Morningstar DBRS Places All Classes of Real Estate Asset Liquidity Trust, Series 2019-1 Under Review With Negative Implications

DBRS Limited (DBRS Morningstar) placed all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-1 (the Certificates) issued by Real Estate Asset Liquidity Trust, Series 2019-1 Under Review with Negative Implications as follows:

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

There are no trends for these credit rating actions.

These rating actions reflect the shorting of interest related to the largest loan in the pool, WSP Place (Prospectus ID#1; 13.1% of the pool), as well as the sharp value decline for the collateral property for the loan, which was transferred to special servicing ahead of its January 2024 loan maturity for payment default. According to servicer commentary, the borrower and special servicer have conceptually entered into a forbearance agreement, which is anticipated to be formalized by the end of June 2024. Terms of the forbearance are expected to include a maturity extension, the borrowers consent to receivership, and the pledge of additional collateral to offset recoverability and interest shortfalls. The loan is full recourse to the sponsor, wholly owned by GSRI Ltd., which invested over $40.0 million renovating and repositioning the property prior to securitization to elevate the property's competitive appeal. Given the trust's significant exposure to this loan and the high loss severity suggested by the most recent appraised value, Morningstar DBRS has placed the ratings of all classes Under Review with Negative Implications. Additional information is expected to become available regarding the execution of forbearance, remediation of interest shortfalls and enforcement of recourse provisions; all of which are pivotal to Morningstar DBRS' analysis to evaluate the potential for credit ratings downgrades.

The loan is secured by a 184,707-square-foot (sf) office tower in Edmonton, which was re-appraised in February 2024 at a value of $14.6 million per the appraisal report, reflecting a 71.4% decline from the issuance value of $51.0 million, triggering an appraisal reduction. As of the June 2024 reporting, loan exposure totaled $37.2 million, implying a loan-to-value ratio (LTV) in excess of 250% and significant loss through the Morningstar DBRS investment-grade rated D-1 and D-2 pro rated and pari passu certificates, based on a stressed scenario, should the loan be liquidated from the trust assuming no recovery from the recourse provisions.

Interest to Classes D-1, D-2, E, and F has been shorted since March 2024, while Class G has been shorted interest since February 2024. Morningstar DBRS has limited tolerance for unpaid interest on investment-grade rated bonds, limited to three to four remittance periods for the BBB credit rating category. For the BB and B credit rating categories, Morningstar DBRS has a tolerance of six remittance periods. Should these certificates continue to accrue interest shortfalls, credit rating downgrades would be warranted. While the certificates senior to those mentioned above continue to receive timely interest payments, those classes are also being placed Under Review with Negative Implications given the propensity for future interest shortfalls and the potential for significant credit erosion if the loan were to be liquidated from the trust.

During its previous review, Morningstar DBRS cited concerns over vacancy levels and soft market conditions ahead of the loan's transfer to special servicing. According to the February 2024 appraisal report, the subject property was 38.8% occupied, with one tenant, Zebra (currently 6.7% of the net rentable area (NRA) having a near-term lease expiration in August 2024. Over the last several years, the property has lost major tenants, including Alberta Health Services (formerly 23.6% of NRA) and Alberta Investment Management Corporation (formerly 8.5% of NRA), while the largest tenant, WSP Canada Inc. (currently 17.9% of NRA, lease expiry in July 2026), reduced its footprint by 50% in 2021, leading to the sustained decline performance.

According to Colliers Q1 2024 reporting, office properties in the Downtown Edmonton submarket reported an average vacancy rate of 19.8% with an average asking rental rate of $17.25 per square foot (psf) as of Q1 2024, relatively in line with the average rental rate of $17.78 psf at the subject. Considering the significant headwinds to backfilling such large vacant spaces in a challenged submarket, as well as the low investor demand for this property type, Morningstar DBRS anticipates stabilization of the asset would take several years, require significant capital contributions from the sponsor and likely yield a lower property value than at initial contribution.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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 Morningstar DBRS.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.
Morningstar DBRS 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.

This credit rating is Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

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://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797

Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

Legal Criteria for Canadian Structured Finance (June 20, 2023; https://dbrs.morningstar.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://dbrs.morningstar.com/research/410863. (July 17, 2023)

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