Morningstar DBRS Confirms Credit Ratings on All Classes of Real Estate Asset Liquidity Trust, Series 2019-HBC

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

-- Class A at AAA (sf)
-- Class X at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)

All trends are Stable.

The credit rating confirmations reflect the transaction's overall stable performance since Morningstar DBRS' last review in July 2023 and Morningstar DBRS' view that the loan is well positioned to be successfully repaid in full at its extended maturity date in September 2024. The loan's original maturity was scheduled in June 2024, but the special servicer indicated that a 90-day extension had been approved to allow for additional time to close on refinancing. Additionally, the loan benefits from a full-recourse guarantee from a strong sponsor that is required to maintain minimum equity of $750.0 million throughout the loan term.

At issuance, the transaction was collateralized by two cross-collateralized and cross-defaulted loans secured by Hudson's Bay (The Bay) flagship stand-alone department stores in downtown Montréal and Ottawa. In October 2022, the loan secured by the Montréal property successfully repaid in full upon its respective maturity. The loan secured by the Ottawa property remains the sole collateral for the transaction with an aggregate principal balance of $72.7 million per the June 2024 reporting, representing a collateral reduction of 70.9% since issuance. The Ottawa property is fully leased to The Bay on a lease through July 2035, which subleases portions of its space to other tenants. It is well located in the highest-trafficked retail district of downtown Ottawa near the newly renovated CF Rideau Centre, one of Ottawa's top retail destinations, adjacent to ByWard Market and Rideau Canal. Based on YE2023 financials, the Ottawa property reported a net cash flow (NCF) that was 36.1% above the Morningstar DBRS NCF figured derived for the property at issuance. Given the continued improvement in the underlying collateral's performance, Morningstar DBRS performed a stressed cash flow scenario to test the durability of the credit ratings, which supported the credit rating confirmations for this review.

The sponsor initially acquired the properties in 2015 as part of a five-property portfolio sale-leaseback transaction. The vendor, Hudson's Bay Company (HBC), retained an 87.5% ownership interest in the properties through RioCan-HBC Limited Partnership, the purchaser of the properties, a joint venture (JV) between HBC and RioCan Real Estate Investment Trust (RioCan; rated BBB with a Stable trend by Morningstar DBRS). Although HBC signed 20-year absolute-net leases that included five six-year renewal options, Morningstar DBRS considered the NCF from these properties to be more volatile given the revenue stream aligned with HBC's retail operating business, with declines in foot traffic for some The Bay stores in recent years.

Cash flow at the property is largely derived from contractual rent payments that HBC makes to the RioCan-HBC JV. Per the YE2023 financial reporting, NCF was $10.8 million (representing a debt service coverage ratio of 2.21 times), which remains in line with the YE2022 and YE2021 financials. When analyzing the loan at issuance, Morningstar DBRS derived a NCF of $7.9 million, reflecting a variance of -14.7% from the Issuer's NCF of $9.3 million, primarily driven by base-rent mark-to-market adjustments, as Morningstar DBRS marked The Bay's rent to 110.0% of an estimated market rent of $22.10 per square foot (psf). As of December 2023, the property reported an average rental rate of $32.45 psf compared with $29.68 psf at issuance.

In determining the credit ratings, Morningstar DBRS analyzed the cash flow under a stressed scenario based on a 20% stress to the YE2023 NCF. Morningstar DBRS derived a stressed value of $118.6 million, a -34.9% variance from the issuance appraised value of $182.3 million and 8.9% higher than the Morningstar DBRS value of $108.9 million at the last review. Morningstar DBRS used the conservative haircut to evaluate the potential for upgrades, given the improvement in collateral performance over the Morningstar DBRS NCF at issuance. Morningstar DBRS applied a capitalization rate of 7.3%, which is at the middle of the range of Morningstar DBRS' capitalization rate ranges for retail properties. The implied Morningstar DBRS loan-to-value (LTV) for the stressed scenario is 62.5%. Morningstar DBRS also maintained a positive qualitative adjustment to the final LTV sizing benchmarks totaling 2.5% for market fundamentals because of the property's location in a high-traffic retail district in downtown Ottawa.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND 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 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.

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 Single-Asset/Single-Borrower Ratings Methodology (July 11, 2024), https://dbrs.morningstar.com/research/436004
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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.

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