Morningstar DBRS Confirms Credit Ratings on All Classes of Real Estate Asset Liquidity Trust, Series 2016-1

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-1 issued by Real Estate Asset Liquidity Trust, Series 2016-1 as follows:

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

All trends are Stable.

The credit rating confirmations are reflective of the pool's overall stable performance, which remains in line with Morningstar DBRS' expectations. As of the August 2024 remittance, 35 of the original 55 loans remain in the trust, with an aggregate balance of $212.3 million, representing a collateral reduction of 47.1% since issuance. There is one fully defeased loan, representing 0.6% of the current pool balance. There are no delinquent or specially serviced loans; however, 10 loans, representing 36.2% of the pool balance, are on the servicer's watchlist. These loans are being monitored primarily for low debt service coverage ratios (DSCRs) and forbearances related to the pandemic. Loans that have exhibited increased credit risk were analyzed with stressed scenarios in Morningstar DBRS' analysis. This resulted in a weighted-average (WA) expected loss (EL) that was more than 2.5 times the pool average. Twenty-four loans, representing 77.7% of the pool balance, are scheduled to mature by YE2025. Morningstar DBRS expects the majority of these loans will successfully repay at their scheduled maturity dates, given their stable historical performance and healthy credit metrics. Excluding the defeased loan, the pool is most concentrated by retail and multifamily properties, which represent 30.5% and 21.0% of the pool balance, respectively. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain asset value.

The third-largest loan, Ste Catherine Street Retail Montréal loan (Prospectus ID#3; 7.4% of the current pool balance), is secured by a 35,219 square foot (sf) unanchored retail property in Montréal. The loan has been monitored on the servicer's watchlist since 2019 after the departure of the only two tenants in 2019 and 2022. The property is well located within a prominent retail corridor, and the borrower has kept the loan current since the property became vacant, funding all operating expenses out of pocket, indicative of the borrower's commitment to the collateral despite the lack of recourse provisions in the loan structure. According to media sources, the Apple Store (Apple) is planning to lease the building. As per the May 2024 site inspection report, the property is undergoing renovations to accommodate the new tenant, totaling approximately $8.0 million, the majority of which Apple is expected to fund, indicating the likelihood that a lease has been signed. This loan is scheduled to mature in September 2025. Morningstar DBRS remains cautiously optimistic about this loan's refinance prospects, but notes there will be no cash flow until Apple takes occupancy and begins paying rent.

In its analysis, Morningstar DBRS identified five loans, representing 12.5% of the current pool balance, at increased risk of default. The largest of these loans is Richmond Street Office (Prospectus ID#14; 3.4% of the current pool balance), which is secured by a 50,158-sf office building in Toronto and has a scheduled maturity in January 2026. The DSCR has been in decline following the departure of the former largest tenant at the property, Cardinia Real Estate (which formerly occupied 78% of the net rentable area (NRA)), at its lease expiry in April 2019. As per the March 2024 rent roll, the property was 23.7% occupied by two tenants--the ground-level restaurant tenant Daphne (13.5% of the NRA, lease expires in June 2033) and the below-grade retail tenant Wine Academy (10.1% of the NRA, lease expires in September 2033). According to the servicer, the building is undergoing extensive capital improvements. Media sources indicate the cost of the asset's renovation to be nearly $2.0 million to date, and the renovations reportedly comprise full modernizations of the technical systems, interior lighting, and elevators along with enhanced common areas. Morningstar DBRS has inquired as to the status of the project in addition to prospective leasing but has not received a response as of this review. While the above-noted updates are likely to improve the subject's desirability, without meaningful leasing activity, cash flow will remain depressed. Offsetting some of this concern is the full recourse nature of the loan and indications of the borrower's commitment, given the loan has remained current since the largest tenant's departure. Morningstar DBRS' analysis for this loan includes an elevated probability of default adjustment to reflect the increased credit risk for the loan as it nears maturity, resulting in an EL that is approximately five times the pool's WA 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 Factors in Credit Ratings (August 13, 2024), at https://dbrs.morningstar.com/research/437781.

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 info-DBRS@morningstar.com.

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

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

Legal Criteria for Canadian Structured Finance (June 20, 2023), https://dbrs.morningstar.com/research/416101

A description of how Morningstar DBRS 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 info-DBRS@morningstar.com.