Morningstar DBRS Upgrades Credit Ratings on Eight Classes of Real Estate Asset Liquidity Trust, Series 2017

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on eight classes of the Commercial Mortgage Pass-Through Certificates, Series 2017 issued by Real Estate Asset Liquidity Trust, Series 2017 as follows:

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

In addition, Morningstar DBRS confirmed the following credit rating:

-- Class A-2 at AAA (sf)

Morningstar DBRS changed the trend on Class C to Positive from Stable. The trends on all remaining classes are Stable with the exception of Classes D-1 and D-2, which remain Positive.

The credit rating upgrades and Positive trends reflect the significant deleveraging since issuance and the overall stable-to-improving performance of the remaining collateral, as evidenced by a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 1.84 times (x), based on the most recent year-end financial reporting. Since Morningstar DBRS' prior credit rating action, 10 loans (12.9% of the original pool balance) were repaid in full at their scheduled maturity dates.

In total, loan repayments and amortization have reduced the pool balance to $138.9 million as of the September 2024 reporting, representing a collateral reduction of 65.9% since issuance. In addition, three loans, representing 6.9% of the current pool balance, have maturity dates within the next 12 months. Morningstar DBRS expects these loans will repay from the trust based on their WA debt yield and DSCR of 14.7% and 1.8x, respectively. This additional paydown will lead to further improvement in credit enhancement levels, especially toward the top and middle of the capital stack, as indicated by the Positive trends carried by Classes C, D-1, and D-2. Morningstar DBRS' analysis also considered a stressed scenario to further evaluate the support for credit rating upgrades. In addition to applying probability of default (POD) and/or loan-to-value ratio adjustments to a select number of loans where applicable, Morningstar DBRS also applied a 20.0% haircut to the issuer's underwritten cash flow for each remaining loan in the pool. The resulting analysis suggests a significant amount of cushion remains against future cash flow volatility, further supporting the credit rating upgrades with this review.

As of the September 2024 remittance, 34 of the original 71 loans remain in the pool. No loans are delinquent or in special servicing. Four loans, representing 27.8% of the pool, are on the servicer's watchlist; however, only two of those loans, representing 22.6% of the pool, are being monitored for performance-related reasons. The transaction is generally well distributed by property type, with loans representing 34.2%, 32.4%, and 14.7% of the pool collateralized by self-storage, retail, and industrial properties, respectively. Only three loans, representing 10.9% of the pool balance, are backed by office properties, further highlighting the favourable makeup of the pool's underlying collateral. The majority of loans remaining in the pool benefit from some level of meaningful recourse to the loan's sponsor.

The largest loan in the pool, Skyline Thunder Centre (Prospectus ID#1; 18.7% of the current pool balance), is secured by an approximately 168,000 square feet (sf) anchored retail property in Thunder Bay, Ontario. The loan is currently being monitored on the servicer's watchlist for a low DSCR. According to the January 2024 rent roll, the property was 86.7% occupied, below the issuance occupancy rate of 99.0%. Over the next year, four tenants, totalling approximately 18.0% of the net rentable area (NRA), have scheduled lease expirations, including the third-largest tenant, Old Navy, which accounts for 8.9% of NRA and has a lease scheduled to expire in November 2024. However, there has been positive leasing momentum at the property in the past few months, with approximately 21,000 sf (12.5% of the NRA) of space being leased by two new tenants. Those tenants had lease commencement dates in August and October of this year, suggesting the property's physical occupancy rate has returned to near 100.0%. According to the YE2023 financial reporting, the property generated $1.8 million of net cash flow (NCF) (a DSCR of 1.03x), an improvement from the YE2022 figure of $1.5 million (a DSCR of 0.88x) but still lower than the Morningstar DBRS figure of $2.2 million (a DSCR of 1.24x). Morningstar DBRS expects revenue will improve once rent payments from new tenants commence; however, given the upcoming rollover, Morningstar DBRS analyzed this loan with an elevated POD penalty, resulting in an expected loss that was more than 2.5x greater than the pool average.

The second-largest loan on the servicer's watchlist, Worthington Office North Bay (Prospectus ID#22; 3.92% of the current pool balance), is secured by a 71,491-sf office property in North Bay, Ontario. According to the servicer-reported financials, the occupancy rate and DSCR were 68.0% and 0.51x, respectively, as of YE2023, compared with 70.0% and 0.86x at YE2022, and well below the issuance occupancy rate of 91.0% and the Morningstar DBRS DSCR of 1.38x. The former third-largest tenant, Strickland Larmer (8.0% of the NRA), vacated the property upon lease expiration in 2022 while the two largest tenants, Canada Post Corporation (27.3% of NRA), and Redpath Mining (12.8% of NRA), extended their leases to 2027 and 2032, respectively. Morningstar DBRS analyzed this loan with an elevated POD penalty to reflect the declines in occupancy rate and cash flow, resulting in an expected loss that was almost 3.5x greater than the pool average.

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 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 Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Class X is an interest-only (IO) certificate that reference 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 01, 2024), https://dbrs.morningstar.com/research/428798.

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

The credit ratings assigned to the Class D-2, E, F, and G certificates materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk. As outlined above, the collateral securing the largest loan in the pool, Skyline Thunder Centre and the second-largest loan on the servicer's watchlist, Worthington Office North Bay, continues to underperform, reporting NCF and DSCR figures well below issuance levels. Because the junior classes do not provide a significant amount of cushion to insulate against potential losses, should those loans, or any other loans experience further performance declines, these deviations were deemed warranted.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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 Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

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

Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024), https://dbrs.morningstar.com/research/437761

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (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.