DBRS Morningstar Upgrades Ratings on Four Classes of Real Estate Asset Liquidity Trust, Series 2018-1, Confirms Remaining Ratings on All Classes

DBRS Limited (DBRS Morningstar) upgraded its credit ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-1 issued by Real Estate Asset Liquidity Trust, Series 2018-1 as follows:

-- Class X to AA (high) (sf) from AA (low) (sf)
-- Class C to AA (sf) from A (high) (sf)
-- Class D-1 to A (sf) from BBB (high) (sf)
-- Class D-2 to A (sf) from BBB (high) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The credit rating upgrades reflect the significant paydown since last review and the overall stable performance of the remaining collateral. Since last review, 14 loans (38.4% of the original pool balance) repaid in full upon their scheduled maturity dates, which when combined with the continued of amortization of the remaining 26 loans in the pool through their respective loan terms, has reduced the transaction’s aggregate principal balance to $154.1 million as of the October 2023 reporting, representing a collateral reduction of 56.2% since issuance. In addition, two loans (3.7% of the current pool balance), which are performing in line with issuance expectations, are scheduled to mature in 2024. The pool benefits from larger concentrations in property types that have historically exhibited strong fundamentals with industrial, multifamily, and self-storage properties representing 24.8%, 22.3%, and 17.6% of the pool, respectively. Based on the most recent year-end financials available, the remaining loans in the pool reported a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 1.88 times (x). There are currently no delinquent or specially serviced loans; however, there are two loans (14.4% of the current pool balance) on the servicer’s watchlist, discussed in more detail below.

The largest loan on the servicer’s watchlist, Chateau Dollard Retirement (Prospectus ID#8, 8.1% of the pool), is secured by a 112-unit retirement facility in Dollard-des-Ormeaux, Québec. The loan was added to the watchlist in July 2020 because of a low DSCR caused by a decline in occupancy, as the property was heavily impacted by the effects of the Coronavirus Disease (COVID-19) pandemic. No updated financials have been provided since YE2021, when the subject reported an occupancy of 68% and a DSCR of 0.49x, below the pre-pandemic figures from YE2019 of 82.8% and 1.38x, respectively. While the loan has full recourse to the sponsor, DBRS Morningstar maintained its approach from last review, given the lack of updated financials coupled with the loan’s poor performance year-over-year. In its analysis, DBRS Morningstar stressed this loan with an elevated probability of default resulting in an expected loss(EL) over 5x the WA pool EL figure.

The second loan on the watchlist, Quality Hotel Dorval (Prospectus ID#9, 6.3% of the pool), is secured by a 161-key, full service hotel in the borough of Saint-Laurent in Montréal, approximately five minutes from the Montréal–Trudeau International Airport. The loan was added to the servicer’s watchlist in July 2020 when the borrower was granted a deferral of principal payments from July 2020 through to December 2020, with principal payments reinstated beginning in January 2021. However, in March 2021, the borrower requested further relief and a second deferral of principal was granted from April 2021 to March 2022. All deferred amounts from both relief requests are to be repaid in monthly installments that will be added to the scheduled monthly payments between April 2022 and March 2027.

Performance at the subject has rebounded, demonstrating significant improvements with a net cash flow and DSCR of $3.8 million and 4.86x for the trailing 12-month (T-12) period ended September 30, 2022, compared with $1.0 million and 1.34x for the T-12 period ended September 30, 2020, respectively, and $3.3 million and 4.17x for the trailing 12 months period ended September 30, 2019, respectively. The occupancy, average daily rate, and RevPAR for the T-12 period ended September 30, 2022, was reported at 91.1%, $115, and $105, respectively, compared with 64.6%, $134, and $86 in the previous T-12 period ended September 30, 2021, respectively. Given the loan continues to comply with the terms of its loan modification, coupled with the significant improvements in performance, DBRS Morningstar believes the loan will continue to perform in accordance with expectations from issuance. The loan also benefits from the full recourse structure.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

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 credit ratings assigned to Classes E, F, and G materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the uncertain loan-level event risk. Because of the timing of the financial reporting, several loans did not have updated financials, including the largest loan on the servicer’s watchlist, Chateau Dollard Retirement. While the loan remains current with full recourse to the sponsor, the reporting available is still showing a DSCR well below issuance expectations.

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 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].