DBRS Assigns Provisional Ratings to PFP 2017-4, Ltd.

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of secured floating-rate notes (the Notes) to be issued by PFP 2017-4, Ltd.:

-- 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

All classes will be privately placed.

With respect to the deferrable notes (the Class C, Class D, Class E, Class F and Class G Notes), 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 31 floating-rate mortgages secured by 35 transitional properties totaling $652.2 million (93.1% of total loan pool), excluding the $48.1 million of future funding commitments. Of the 31 loans, there are three unclosed loans as of September 13, 2017, representing 7.6% of the pool (Sterling Crest, Rivers Park Business Center and 1155 Northern Boulevard). 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. Twenty-one of these loans have future funding participations that may be acquired by the Issuer in the future with principal repayment proceeds for a total of 48.1 million. If the acquisition by the Issuer of all or a portion of a future funding participation results in a downgrade of the ratings by DBRS, in and of itself, then PFP Holding Company V, LLC will be required to promptly repurchase such related funded companion participation at the same price as the Issuer paid to acquire it.

The floating-rate mortgages were analyzed to determine the probability of default (POD) 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 24 loans, representing 63.6% of the mortgage loan cut-off date balance (initial pool balance), with a DBRS Term debt service coverage ratio (DSCR) 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 22 loans, or 64.9% of the loans, having a DBRS Refi DSCR 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. Eighteen loans totaling 46.0% of the initial pool balance represent acquisition financing, with borrowers contributing cash equity to the transaction.

The loans were all sourced by Prime Finance, an affiliate of PFP, Inc., which has strong origination practices. Since inception, Prime Finance has originated or acquired approximately 316 commercial and multifamily mortgage loans, representing total capital commitments of approximately $9.2 billion. Class E, Class F, Class G and the Preferred Shares will be purchased by a wholly owned subsidiary of PFP, Inc. and represent 15.4% of the initial pool balance.

The properties are primarily located in core markets (1.9% urban and 97.5% suburban) that benefit from greater liquidity. Only one loan, representing 0.6% of the mortgage loan cut-off date balance, is located in a tertiary market, and no loans are located in rural markets. The pool is relatively concentrated based on loan size, as there are only 31 loans in the initial pool, resulting in a concentration profile similar to a pool of 19 equally sized loans. The ten largest loans represent 59.1% of the initial pool balance, and the largest three loans represent 25.5% of the initial pool balance. Furthermore, the pool is relatively geographically non-diverse, as the top two states, California and Missouri, account for 12 loans, representing 47.8% of the initial pool balance.

The deal appears concentrated by property type, with 17 loans, representing 59.7% of the mortgage loan cut-off date balance, secured by office properties. The largest loan secured by an office property, One Kansas City Place, representing 17.3% of the office concentration, is primarily occupied by an investment-grade tenant, Kansas City Power and Light Company, on a long-term lease that expires over nine years past the fully extended loan maturity. There are eight loans in the pool, representing 23.1% of the initial pool balance, secured by multifamily properties. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. None of the multifamily loans in the pool are currently secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.

Based on the weighted initial pool balances, the overall weighted-average DBRS Term DSCR and DBRS Refi DSCR of 1.01x and 0.96x, respectively, and corresponding DBRS Debt Yield and DBRS Exit Debt Yield of 7.4% and 8.9%, respectively, are reflective of high-leverage financing. Based on pool balances if all eligible future funding participations are acquired by the trust and higher quality loans pay down in an equal amount, the overall weighted-average DBRS Term DSCR and DBRS Refi DSCR of 0.98x and 0.96x, respectively, and corresponding DBRS Debt Yield and DBRS Exit Debt Yield of 7.3% and 8.9%, respectively, are also considered high-leverage financing. 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 analyzes POD based on the DBRS In-Place NCF. The corresponding weighted-average DBRS Debt Yield is 7.4%, which is lower than the weighted-average DBRS Exit Debt Yield, based on a DBRS Stabilized NCF of 8.9%. Both the DBRS as-is and Stabilized NCF figures are weighted on the initial pool balance. Credit is given to the higher DBRS Stabilized NCF when determining loss given default and, based on the 8.9%, would indicate a modest amount of upside.

For more information on this transaction and supporting data, 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.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the 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 require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Multi-borrower CMBS Methodology, which can be found on dbrs.com under Methodologies.

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

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

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