DBRS Morningstar Upgrades Seven Classes of Real Estate Asset Liquidity Trust, Series 2016-2

DBRS Limited (DBRS Morningstar) upgraded seven classes of Commercial Mortgage Pass-Through Certificates, Series 2016-2 issued by Real Estate Asset Liquidity Trust, Series 2016-2 as follows:

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

In addition, DBRS Morningstar confirmed the rating on the remaining class in the transaction as listed below:

-- Class A-2 at AAA (sf)

The trends for Classes B, C, and X have been changed to Stable from Positive. All other trends remain Stable.

The rating upgrades reflect significant paydowns within the transaction and the overall stable performance of the remaining collateral. There have been some challenges that have generally been driven by the effects of the Coronavirus Disease (COVID-19) pandemic, but in general, the impacted loans have benefitted from proactive sponsors who have worked with the servicer to address short-term needs for relief and have continued to show commitment to the collateral.

At issuance, the transaction consisted of 47 fixed-rate loans secured by 72 commercial and multifamily properties, with a trust balance of $421.5 million. According to the December 2021 remittance report, 15 loans have paid in full, leaving 32 loans within the transaction. There has been a collateral reduction of 40.9% since issuance, lowering the trust balance to $249.1 million. Defeasance has been minimal, with one loan, representing 3.9% of the pool, defeased since issuance. There have been no losses to date, with the $8.4 million unrated Class H balance at issuance unchanged as of the December 2021 remittance. The majority of loans remaining in the pool benefit from some level of material recourse to the loan sponsor.

The transaction is concentrated with loans backed by office, industrial, and retail properties, representing 27.6%, 24.1%, and 17.5% of the current trust balance, respectively. The remaining concentrations by property type are relatively low, including independent living and lodging properties, which represent 11.6% and 10.3% of the current trust balance, respectively. According to the December 2021 remittance report, there are no loans in special servicing and 19 loans, representing 24.4% of the current trust balance, are on the servicer’s watchlist. These loans are on the watchlist for a variety of reasons, including low debt service coverage ratios (DSCRs), low occupancy, and tenant rollover concerns. However, the primary drivers are retail and independent living assets, which continue to suffer from sustained downward pressure on operational performance, stemming from ongoing disruptions related to the pandemic. Where applicable, DBRS Morningstar analyzed the watchlisted loans with probability of default penalties to increase the expected loss for this review.

The largest loan on the servicer’s watchlist, 480 Hespeler Road (Prospectus ID#7; 5.5% of the pool), is secured by an unanchored retail centre in Cambridge, Ontario, approximately 100 kilometres west of Toronto. The loan was added to the servicer’s watchlist in May 2020 for operational and performance concerns, driven primarily by provincial lockdown measures adopted in response to the coronavirus pandemic. The loan was granted a series of interest and principal deferrals between April 2020 and March 2021 and repayment was to be made over nine months, beginning in April 2021. According to the most recent advance recovery report, all outstanding amounts have been repaid. The largest tenant at the property is Crunch/Planet Fitness (26.0% of NRA), which currently remains closed due to provincial restrictions targeting non-essential businesses. The remaining tenant mix generally offers some combination of in-store shopping, curb side pickup, and takeout options for the food outlets. Due to the property’s strong sponsorship, which is structured with a 50% personal recourse guarantee and roster of nationally recognized tenants including Dollar Tree, Value Village, and Royal Bank of Canada, DBRS Morningstar believes that the overall outlook for this loan remains stable in the near-to-moderate term, despite the exposure to non-essential tenants.

Another loan of concern on the servicer’s watchlist, The Duke of Devonshire (Prospectus ID#17; 3.6% of the pool), is on the DBRS Morningstar Hotlist and has been on the servicer’s watchlist intermittently since October 2017. The loan has consistently been monitored for a very low DSCR, driven by depressed occupancy rates since issuance. The loan is secured by a 105-unit independent living facility in Ottawa and is owned and operated by Chartwell Retirement Residences (Chartwell) (rated BBB (low) with a Negative trend by DBRS Morningstar). DBRS Morningstar released commentary with the most recent rating action in April 2021 stating the Negative trend was reflective of increased risks for the company amid the coronavirus pandemic.

As of March 2021, the property was only 55.5% occupied. The servicer also reports ongoing litigation against the vendor that began in January 2018 and relates to breach of contract/fraudulent misrepresentation claims. According to the servicer, litigation was still in the discovery stage as of the most recent update provided, in March 2021. Further information has been requested and DBRS Morningstar will continue to monitor this loan for updates. The loan is full recourse to Chartwell and although the company faces challenges amid the ongoing pandemic, it is noteworthy that the subject loan has never reported delinquent and there has been no coronavirus-related relief request processed by the servicer to date.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Classes F and G as the quantitative results suggested a higher rating. The material deviation is warranted given uncertain loan-level event risk, particularly for the Duke of Devonshire loan, which is being monitored for ongoing litigation and sustained cash flows well below issuance figures.

Class X is an interest-only (IO) certificates 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#17 – Duke of Devonshire (3.6% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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