DBRS Morningstar Confirms Ratings on All Classes of Real Estate Asset Liquidity Trust, Series 2016-1

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2016-1 issued by Real Estate Asset Liquidity Trust, Series 2016-1 as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of this transaction, which remains in line with DBRS Morningstar’s expectations. Since the last review, Tamarack Centre Retail (Prospectus ID#1), previously the largest loan in the pool with an issuance balance of $30.0 million, paid off in full in June 2023, prior to its May 2026 loan maturity date. In addition, the transaction continues to benefit from the amortization of all loans in the pool. There are currently no delinquent or specially serviced loans.

As of the August 2023 remittance, 38 of the original 55 loans remain in the trust, with an aggregate balance of $234.6 million, representing a collateral reduction of 41.5% since issuance. The transaction is concentrated by property type with loans backed by retail, multifamily, and office properties representing 31.4%, 23.0%, and 19.8% of the pool balance, respectively. One loan is fully defeased, representing 0.6% of the current pool balance. Nine loans, representing 30.0% of the pool balance, are on the servicer’s watchlist and are primarily being monitored for low debt service coverage ratios (DSCRs), tenant rollover risk, forbearances related to the Coronavirus Disease (COVID-19) pandemic, or upcoming loan maturity. Loans that have exhibited increased credit risk were analyzed with stressed scenarios in the analysis. This resulted in a weighted-average expected loss that was more than triple the pool average.

The largest loan on the servicer’s watchlist is the Toronto Congress Centre loan (Prospectus ID#2, 7.7% of the current pool balance), which is secured by a 471,268-square-foot (sf) convention and trade show centre near Toronto Pearson International Airport and is fully leased to Congress Centres Inc. The partial interest-only (IO) loan is currently amortizing over a 25-year schedule. At issuance, the loan was shadow-rated investment grade. The loan was initially added to the servicer’s watchlist in July 2020 following the sponsor’s pandemic-related relief request and is currently being monitored for not providing updated financial statements. The forbearance agreement was revised a few times, but ultimately the borrower was granted a three-month deferral of payments and an 18-month IO period, extending to March 2022. The deferred principal is to be repaid at maturity. As per the May 2023 servicer site inspection, there is $2.3 million in capital expenditure planned for the property, primarily focused on roof replacement. The most recently provided financials from YE2021 reported a DSCR of 0.91 times (x), an improvement from YE2020 DSCR of 0.15x, but continues to lag behind the DBRS Morningstar DSCR of 1.52x at issuance. While the subject struggled amid the challenges posed by the pandemic surrounding capacity restrictions, the increased volume of events booked at the subject and the net cash flow (NCF) improvement suggests the subject is rebounding. Other mitigating factors include the subject’s desirable location and experienced sponsorship, and the loan’s full recourse to the sponsor, who has owned an interest in the property since 1994. The loan also benefits from a low issuance loan-to-value (LTV) of 31.9%, which provides cushion for potential value declines. With this review, DBRS Morningstar confirms that the loan characteristics remain in line with an investment-grade shadow rating.

The second-largest loan on the servicer’s watchlist is the Ste Catherine Street Retail Montreal loan (Prospectus ID#4, 6.9% of the current pool balance), which is secured by an 35,219-sf unanchored retail property in Montréal. The loan has been watchlisted since 2019 after the largest tenant, Forever 21 (85.8% of the net rentable area), had announced plans to close its Canadian stores. The space was backfilled by Ardene on a month-to-month lease but was vacated in 2022. Fossil was the second tenant at the subject and occupied 14.2% of the space; however, the tenant vacated the space in October 2022. This space was backfilled by a new tenant, Quartz Co., through a lease until February 2023.

The borrower is actively marketing the fully vacant property. The borrower has kept the loan current despite reporting negative NCFs in the last few years, and there are no recourse provisions. The property is well-located within a prominent retail corridor, but given the increased risk, the loan was analyzed with an elevated probability of default, resulting in an expected loss almost seven times higher than the pool average.

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 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Class X is an IO certificate 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

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

The credit rating assigned to Class C materially deviates from the credit rating implied by the predictive model. DBRS Morningstar 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 rating. The rationale for the material deviation is the uncertain loan-level event risk. Because of the timing of the financial reporting, several loans did not have updated financials, including loans that are scheduled to mature in the near term, as well as the largest watchlist loan, Toronto Congress Centre. Despite the loan exhibiting improvements in performance based on increased bookings and positive year-over-year NCF trends, the reporting available is still showing a DSCR below issuance expectations.

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 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 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.

DBRS Morningstar 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.

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://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022), https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://www.dbrsmorningstar.com/research/415687

Legal Criteria for Canadian Structured Finance (June 20, 2023) https://www.dbrsmorningstar.com/research/416101

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/410863.

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