DBRS Morningstar Confirms All Ratings on Real Estate Asset Liquidity Trust, Series 2021-1

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-1 issued by Real Estate Asset Liquidity Trust, Series 2021-1 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D-1 at BBB (sf)
-- Class D-2 at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains relatively in line with DBRS Morningstar’s expectations at the last rating action in November 2022. There are no delinquent or specially serviced loans and only three loans, representing 5.6% of the pool, on the servicer’s watchlist that are being monitored for low debt service coverage ratios (DSCRs). The office exposure also remains relatively low, with only 8.4% of the current pool backed by office properties. The majority of the pooled loans continue to perform in line with expectations.

As of the July 2023 remittance, all 79 of the original loans remain in the trust, with an aggregate balance of approximately $525.0 million. There is minimal collateral reduction of 3.5% since issuance given the deal’s recent vintage and limited seasoning. There is one loan that is fully defeased, representing 0.8% of the pool balance. The pool is concentrated by property type with 31.6% of the total balance backed by multifamily properties, followed by retail and industrial properties with 24.1% and 16.8% of the pool, respectively.

The largest loan on the servicer’s watchlist, Tamarack Gardens Multifamily Edmonton (Prospectus ID#8, 2.8% of the current pool balance), is secured by a 126-unit multifamily complex located in Edmonton. The loan was recently added to the servicer’s watchlist in July 2023 because of a low DSCR. The most recent net cash flow (NCF) figure per the trailing 12-month report ended September 30, 2022, was $873,436, reflective of a DSCR of 1.02 times (x). In comparison, the DBRS Morningstar NCF and DSCR at issuance were $980,961 and 1.14x, respectively. According to the most recent reporting, there has been a 23.3% increase in total operating expenses, primarily attributable to Repairs & Maintenance, which have jumped 114.4% from the issuer’s underwritten figure. According to the servicer commentary, the increase from the issuance budget stems from new maintenance and cleaning staff hired at the subject property. Overall, operating expenses are up approximately 15.4% from the DBRS Morningstar issuance amount.

As per the January 2023 rent roll, the collateral reported an occupancy rate of 91.3% with an average rental rate of $1,372.10 per unit, compared with an occupancy rate of 95.2% and an average rental rate of $1,259.59 at issuance. DBRS Morningstar’s concluded vacancy rate at issuance was 5.5%. The increase in expenses, coupled with the slight decline in occupancy, are the primary drivers of the low DSCR. Given the higher contractual rates with the new staffing company, expenses are likely to remain elevated and the DSCR will remain lower than expected, unless there is sufficient growth in occupancy and/or rental rates. In its analysis, DBRS Morningstar applied an elevated probability of default adjustment for this loan, resulting in an expected loss that is almost double the weighted-average, pool-level expected loss.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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/416784 (July 4, 2023).

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

Notes:
All figures are in Canadian 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 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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for Canadian Structured Finance (June 20, 2023; https://www.dbrsmorningstar.com/research/416101)

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/410863.

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