Morningstar DBRS Upgrades Credit Ratings on Three Classes of Real Estate Asset Liquidity Trust, Series 2018-1

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-1 issued by Real Estate Asset Liquidity Trust, Series 2018-1 as follows:

-- Class E to BBB (high) (sf) from BBB (low) (sf)
-- Class F to BB (high) (sf) from BB (sf)
-- Class G to BB (low) (sf) from B (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

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

All trends are Stable.

The credit rating upgrades reflect the continued paydown since last review, favourable collateral type concentrations, and the overall stable performance of the remaining loans in the pool. Since Morningstar DBRS' last credit rating action, two additional loans have repaid in full, reflecting an additional principal paydown of approximately $10 million. There has been an overall collateral reduction of 59.0% since issuance with a current balance of $144.1 million as of the October 2024 remittance. In addition, two loans (9.9% of the current pool balance), which continue to perform in line with issuance expectations, are scheduled to mature within the next 12 months. Morningstar DBRS expects that those loans will likely secure takeout financing at maturity based on current in-place performance and favourable maturity profile. As the transaction continues to benefit from loan repayment and scheduled amortization, Morningstar DBRS expects there could be continued upgrade pressure, particularly toward the middle of the capital stack as the deal continues to season.

Morningstar DBRS' analysis for this review 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 supported by current performance and/or upcoming concerns, 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.

The pool benefits from larger concentrations in loans collateralized by property types that have historically exhibited healthy fundamentals with industrial, multifamily, and self-storage properties representing 29.3%, 28.8%, and 21.4% of the pool, respectively while office-backed loans account for only 0.4% of the pool. Based on the most recent year-end financials available, the remaining loans in the pool reported a healthy weighted-average (WA) debt service coverage ratio (DSCR) of 2.15 times (x). There are currently no delinquent or specially serviced loans; however, there are two loans (15.5% of the current pool balance) on the servicer's watchlist, one is being monitored for active performance declines discussed further below while the other is being monitored for compliance with a previous forbearance.

One of the loans on the servicer's watchlist, Chateau Dollard Retirement (Prospectus ID#8, 8.5% of the pool), is secured by a 122-unit retirement facility in Dollard-des-Ormeaux, Québec. The loan was added to the servicer's watchlist in July 2020 because of a low DSCR reported at 0.75x as of YE2023 (net cash flow (NCF) of $651,937), remaining well below the Morningstar DBRS DSCR of 1.40x (Morningstar DBRS NCF of $1.26 million). According to the servicer commentary, the property was significantly affected by the coronavirus pandemic and has yet to recover. According to the provided January 2024 rent roll, the subject was 79% occupied, which has increased from 70% at YE2021; however, occupancy remains significantly less than the issuance figure of 92%. Although occupancy remains depressed, revenue as of YE2023 exceeds the revenue figure assumed at issuance by Morningstar DBRS, suggesting unit rents have increased comfortably since that time. However, the in-place NCF has remained depressed from Morningstar DBRS' expectations as overall expenses have increased by 26%. While the loan has full recourse to the sponsor and has remained current throughout the years of below breakeven coverage, Morningstar DBRS believes the overall risks have increased significantly from issuance. As such, the analysis for this review considered an increased POD from the 2023 credit rating action analysis, as well as an elevated POD, which resulted in an expected loss (EL) over 5x the WA pool EL figure.

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), https://dbrs.morningstar.com/research/437781.

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 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 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.

-- 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
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024),
https://dbrs.morningstar.com/research/435294
-- Legal and Derivatives Criteria for Canadian Structured Finance (August 12, 2024), https://dbrs.morningstar.com/research/437761
-- 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

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/410863.

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