DBRS Morningstar Upgrades Ratings on Five Classes of AREIT 2019-CRE3 Trust, Changes Trends to Stable on Two Classes

DBRS, Inc. (DBRS Morningstar) upgraded its ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2019-CRE3 issued by AREIT 2019-CRE3 Trust as follows:

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

DBRS Morningstar also confirmed its ratings on two classes as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)

DBRS Morningstar changed the trends on Classes E and F to Stable from Negative, while the trends on all other classes remain Stable.

The rating upgrades and trend changes reflect the increased credit support to the bonds as a result of successful loan repayment, representing a collateral reduction of 42.1% since issuance as of the June 2022 remittance. While select loans remaining in the transaction, notably those secured by hotel properties or office properties, have experienced delays in the stated business plans as a result of the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar has generally observed performance improvements across the collateral pool since its last rating action in August 2021. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

At issuance, the collateral consisted of 30 floating-rate mortgage loans secured by 31 mostly transitional commercial real estate properties with a cut-off balance totaling $717.9 million, excluding approximately $93.9 million of future funding commitments to fund capital expenditures and operating shortfalls to aid in the individual properties’ stabilization plans.
The transaction is structured with a 36-month Permitted Funded Companion Participation Acquisition Period ending August 2022, whereby the Issuer can contribute funded participations of loans into the Trust. As of the June 2022 remittance, there are no available funds in the Permitted Funded Companion Participation Acquisition Account.

As of the June 2022 reporting, 13 loans remain in the pool with a current principal balance of $409.5 million. According to the collateral manager, $42.7 million of loan future funding has been advanced to nine individual borrowers to date to aid in business plan completion. An additional $5.5 million of loan future funding is allocated to the borrower on the Gulf Tower loan for tenant improvements and leasing costs. The loan was structured with an Outside Advance Date of June 2022, whereby the borrower had a choice to have a portion or all outstanding loan future funding placed into an interest accruing reserve held by the issuer or to waive the right to receive any additional funding. The property sustained significant damage in May 2021, however, as a result of an explosion, which has stalled leasing momentum and led to a significant restoration project. The borrower appears to have repositioned the property using insurance proceeds with the project expected to completed in 2022. The casualty event, combined with the impact of the coronavirus pandemic, has extended the borrower’s business plan completion date; however, the borrower remains committed to the property. It is unknown if the Outside Advance Date has been extended given the casualty event.

The transaction is concentrated by property type as there are five loans (55.3% of the current pool balance) secured by office properties and five loans (33.6% of the current pool balance) secured by hospitality properties. Eight loans, representing 69.8% of the current pool balance, are in urban markets with DBRS Morningstar Market Ranks of 6, 7, and 8. These markets have historically shown greater liquidity and demand. There are five loans, representing 30.2% of the current pool balance, secured by properties in markets with a DBRS Morningstar Market Rank of 3 or 4, which are suburban in nature and have historically had higher probability of default levels when compared with properties located in urban markets.

As of June 2022 reporting, all loans remain current and there are nine loans on the servicer’s watchlist, representing 77.6% of the pool balance. The three largest loans, representing 46.8% of the current pool balance, were placed on the servicer’s watchlist because of upcoming loan maturity dates; however, all loans feature extension options. DBRS Morningstar expects the individual borrowers to exercise the loan extension options and in any instances where property performance not does meet performance-based hurdles to qualify for the extension options, DBRS Morningstar expects the borrowers and lender to negotiate an agreement to allow the extension to be exercised. The six remaining loans, representing 30.8% of the current pool balance, were generally added to the watchlist for low debt service coverage ratios or declines in occupancy.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Class F as the quantitative results suggested a higher rating. The material deviations are warranted given the sustainability of loan performance trends has not been demonstrated, as several properties securing loans in the transaction have yet to stabilize.

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:

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 U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

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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