DBRS Morningstar Changes Trends on Three Classes, Confirms All Classes of Real Estate Asset Liquidity Trust, Series 2016-2

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-2 issued by Real Estate Asset Liquidity Trust, Series 2016-2 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class X at A (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)

DBRS Morningstar also changed the trends on Classes B, C, and X to Positive from Stable; all other trends remain Stable.

The rating confirmations and trend changes reflect the overall stable performance and significant paydown of the transaction since issuance. At issuance, the transaction consisted of 47 loans at the original trust balance of $421.4 million. As of the December 2020 remittance report, 40 loans remain in the transaction at the current trust balance of $312.8 million, representing a collateral reduction of approximately 25.8% since issuance. Property type concentration across the portfolio is relatively evenly distributed, with the largest concentration being in office properties that back loans representing 22.9% of the current trust balance. Six loans, representing 19.8% of the current trust balance, are secured by industrial properties. Furthermore, nine loans, representing 18.3% of the current trust balance, are secured by retail assets and an additional five loans, representing 18.1% of the balance, are secured by healthcare properties.

According to the December 2020 remittance report, eight loans, representing 19.4% of the current trust balance, are on the servicer’s watchlist. Five of those loans, representing 11.0% of the pool, have been granted forbearances due to Coronavirus Disease (COVID-19)-related disruptions. The largest of these loans is Prospectus ID#7 – 480 Hespeler Road, which is secured by a 118,000-square-foot unanchored retail centre in Cambridge, Ontario. The loan was granted a deferral of principal and interest payments for May and June 2020 and a further deferral of principal payments from July to September 2020, with repayment expected to begin in January 2021. The other four loans that received coronavirus-related forbearances received similar packages.

One watchlisted loan, Prospectus ID#17 – The Duke of Devonshire, representing 3.0% of the pool, is on the DBRS Morningstar Hotlist and has been on the servicer’s watchlist since October 2017. The loan has been monitored for a consistently very low debt service coverage ratio driven by depressed occupancy rates since issuance. The trust loan, which is part of an $18.5 million pari passu whole loan, is secured by a 105-unit independent living facility in Ottawa and is owned and operated by Chartwell Retirement Residences (rated BBB (low) with Negative trends by DBRS Morningstar in October 2020, reflecting increased risks for the company amid the coronavirus pandemic). As of the February 2020 rent roll (the most recent provided by the servicer), the property was only 53.9% occupied, a level that is consistent with the figures reported post-closing for the subject loan and well below the issuance occupancy rate of 95.0%.

According to the servicer’s watchlist commentary, the property remained 53.0% occupied as of November 2020, which can be attributed to a temporary oversupply in the local market. The servicer also reports ongoing litigation against the property and borrower that pertains to the property’s sale in 2015 and is in regard to a breach of contract/fraudulent misrepresentation. According to the servicer, the litigation was in the discovery stage as of December 2020. Further information has been requested. For this review, the loan was analyzed with an increased probability of default, significantly increasing the expected loss.

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.

DBRS Morningstar materially deviated from its principal methodology when determining the ratings assigned to Class C as the quantitative results suggested a higher rating. The material deviation is warranted given uncertain loan level event risk.

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#7 – 480 Hespeler Road (4.5% of the pool)
-- Prospectus ID#17 – Duke of Devonshire (3.0% 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 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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