DBRS Finalizes Provisional Ratings on RAIT 2016-FL6 Trust

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of secured Floating Rate Notes (the Notes), to be issued by RAIT 2016-FL6 Trust:
-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

The trends are Stable.

Classes A, B, C and D have been privately placed.

Classes E and F are non-offered classes.

With respect to the deferrable notes (Class C, Class D, Class E and Class F), to the extent that interest proceeds are not sufficient on a given payment date to pay accrued interest, interest will not be due and payable on the payment date and will instead be deferred and capitalized. The ratings assigned by DBRS contemplate the timely payments of distributable interest and, in the case of deferred interest notes, the ultimate recovery of deferred interest (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law).

The collateral for the transaction consists of 23 recently originated floating-rate mortgages secured by 33 transitional commercial real estate properties totaling $257.9 million based on current cut-off balances and $270.5 million based on the fully funded loan amount (including the future funding non-controlling pari passu participation interests). The loans are secured by current cash flowing assets, most of which are in a period of transition, with plans to stabilize and improve the asset value. The floating-rate mortgages were analyzed to determine the probability of loan default over the term of the loan and its refinance risk at maturity, based on a fully extended loan term. Due to the floating-rate nature of the loans, the index (one-month LIBOR) was modeled at the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap, with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS In-Place NCF and their respective stressed constants, there were 16 loans, representing 71.2% of the pool, with term DSCRs below 1.15 times (x), a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk, DBRS applied its refinance constants to the balloon amounts, resulting in 16 loans, or 78.3% of the pool having refinance DSCRs below 1.00x relative to the DBRS Stabilized NCF. The properties are often transitioning, with potential upside in the cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or other loan structural features in place were insufficient to support such treatment. Furthermore, even with structure provided, DBRS generally does not assume the assets to stabilize above market levels.

The properties are located in primarily core markets (2.3% urban and 86.5% suburban) that benefit from greater liquidity. Only two loans, representing 7.3% of the pool, are located in a tertiary market and only one loan, representing 3.9% of the pool, is located in a rural market. Thirteen loans totaling 62.1% of the deal balance represent acquisition financing, with borrowers contributing equity to the transaction. Three loans, representing 25.6% of the pool, have a future funding component. As of the cut-off date, the aggregate remaining future funding participations totaled nearly $12.6 million and ranged from approximately $1.7 million to $6.6 million. The proceeds necessary to fulfill the future obligations will be drawn on primarily from a Committed Warehouse Line and will be held outside the trust, but will be pari passu with the trust participations. The vast majority of these future funding participations will be utilized by the borrowers to fund property renovations and cover leasing costs. Each property has a business plan to execute that is expected to increase net cash flow.

The loans have been underwritten by DBRS to a stabilized cash flow that is in some instances above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS made relatively conservative stabilization assumptions and in each instance considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS models probability of default (POD) based on the DBRS In-Place NCF and the fully funded loan amount (including the future funding participation structures). The corresponding weighted-average (WA) DBRS Debt Yield is 6.2%, which is lower than the WA DBRS Exit Debt Yield, based on a DBRS Stabilized NCF of 8.3%. This indicates a moderate amount of upside that is modeled.

The overall WA DBRS Term and Refinance (Refi) DSCRs of 0.93x and 0.92x, respectively, and corresponding DBRS Debt and Exit Debt Yields of 6.2% and 8.3%, respectively, are considered high-leverage financing. The DBRS Term and Refi DSCRs are based on the DBRS In-Place NCF and debt service is calculated using a stressed interest rate. The WA stressed rate used is 6.5%, which is greater than the current WA interest rate of 5.8% (based on WA mortgage spread and a one-month LIBOR index). Regarding the significant refinance risk indicated by the DBRS Refi DSCR of 0.92x, credit enhancement levels are reflective of the increased leverage that is substantially higher than in recent fixed-rate transactions. The assets are generally well positioned to stabilize and any realized cash flow growth would help to offset a rise in interest rates and also improve the overall debt yield of the loans. DBRS associates its POD based on the assets’ in-place cash flow, which does not assume that the stabilization plan and cash flow growth will ever materialize.

The ratings assigned to the Notes by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

To provide more information on this transaction and supporting data, the transaction is available on DBRS CMBS IReports. Please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E), which contains a description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.