DBRS Morningstar Confirms All Classes of Real Estate Asset Liquidity Trust, Series 2019-1

DBRS Limited (DBRS Morningstar) confirmed all ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-1 (the Certificates) issued by Real Estate Asset Liquidity Trust, Series 2019-1 as follows:

--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) (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 since the last rating action. The pool benefits from a healthy weighted-average (WA) pool debt service coverage ratio (DSCR) that, as of the October 2023 remittance, was reported at 1.60 times (x) compared with the issuance WA term DSCR of 1.39x. There has also been significant deleveraging since the last rating action with three loans, representing 12.7% of the pool’s securitization balance, repaying from the trust. There are no loans in special servicing as of the most recent reporting. DBRS Morningstar has identified increased credit risk for the largest loan in the pool, WSP Place (Prospectus ID#1; 11.0% of the pool), given a lack of reporting, low occupancy, and an upcoming termination option for the largest tenant, as further discussed below. In addition to WSP Place, 10 other loans (representing 17.6% of the pool) are scheduled to mature in the next 12 months. As of the most recent servicer reporting, these loans reported a WA DSCR and debt yield of 1.57x and 13.4%, respectively.

The pool generally continues to perform in line with DBRS Morningstar’s expectations. As of the October 2023 reporting, 40 of the original 48 loans remain in the pool with an aggregate trust balance of $284.6 million representing a collateral reduction of approximately 36.2% since issuance as a result of scheduled loan amortization and repayment. Since the last rating action, there have been no defaults and no defeasance. No loans have defeased since issuance in 2019. Eight loans (23.7% of the pool) are being monitored on the servicer’s watchlist. The pool consists primarily of loans secured by retail and office properties, which represent 40.2% and 23.1% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In its analysis for this review, DBRS Morningstar adjusted one of the four office loans in the pool with a stressed probability of default (POD) scenario. The three remaining office properties exhibited strong occupancy, year-over-year cash flow growth, and DSCR figures that remain in line with issuance.

The WSP Place loan is secured by a 184,707- square foot office tower in Edmonton. The loan was added to the servicer’s watchlist in May 2020, as the borrower, who serves as the full recourse entity, requested Coronavirus Disease (COVID-19)-related payment relief. The servicer has been monitoring the loan for two outstanding mechanic’s liens, one of which was withdrawn in February 2022. In May 2022, the borrower applied a $226,017 payment to the outstanding lien amount, leaving $364,226 unpaid. According to servicer commentary, the borrower placed an additional $400,000 in a trust and plans to meet with the contractor in the short term to attempt resolution.

The five-year loan has an upcoming maturity in January 2024 and, according to the most recent reporting, the borrower missed its September debt service payment. The servicer has been contacted for an update regarding the upcoming maturity, and DBRS Morningstar awaits a response. Financial statements for the YE2022 were not reported. According to the YE2021 statement, the net cash flow (NCF) was reported at $3.0 million (a DSCR of 1.27x), a decrease from $3.3 million (a DSCR of 1.39x) at YE2020 and $3.2 million (a DSCR of 1.37x) at issuance. The occupancy rate has declined to 67.0% from 92.1% at issuance following the departure of two of the property’s previous major tenants, Alberta Health Services (previously 23.6% of net rentable area (NRA)) in 2021 and Alberta Investment Management Corporation (previously 8.5% of NRA) in 2019. In addition, the largest tenant at the property, WSP Canada Inc. (36.4% of total NRA, lease expiry in July 2026), has a termination option that it may execute in December 2023 conditional upon a $2.0 million termination fee. In addition, the tenant was required to provide 12 months’ notice of its intent to execute the termination option. DBRS Morningstar inquired with the servicer to confirm the status of this tenant and awaits an update. The September 2021 rent roll indicated an in-place average rental rate of $10 per square foot (psf), notably below the issuance figure of $17 psf. In comparison, Colliers reported average downtown Edmonton submarket rental rates of $18 psf for Q2 2023. Given the performance declines since issuance, lack of updated reporting, the potential for additional vacancy, and the loan’s upcoming maturity in January 2024, DBRS Morningstar applied a stressed probability of default for this review. The resulting expected loss exceeded the pool’s average expected loss by approximately 400.0%. The loan is full recourse and in a liquidation scenario, should the loan default, the expected loss would be contained to the unrated first-loss class.

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 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/417279.

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