DBRS Morningstar Changes All Trends to Stable from Negative and Confirms Ratings on All Classes of Real Estate Asset Liquidity Trust, Series 2019-HBC

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-HBC issued by Real Estate Asset Liquidity Trust, Series 2019-HBC as follows:

-- Class A at AAA (sf)
-- Class X at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)

DBRS Morningstar changed the trends on all classes to Stable from Negative. The trend changes and rating confirmations reflect the overall stable credit profile given the sponsor’s continued support of the subject loans and collateral, as further described below.

The transaction includes two cross-collateralized and cross-defaulted loans secured by Hudson’s Bay (The Bay) flagship stand-alone department stores in downtown Montréal and Ottawa. The sponsor acquired the properties in 2015 as part of a five-property portfolio sale-leaseback transaction with an allocated purchase price of approximately $535.0 million. The vendor, Hudson’s Bay Company (HBC), retains an 87.5% ownership interest in the properties through RioCan-HBC Limited Partnership, the purchaser of the properties, which is a joint venture (JV) between HBC and RioCan Real Estate Investment Trust (RioCan; rated BBB with a Stable trend by DBRS Morningstar). Although HBC signed 20-year absolute-net leases that include five six-year renewal options, DBRS Morningstar considers the net cash flow (NCF) from these properties to be more volatile given that the rental revenue stream is closely linked to HBC’s retail operating business, which has been affected by the decline in traffic for some stores in both the pandemic and pre-pandemic years.

The subject locations have been open for more than 50 years. Recently, HBC and RioCan announced a plan to redevelop the Montréal location and add a 25-storey, terraced office tower over a four-year construction period, thereby shrinking The Bay’s footprint to 295,000 square feet (sf) when the project is complete from 655,000 sf at issuance. The store will remain open and continue to operate during construction, which is proposed to begin in 2023 and is expected to be completed in 2027. The proposal currently remains with Montréal City Council and DBRS Morningstar notes there have been announcements regarding similar redevelopment plans for other flagship stores across Canada. According to an article published by Daily Hive in February 2022, The Bay's flagship store in Vancouver is also to be redeveloped into a mixed use (office and retail) building, with a similar reduction in the store’s retail footprint upon completion of the project. DBRS Morningstar has requested an update on redevelopment plans at the subject transaction and the servicer's response is pending as of the date of this press release. In general, DBRS Morningstar views the proposed plans for the subject properties and other locations as a positive development overall as they displays HBC’s willingness to pivot and invest in strategies that will capitalize on its commercial real estate portfolio.

At issuance, the Montréal property was the second-best performer within The Bay department store chain in Canada. Although the Ottawa property was an underperforming asset in 2018, the transaction benefits from the cross-collateralization with the Montréal property. Furthermore, the properties are well located in primary urban markets fronting prominent commercial streets where retail spaces are in high demand. Therefore, if HBC decides to downsize or close the Ottawa location, or should the plans to redevelop the Montréal property change to downsizing only The Bay’s footprint, both properties will likely generate good sublease demand. Additionally, there is significant cash equity of $252.0 million behind the subject loan, resulting in a current loan-to-cost-basis ratio of only 45.7% based on the 2015 allocated purchase price. At issuance, the loan sponsor had invested more than $31.7 million in capital expenditures (capex) to improve the properties since the acquisition and had reportedly committed to invest at least $20.0 million in additional capex over the subsequent few years. Lastly, the loans benefit from a full-recourse guarantee from a strong sponsor that is required to maintain minimum equity of $750.0 million throughout the loan terms.

As of the July 2022 remittance report, the trust reported a current balance of $236.3 million, representing a 5.5% reduction from issuance because of scheduled amortization. The two underlying loans have different terms, with the loan secured by the Montréal property maturing in October 2022 and the loan secured by the Ottawa property maturing in June 2024. The servicer has confirmed that takeout financing is in the process of being finalized with the borrower for the Montréal property. At YE2021, both properties reported an occupancy rate of 100%. Net cash flow (NCF), largely derived from contractual rental payments made by HBC to the RioCan-HBC JV, increased between issuance and YE2021. At the Montreal property, NCF saw a positive growth of 8.3%, resulting in a YE2021 debt service coverage ratio (DSCR) of 1.96 times (x) compared with the issuer’s DSCR of 1.81x. At the Ottawa property, NCF increased by 16.2%, resulting in a YE2021 DSCR of 2.21x compared with the issuer’s DSCR of 1.90x.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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 this transaction.

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.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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].

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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