issues partially related to the stressed real estate environment caused by the coronavirus pandemic. Because of the transitional nature of the underlying collateral, proposed business plans that are necessary to bring the assets to stabilization may be delayed and, in some cases, borrowers have requested relief from the Issuer.

At issuance, the collateral consisted 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. As of the July 2020 remittance report, the original 30 loans remain in the pool with approximately $29.9 million of future funding commitments released to individual borrowers as of June 2020.

As of the July 2020 remittance, 15 loans, representing 49.8% of the pool, are on the servicer’s watchlist with no loans in special servicing. Nine of these 15 loans are secured by transitional multifamily properties that have been flagged for occupancy below 80%; however, as these properties generally had renovation and lease-up business plans, the in-place occupancy rates are expectedly low and, as such, DBRS Morningstar does not believe there is elevated risk associated with these loans as the individual borrowers are executing their respective business plans. The other six loans on the servicer’s watchlist are secured by hospitality properties, which are being monitored due to the broader lodging industry’s exposure to the coronavirus pandemic. Of these six loans, four have been granted a loan modification or forbearance and one loan, SIXTY Hotel LES (3.1% of the pool balance), is reported as 60 to 89 days delinquent. DBRS Morningstar analyzed these loans with elevated PODs to reflect concerns with the hospitality industry and the potential for delayed stabilization. For additional information on these loans, please see the respective loan commentaries on the DBRS Viewpoint platform.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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#1 – 110 Tower (11.9% of the pool)
-- Prospectus ID#2 – Hyatt House Fulton Market District (8.5% of the pool)
-- Prospectus ID#3 – The Curb (8.3% of the pool)
-- Prospectus ID#4 – Rialto I & II (5.0% of the pool)
-- Prospectus ID#5 – Encore Montrose (4.6% of the pool)
-- Prospectus ID#6 – The Kent (4.5% of the pool)
-- Prospectus ID#7 – Gulf Tower (4.0% of the pool)
-- Prospectus ID#8 – Inn at the Pier (3.7% of the pool)
-- Prospectus ID#9 – 600 Chestnut Street (3.5% of the pool)
-- Prospectus ID#11 – SIXTY Hotel LES (3.1% of the pool)
-- Prospectus ID#17 – Graduate Hotel State College (2.4% of the pool)
-- Prospectus ID#22 – 318-334 Lincoln Road (2.1% 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 U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905

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. 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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