Morningstar DBRS Confirms Credit Ratings on All Classes of Real Estate Asset Liquidity Trust, Series 2021-1

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-1 issued by Real Estate Asset Liquidity Trust, Series 2021-1 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X at AA (high) (sf)
-- Class B at AA (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)

The credit rating confirmations are reflective of the pool's overall stable performance, which remains in line with Morningstar DBRS' expectations. As of the July 2024 remittance, 78 of the original 79 loans remained in the trust, with an aggregate balance of $512.2 million, representing a collateral reduction of 5.8% since issuance. There is one fully defeased loan, representing 0.8% of the current pool balance. There are no delinquent or specially serviced loans; however, four loans, representing 7.0% of the pool balance, are on the servicer's watchlist. Ten loans, representing 18.1% of the pool balance, have scheduled maturity dates in 2025, including the largest loans in the pool: Beverley Corners Marketplace (Prospectus ID#1, 6.1% of the current pool balance) and McKeown Commons North Bay (Prospectus ID#2, 4.6% of the current pool balance). Morningstar DBRS expects the majority of these loans will successfully repay at their scheduled maturity dates given their current performance remains in line with Morningstar DBRS' expectations since issuance. Excluding the defeased loans, the pool is most concentrated by multifamily and retail properties, which represent 31.7% and 24.0% of the pool balance, respectively. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain asset value.

In its analysis, Morningstar DBRS identified two loans to be at increased risk of default. Conklin Place Plaza (Prospectus ID#12, 2.1% of the current pool balance), is secured by a 34,400-square-foot (sf) mixed-use property located in Brantford, Ontario, and has a scheduled maturity in January 2025. The loan was added to the servicer's watchlist in October 2022 because of a decline in DSCR, which has consistently remained below breakeven since in YE2021 with minimal improvements year over year. According to the rent roll from January 2024, the property was 84.0% occupied at an average rental rate of $28.73 per sf (psf). In comparison, the property was fully occupied at an average rental rate of $36.15 psf at issuance. Offsetting some of this concern is the minimal scheduled rollover in the near term, limited-recourse structure, and indications of the borrower's commitment to the property as evidenced by periodic equity injections as required. Despite these factors, given the decline in occupancy and DSCR metrics since issuance, and lack of meaningful leasing activity, it is likely the property value has declined from issuance. As such, Morningstar DBRS' analysis for this loan includes an elevated probability of default (POD) adjustment to reflect the increased credit risk for the loan since issuance, resulting in an expected loss (EL) that is more than two times the pool's weighted-average (WA) EL.

McKeown Commons North Bay is secured by a retail center in North Bay, Ontario. The five-year loan is full recourse to the sponsor. The property was fully occupied as per the March 2023 rent roll; however, leases totaling 45.8% of the NRA are scheduled to expire prior to loan maturity in December 2025. While most tenants have been at the property since it was built in 2015 and have extension options available to them, the high concentration of tenant rollover and potential for occupancy and cash flow decline in the loan's maturity year could make refinancing a challenge. Morningstar DBRS' analysis for this loan includes an elevated POD adjustment to reflect rollover concerns, resulting in an EL that is almost three times the pool's WA EL.

The largest loan on the servicer's watchlist is the Tamarack Gardens Multifamily Edmonton (Prospectus ID#8, 2.8% of the current pool balance), which is secured by a 126-unit multifamily complex in Edmonton. The loan was added to the servicer's watchlist in January 2023 because of a low DSCR. The decline stems from a 57.7% increase in total operating expenses, primarily attributable to the Repairs & Maintenance line item, which has jumped almost 135% since 2022 and 400% from the issuer's underwritten figure. According to the servicer's commentary, the increase in costs are because of new maintenance and cleaning staff hired at the subject property. The operating statement also notes that there have been extensive repairs/replacement across several units, causing the spike this year. Overall, operating expenses are up approximately 150% from the Morningstar DBRS issuance amount. As per the January 2024 rent roll, the property reported an occupancy rate of 96.2% with an average rental rate of $1,438 per unit, compared with the occupancy rate of 95.2% and average rental rate of $1,260 per unit at issuance. Though improved from issuance, the current rental rates do not sufficiently offset the increase in expenses. Unless there is additional growth in rental rates and/or reduction in expenses, it is likely the DSCR will remain below issuance expectations. Morningstar DBRS applied an elevated POD adjustment in its analysis for this loan, resulting in an EL that is three times the WA pool level EL.

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 at (January 23, 2024), 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 U.S. 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- 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 (July 17, 2023).

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