Morningstar DBRS Confirms All Credit Ratings on Real Estate Asset Liquidity Trust, Series 2016-2

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2016-2 issued by Real Estate Asset Liquidity Trust, Series 2016-2 as follows:

-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AAA (sf)
-- Class X at AA (high) (sf)
-- Class D at AA (sf)
-- Class E at A (sf)
-- Class F at BB (high) (sf)
-- Class G at B (high) (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 since last review. Since Morningstar DBRS' last credit rating action, one loan (previously 5.2% of the pool) was repaid in full at its scheduled maturity date. In total, loan repayments and amortization have reduced the pool balance to $149.3 million as of the September 2024 reporting, representing a collateral reduction of 64.6% since issuance. The majority of remaining loans in the pool secured by nondefeased collateral have maturity dates by YE2026 and all remaining loans benefit from some level of meaningful recourse to the loan's sponsor. Morningstar DBRS expects most of these loans will successfully repay at or near their scheduled maturity dates given their current performance remains in line with Morningstar DBRS' expectations since issuance; however, five loans, representing 30.0% of the pool, were identified as loans with an increased risk of default because of performance falling below issuance expectations. As a result of significant collateral reduction since issuance, the model results for this review suggest positive pressure on the junior bonds in the capital stack, but given concerns with the aforementioned five loans and a relatively small $8.4 million unrated Class H certificate, the credit rating confirmations are warranted.

As of the September 2024 reporting, there are three loans, representing 21.4% of the pool, currently being monitored on the servicer's watchlist, two of which for performance related concerns. There is one loan, representing 5.8% of the pool, that has been fully defeased, and no loans are delinquent or in special servicing. The pool is concentrated by property type with office, retail, and industrial collateral representing 36.4%, 20.2%, and 15.8% of the pool, respectively. Though the office sector has been challenged, the majority of office loans in the pool continue to perform, reporting a weighted-average (WA) debt service coverage ratio (DSCR) of 1.48 times (x). With this review, Morningstar DBRS analyzed five loans exhibiting concerning credit metrics with stressed loan-to-value ratios (LTVs) and/or elevated probabilities of default (PODs), resulting in a WA expected loss (EL) approximately 2.5x the pool average.

The largest loan on the watchlist, Cameron Street Industry Hawkesbury (Prospectus ID#6, 8.0% of the pool), is secured by two industrial properties, 1303 Cameron and 1173 Cameron, totaling 264,256 square feet in Hawkesbury, Ontario. The loan was placed on the watchlist in August 2024 for poor property condition, as, according to servicer commentary, the 1173 Cameron property is not in a functioning state and has no power nor tenants. The properties are now presumed to be 78.2% occupied by the sole tenant at 1303 Cameron, Robert Transport (78.2% of net rentable area (NRA)), on a month-to-month lease. According to YE2022 financials, the most recent on file, the loan reported a net cash flow (NCF) and DSCR of $1.2 million and 1.21x, respectively, which represent declines from the Morningstar DBRS NCF and DSCR of $1.5 million and 1.55x, respectively. As a mitigant; however, the loan does benefit from being full recourse to the sponsor. Given the physical state of the 1173 Cameron building and the decline in occupancy, Morningstar DBRS analyzed the loan utilizing an elevated POD and a stressed LTV, resulting in an EL greater than 5x the pool average.

Morningstar DBRS made additional analytical adjustments to the 6655 Pierre Bertrand Boulevard (Prospectus ID#4, 8.7% of the pool) and Rue Laval (Prospectus ID#10, 6.8% of the pool) loans. 6655 Pierre Bertrand Boulevard is secured by a mixed-use property with office, retail, and industrial components in Québec City while Rue Laval is secured by an office property in Gatineau, Québec. 6655 Pierre Bertrand Boulevard reported a year-over-year decline in NCF, most recently reporting a DSCR of 1.02x as of YE2023. The property is reported as 100% occupied, has minimal rollover until 2029, and is full recourse to the sponsor. Rue Laval continues to report a NCF in line with issuance levels; however, Morningstar DBRS is concerned with the significant amount of rollover as four of the top five tenants, representing 47.9% of NRA, have lease expirations in the 12 months. Both loans were analyzed with elevated PODs, resulting in ELs ranging from 1.5x to 2x 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 (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Class X is an interest-only (IO) certificates 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 1, 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 Classes F and G 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 stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk given the concerns with five loans exhibiting increased risk of default coupled with the lack of significant credit support provided by the relatively small $8.4 million unrated Class H certificate.

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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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, (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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.