DBRS Morningstar Confirms All Classes of Real Estate Asset Liquidity Trust, Series 2020-1

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-1 issued by Real Estate Asset Liquidity Trust, Series 2020-1:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AA (sf)
-- Class X at A (high) (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 credit rating confirmations reflect the overall performance since DBRS Morningstar’s last review. The pool benefits from favourable pool diversity, no delinquencies, no specially serviced loans, and a low pool-level expected loss (EL). Since the last credit rating action, LBC Carrefour Retail (Prospectus ID#2, previously 6.9% of the pool) matured and was repaid in full. DBRS Morningstar maintains a cautious outlook on two watchlist loans in the top five, representing 9.6% of the pool combined. In addition, DBRS Morningstar notes a small concentration of upcoming loan maturities in 2024, representing 11.6% of the pool. Mitigating factors include the pool’s low office concentration; 40 loans, representing 65.7% of the pool, having partial or full recourse; and the pool’s overall stable performance that remains in line with issuance expectations. The weighted-average pool debt service coverage ratio (DSCR) was 1.36 times (x) as of YE2022, compared with the 1.37x figure at issuance.

As of the September 2023 reporting, 51 of the original 52 loans remain in the pool, with an aggregate balance of $458.0 million, representing a collateral reduction of approximately 13.9% since issuance as a result of loan repayment and amortization. To date, there has been no defeasance. Six loans, representing 16.4% of the pool are on the servicer’s watchlist. The pool comprises mainly retail and multifamily properties, making up 30.1% and 26.0% of the pool, respectively. Office properties represent just 10.2% of the pool.

The largest loan on the watchlist is O’Shaughnessy Tower (Prospectus ID#3, 5.3% of the pool), which is secured by a 145,074-square-foot office tower in Montréal. The servicer added it to the watchlist in June 2021 for a low DSCR, which remains well below breakeven as of the YE2022 reporting. In an effort to improve curb appeal, the borrower spent approximately $2.1 million in capital expenditures throughout 2021, replacing windows and improving the exterior structure of the building. The YE2022 occupancy decreased to 71.0% from the YE2021 and issuance figures of 73.9% and 93.6%, respectively. Alongside a slip in occupancy, net cash flow (NCF) fell approximately 23.0% to $0.87 million from the YE2021 figure of $1.0 million and 51.9% from the DBRS Morningstar NCF of $1.81 million at issuance. The property reported an in-place average rental rate of $18.70 per square foot (psf), according to the June 2023 rent roll, compared with the Q2 2023 reported Colliers average rental rate within the Montréal office market of $19.70 psf. Given the shift in demand for office space and collateral performance that remains below issuance levels, DBRS Morningstar applied a stressed loan-to-value ratio scenario in its analysis for this review. The resulting EL exceeded that of the pool by approximately 300.0%.

The second-largest loan on the servicer’s watchlist, Rossignol Drive Retirement Residence (Prospectus ID#4, 4.3% of the pool), is secured by a 119-unit senior housing property in Ottawa. The servicer added the loan to the watchlist in June 2021 for a low DSCR, which, alongside occupancy and cash flow figures, has steadily declined since issuance. DBRS Morningstar reached out to the servicer for updated financials; however, none have been provided as of this writing. The most recently available NCF was for YE2021 at $1.1 million (reflecting a DSCR of 0.90x), a decline from the YE2020 figure of $1.3 million (reflecting a DSCR of 1.05x) and the DBRS Morningstar NCF of $1.6 million at issuance. Operating expenses simultaneously increased to 78.0% at YE2021 from 69.0% at issuance. Occupancy exhibited similar deterioration, falling to the YE2021 figure of 78.0% from 90.1% at issuance. The March 2023 rent roll indicates occupancy fell further to approximately 76.0%, with 29 of the 119 units listed as vacant. DBRS Morningstar believes current cash flows have further declined from the last reported figures, so it analyzed this loan with a stressed probability of default scenario, which resulted in an EL that exceeded that of the pool by approximately 100.0%.

ENVIRONMENTAL, SOCIAL, AND 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 credit 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
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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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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 analyzes 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].