DBRS Morningstar Confirms Ratings on All Classes of AREIT 2019-CRE3 Trust

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-CRE3 issued by AREIT 2019-CRE3 Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 52.2% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as four loans are secured by office properties (56.7% of the current pool balance). As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates, resulting in lower than expected cash flows. While all loans remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

As of the March 2023 remittance, the trust reported an outstanding balance of $343.0 million with 10 of the original 30 loans remaining in the trust. Since the previous DBRS Morningstar rating action in November 2022, there has been collateral reduction of $36.7 million, including the full repayment of one loan. The remaining loans in the transaction beyond the office concentration noted above include five loans secured by hotel properties (38.4% of the current trust balance) and one loan secured by a retail property (4.9% of the current pool balance). Unlike office collateral, the borrowers of the hotel loans generally reported performance improvement throughout 2022. The property type concentration of the transaction has remained relatively stable since June 2022 when 55.3% of the trust balance was secured by office collateral, and 33.6% of the trust balance was secured by hotel collateral.

Nine of the 10 loans, representing 96.4% of the current trust balance, have scheduled maturity dates in 2023. Of these loans, eight are structured with additional extension options of six or 12 months, which the borrower may exercise if its respective property meets the required performance-based minimum debt service coverage ratio (DSCR), minimum debt yield and/or maximum loan to value ratio (LTV) tests. The loan that no longer has an extension option remaining, the Graduate Hotel State College (Prospectus ID#17; 6.8% of the current pool balance), is secured by a hotel in State College, Pennsylvania. According to the trailing 12 months ended January 31, 2023, STR report, the property appears to be approaching stabilization as occupancy, average daily rate (ADR) and revenue per available room (RevPAR) were reported at 69.0%, $178.34, and $122.99, respectively, with both ADR and RevPAR achieving penetration rates above 100.0% when compared with the property’s competitive set. According to the servicer, the sponsor is actively seeking refinance capital ahead of the November 2023 maturity date with a new loan potentially collateralized by the subject and additional hotel properties carrying the same flag. The one loan that does not mature in 2023 is secured by a limited-service hotel property in Pensacola, Florida, and was recently extended to its final maturity date in February 2024 after the borrower exercised its extension option as the property achieved the minimum 1.45 times (x) DSCR, minimum 11.75% debt yield, and maximum 70.0% LTV tests.

The remaining loans are primarily secured by properties in urban and suburban markets. Six loans representing 75.2% of the pool are secured by properties in urban markets as defined by DBRS Morningstar with a DBRS Morningstar Market Ranks of 6, 7, or 8, and three loans representing 18.0% of the pool are secured by properties with a DBRS Morningstar Market Rank of 3, which denotes a light suburban market. In comparison with the pool composition in June 2022, properties in urban markets represented 69.8% of the collateral, and properties in suburban markets represented 24.1% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

All properties received updated appraisals in Q2 2022. Based on these updated property valuations, the current weighted-average (WA) as-is LTV and stabilized LTV ratios for the transaction are 68.4% and 62.3%, respectively. In comparison with the transaction as of June 2022, these figures were 68.7% and 60.2%, respectively.

In total, the lender has advanced $28.8 million in loan future funding to six of the remaining individual borrowers to aid in property stabilization efforts, with the largest advances made to the borrowers of the Graduate Hotel State College ($8.1 million) and 600 Chestnut Street ($6.4 million) loans. The borrow of the Graduate Hotel State College loan used the advanced funds to cover debt service payment shortfalls. The 600 Chestnut Street loan is secured by an office property in Philadelphia, with the advanced funds used to pay for capital improvement and leasing costs. There are no longer any available loan future funding dollars available to any of the remaining borrowers.

No loans are in special servicing; however, nine of the remaining 10 loans, representing 90.1% of the current trust balance, are on the servicer’s watchlist. The loans are generally on the servicer’s watchlist for upcoming maturity, although select loans have also been flagged for performance issues, such as depressed occupancy rates and DSCRs. Additionally, seven of the remaining loans, representing 59.2% of the current trust balance, have either been modified, or the borrowers have received a forbearance since loan origination. Loan modifications and forbearances were the preferred resolution strategy at the onset of the pandemic when commercial property operations were stressed as well as at loan maturity, as the required performance-based tests to extend loans were often waived.

The largest loan on the servicer’s watchlist, 110 Tower (Prospectus ID#1; 26.2% of the current trust balance), is secured by an office property in downtown Fort Lauderdale, Florida. The loan was flagged for upcoming maturity; however, the borrower exercised the first of two, 12-month loan extension options in August 2022, extending loan maturity to August 2023 as property operations successfully met the performance-based extension tests. A March 2023 update from the servicer, noted it expects the borrower to also exercise the second extension option, potentially extending the loan to a final maturity date of August 2024.

The single loan not on the servicer’s watchlist, Gulf Tower (Prospectus ID#7; 10.1% of the current pool balance), is secured by an office property in downtown Pittsburgh. The loan has been modified twice with the second modification occurring in January 2023, with terms including a 1.0% reduction in the floating interest rate spread to 1.95%, the suspension of amortizing loan payments and collection of monthly leasing and capital improvement reserves, and $0.1 million in cash held in reserve was released to pay outstanding invoices. The loan matures in June 2023, and according to a March 2023 update from the servicer, the loan may be modified again to provide the borrower a short-term extension to facilitate its exit strategy, which is likely to be a property sale. The property was re-appraised in June 2022 at a value of $47.0 million, relatively similar to the 2019 value of $46.3 million and indicative of a current LTV ratio of 74.0%. DBRS Morningstar expects the loan to remain current to loan maturity; however, the loan exhibits increased credit risk, and it is possible the June 2022 appraised value is inflated based on the YE2022 cash flow of $2.0 million and the prevailing capitalization rates for non-stabilized office properties.

There were no environmental, social, and governance 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release. 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.

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].

DBRS, Inc.
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Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses structured finance transactions and how the
methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/278375.

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