DBRS Assigns Provisional Ratings to Ready Capital Mortgage Trust 2018-4

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Ready Capital Mortgage Trust 2018-4 Commercial Mortgage Pass-Through Certificates (the Certificates) to be issued by Ready Capital Mortgage Trust 2018-4 (the Issuer):

-- Class A at AAA (sf)
-- Class IO-A at AAA (sf)
-- Class B at AAA (sf)
-- Class IO-B/C at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The Class IO-A and IO-B/C balances are notional.

The collateral consists of 50 fixed-rate loans secured by 54 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS In-Place net cash flow (NCF) and their respective actual constants, 20 loans, representing 42.5% of the total pool, had a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. With the exception of ten loans, representing 21.0% of the pool trust balance, all other loans are structured without any interest-only (IO) period, thus reducing refinance default risk. The current trust balance is expected to amortize by 15.7% at maturity.

Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 20 loans, representing 41.4% of the pool, having refinance DSCRs below 1.00x, and three loans, representing 13.0% of the pool, having refinance DSCRs below 0.90x. The DBRS term metrics are based on the DBRS In-Place NCF, and the DBRS refinance metrics are based on the DBRS Stabilized NCF. For loans without future finding components, DBRS set the DBRS Stabilized NCF at an equal level to the DBRS In-Place NCF. The properties with future funding components were typically 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 the structure provided, DBRS generally does not assume the assets will stabilize above market levels.

The loans are generally secured by traditional property types (i.e., retail, multifamily, office and industrial), with no exposure to higher-volatility property types such as hotels. There are only two loans, representing 5.0% of the pool, secured by non-traditional properties types (i.e., self-storage and MHC). There are 23 loans in the pool, representing 38.7% of the mortgage loan cut-off date 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.

The pool is relatively diverse based on loan size, with a concentration profile equivalent to that of a pool of 29 equal-sized loans. Increased pool diversity helps to insulate the higher-rated classes from event risk. No loan accounts for more than 10.0% of the pool trust balance, and only two loans account for more than 5.0% of the trust balance. The pool has an average trust balance of $3.3 million; this is significantly lower than the average loan balance for conduit loans, which is typically above $15 million. Historically, loans with smaller balances have experienced significantly higher loss severities in the event of default than larger loans.

Eleven loans, representing 16.8% of the pool, are located in rural or tertiary markets. Properties located in tertiary and rural markets are penalized with significantly higher loss severities than those located in urban and suburban markets. The loans secured by properties in these markets have a straight-line average DBRS Exit Debt Yield of 12.4%, which is substantially higher than the pool’s weighted-average (WA) DBRS Exit Debt Yield of 10.7%.

Of the 21 loans DBRS sampled, six loans, representing 14.6% of the pool (23.1% of the DBRS sample) were identified with Below Average or Average (-) property quality. Lower-quality properties are less likely to retain existing tenants, resulting in less stable performance. The six loans have a straight-line average DBRS Exit Debt Yield of 12.0%, which is substantially higher than the pool’s WA DBRS Exit Debt Yield of 10.7%. Seven loans, representing 22.9% of the pool, have sponsorship and/or loan collateral with a prior discounted payoff, loan default, DST borrower, limited liquidity relative to loan obligation, a historical negative credit event or have a prior or pending litigation issue with the respective property. DBRS increased the probability of default for loans with identified sponsorship concerns and loans with Below Average or Average (-) property quality.

Classes IO-A and IO-B/C are IO certificates that reference a single rated tranche or multiple rated tranches. The IO ratings mirror the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint 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 the North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

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 for this rating action. DBRS 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.dbrs.com or contact us at info@dbrs.com.