DBRS Finalizes Provisional Ratings on Hunt Commercial Real Estate Notes 2017-FL1

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of secured Floating-Rate Notes (the Notes) to be issued by Hunt Commercial Real Estate Notes 2017-FL1:

-- 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 B (low) (sf)

All trends are Stable.

With respect to the deferrable notes (Class C, Class D and Class E), 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 initial collateral consists of 23 floating-rate mortgages secured by 36 transitional properties totaling $279.4 million (80.0% of total loan pool), excluding the $15.5 million of future funding and additional ramp-up commitment, resulting in a total Target Mortgage Asset Balance of $349.2 million. 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 transaction has a ramp-up period during the first 180 days from the closing of the transaction and a Reinvestment Period 30 months from closing; after the expiration of the Reinvestment Period, there will be no ability to add new loans. Both ramp-up and reinvestment periods are subject to Acquisition Criteria, which include rating agency conditions by DBRS.

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. Because of the floating-rate nature of the loans, the index DBRS used (one-month LIBOR) was the lower of a DBRS stressed rate that corresponded to the remaining fully extended term of the loans or 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 net cash flow (NCF) and their respective stressed constants, there were 18 loans, representing 85.8% of the initial pool balance, with term debt service coverage ratios (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 nine loans, or 42.8% of the loans, 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 if 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 loans were all sourced by Hunt Mortgage Group (HMG), a subsidiary of Hunt Companies, Inc. (Hunt Companies), a commercial mortgage originator with strong origination practices and one of the largest FHA, Freddie Mac and Fannie Mae multifamily loan originators with an annual $2.0+ billion GSE multifamily lending. HMG and its affiliates currently act as a servicer for a $12.5 billion loan portfolio, and HMG leverages Hunt Companies’ vertically integrated real estate program. Hunt will retain the bottom 16.75% of the transaction balance.

The overall weighted-average (WA) DBRS Term and Refi DSCRs of 1.00x and 1.11x, respectively, and corresponding DBRS Debt and Exit Debt Yields of 7.3% and 9.6%, respectively, are considered high-leverage financing. The DBRS Term and Refinance DSCRs are based on the DBRS In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 7.1%, which is greater than the current WA interest rate of 5.2% (based on a WA mortgage spread and an assumed 0.75% one-month LIBOR index). Regarding the refinance risk indicated by the DBRS Refi DSCR of 1.11x, the credit enhancement levels are reflective of the increased leverage, which 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 probability of default based on the assets’ in-place cash flow, which does not assume that the stabilization plan and cash flow growth will ever materialize. The properties are primarily located in core markets (4.2% urban and 61.4% suburban), which benefit from greater liquidity. There are only six loans, representing 23.6% of the initial pool balance, located in tertiary markets, and no properties located in rural markets.

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.

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 principal methodologies are the North American CMBS Multi-borrower Rating Methodology, Unified Interest Rate Model for Rating U.S. Structured Finance Transactions and DBRS Commercial Real Estate Property Analysis Criteria, which can be found on dbrs.com 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.