DBRS Morningstar Confirms All Classes of AREIT 2019-CRE3 Trust, Maintains Negative Trends on Two Classes

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

Classes E and F have Negative trends. All other trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. The Negative trends on Classes E and F reflect DBRS Morningstar’s concerns with select loans experiencing performance issues, specifically those secured by hotel properties. Additionally, two loans, representing 3.3% of the pool, are in special servicing. In conjunction with this press release, DBRS Morningstar has published a rating action report with in-depth analysis and credit metrics for the transaction with business plan updates on the select loans. To access this report, please click on the link under Related Documents below or contact us at [email protected].

At issuance, the collateral consisted of 30 floating-rate mortgage loans secured by 31 mostly transitional real estate properties with a cut-off balance totalling $717.9 million, excluding approximately $93.9 million of future funding commitments. As of the July 2021 remittance report, 26 loans remain in the pool, with an aggregate trust balance of $664.8 million as four loans have successfully paid out of the transaction, resulting in collateral reduction of 6.1%. The Permitted Funded Companion Participation Acquisition Account had a balance of $9.1 million, which the Issuer can use to acquire funded loan participation interests during the Permitted Funded Companion Participation Acquisition Period (expires with the August 2022 Payment Date). According to an update from the collateral manager, a cumulative amount of $48.8 million in future funding commitments has been released to individual borrowers as of August 2021 with unfunded commitments totalling $29.5 million. Of the $48.8 million advanced to borrowers, $44.3 million has been purchased into the Trust.

As of the July 2021 remittance, 11 loans, representing 46.2% of the pool, are on the servicer’s watchlist and two loans, representing 3.3% of the pool, are in special servicing. The two largest loans on the watchlist, comprising 22.2% of the pool, are being monitored for upcoming maturity dates but are performing in line with expectations. Four loans, representing 13.4% of the pool, are secured by hotel properties, which have received Coronavirus Disease (COVID-19) relief request and experienced depressed cash flows in 2020. The remaining five loans, representing 10.6% of the pool, are being monitored for low debt service coverage ratios (DSCRs); however, as these properties generally had renovation and lease-up business plans, in-place cash flows and 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 the respective business plans.

The SIXTY Hotel LES loan (Prospectus ID#11, 3.4% of the pool), secured by an upscale full-service hotel in the Lower East Side of Manhattan, is currently flagged as over 120 days delinquent and is being monitored on the servicer’s watchlist for low DSCR and a coronavirus relief request. The loan was initially modified in May 2020 to defer the collection of interest payments and allow the use of existing furniture, fixtures, and equipment (FF&E) reserves to cover operating shortfalls for a period of three months from May 2020 through July 2020. Due to the soft lodging market, the borrower requested consent to extend its use of FF&E reserves and cash management funds to cover debt service shortfalls for six additional months starting in December 2020. The loan has been delinquent since February 2021 and, as of July 2021, the loan is over 120 days past due. Despite negative cash flow in 2020, the loan reports reserves including $37,500 in FF&E reserves, $623,000 in other reserves, and, after a $1.0 million deposit in July 2021, $1.3 million in debt service reserves. DBRS Morningstar analyzed this loan with an elevated probability of default to reflect the ongoing concerns with the hospitality industry and the delayed stabilization of the property.

The largest loan in special servicing, 75 North 7th Street (Prospectus ID#23, 2.2% of the pool), transferred to special servicing in December 2020 for payment default. The loan is secured by a newly constructed mixed-use retail and office property in the Williamsburg neighbourhood of Brooklyn, New York, and was 100% vacant at issuance. The sponsor had initially signed a co-working tenant to take 100% of the property’s office space (47.9% of the net rentable area (NRA)); however, as a result of the pandemic and soft co-working market, the tenant opted to terminate its lease, paying an upfront termination fee of $500,000 in Q3 2020 and an additional $400,000 or $500,000 in either 12 or 18 months afterward. All proceeds from termination fees will be deposited in a debt service reserve to fund operating shortfalls. Two retail tenants, representing 30.0% of the NRA, have since signed leases at the property; however, with the property vacant for most of 2020, cash flow remained depressed and the loan became delinquent in September 2020 after an initial deferral period in the summer. The sponsor is currently in talks with perfume brand Le Labo to take the remaining retail and office space to serve as its corporate headquarters. The current discussed terms include a seven-year term at a rental rate of $69.00 per square foot. An updated appraisal as of February 2021 valued the property on an as-is basis at $14.0 million, representing a 36.3% decline from the issuance as-is value of $22.0 million, resulting in an implied loan-to-value ratio over 100%. The appraiser also provided an estimated stabilized value at $18.0 million. According to special servicer commentary, a loan modification and forbearance was agreed to in May 2021, which includes a loan extension as the initial maturity date occurred in March 2021. The loan modification will extend the loan term two additional years to February 2023, reduce the loan’s interest rate, and require the sponsor to deposit $500,000 into a TI/LC reserve. The loan is expected to be returned to the master servicer. DBRS Morningstar analyzed this loan with a liquidation scenario given the steep value decline, with an implied loss severity exceeding 20.0%.

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 https://www.dbrsmorningstar.com/research/373262.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 26, 2021), 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 [email protected].

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 [email protected].

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