DBRS Assigns Provisional Rating to Sutherland Commercial Mortgage Trust 2018-SBC7

DBRS, Inc. (DBRS) assigned a provisional rating to the following class of Commercial Notes, Series 2018-SBC7 to be issued by Sutherland Commercial Mortgage Trust 2018-SBC7 (SCMT 2018-SBC7):

-- Class A at A (low) (sf)

The trend is Stable.

The collateral consists of 452 individual loans secured by 460 commercial and multifamily properties. The conduit pool was analyzed to determine the ratings, reflecting the long-term probability of loan default within the term and, if applicable, its liquidity at maturity. Of the 452 individual loans, 248, representing 65.4% of the pool, have a fixed interest rate. The floating-rate loans are structured with interest-rate floors ranging from 0.0% to 6.0% with a straight average of 3.051% and an interest-rate margin ranging from 0.0% to 6.5% with a straight average of 3.142%. DBRS applied a stress to the index (one-month LIBOR) that corresponded to the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed interest rate over the loan term. DBRS looked to the greater of the interest-rate floor or the DBRS stressed index rate when calculating stressed debt service. The loans amortize on a five- to 35-year basis with original term lengths ranging from nine months to 363 months. When the cut-off loan balances were measured against the DBRS net cash flow (NCF) and their respective actual constants or stressed interest rates, there were 192 loans, representing 46.7% of the pool, with term debt-service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default.

The pool is relatively diverse based on loan size, with an average balance of $583,029, a concentration profile equivalent to that of a pool of 173 equal-sized loans and a top ten loan concentration of only 15.2%. Increased pool diversity helps to insulate the higher-rated classes from event risk. The loans are mostly secured by traditional property types (i.e., retail, multifamily, office and industrial), with only 7.6% exposure to higher-volatility property types, such as hotels, self-storage or manufactured housing communities. The pool has low refinance risk, as only 19 loans, representing 5.2% of the pool, have a DBRS DSCR below 1.00x.

Based on a combination of fixed and DBRS-stressed interest rates, the pool is anticipated to amortize by 69.7% over the remaining loan term, which also significantly reduces refinance risk. Furthermore, 41.6% of the pool consists of fully amortizing loans.

Based on the respective actual constants or stressed interest rates, there were 192 loans, representing 46.7% of the pool, with term DSCRs below 1.15x, a threshold indicative of a higher likelihood of term default. The NCF generally utilized to calculate the DBRS DSCRs was based on a broker’s opinion of value (BOV) that used estimated market rents and expense levels and does not necessarily reflect actual lease rates or operating expenses at the individual property. Furthermore, 321 loans, representing 55.4% of the pool, are fully amortizing over the remaining loan term, thus reducing refinance default risk.

The pool has an average balance of $583,029, significantly lower than the average loan balance for CMBS 2.0 deals of approximately $18.6 million, based on 2018 conduit transactions. Historically, loans with smaller balances have experienced significantly higher loss severities in the event of default than larger loans. DBRS modeled all loans with a higher associated loss severity correlated to loan size. Loans with balances of less than $5 million, which represent 93.0% of the pool, are treated most punitively. 199 loans were identified as occupied by a single tenant, representing 47.2% of the pool. Additionally, 155 loans, representing 29.1% of the pool, were identified as owner-occupied properties. Loans secured by properties occupied by single tenants or by properties occupied by the owner have been found to have higher losses in the event of default. Single-tenant properties have been modeled with a higher expected loss compared with multi-tenant properties. These properties are expected to amortize 71.9% over the loan term. Owner-occupied properties have also been modeled with a higher expected loss compared with non-owner-occupied properties. These properties are expected to amortize 82.1% over the loan term. Of the 62 loans DBRS performed exterior inspections on, 29 loans, representing 5.2% of the pool (23.4% of the DBRS sample), were modeled with Average (-) to Poor property quality, and on an overall basis the mean DBRS property quality was Average (-). Lower-quality properties are less likely to retain existing tenants, resulting in less stable performance. DBRS increased the probability of default (POD) for these loans to account for the elevated risk. Furthermore, DBRS modeled any uninspected loans as Average (-), which has a slightly increased POD level. One hundred and twenty-nine loans, representing 32.1% of the pool, are located in rural or tertiary markets. Properties located in tertiary and rural markets are modeled with significantly higher loss severities than those located in urban and suburban markets. The origination policies executed by respective loan originators do not necessarily provide for terrorism, earthquake or flood insurance. Small-balance loans are generally not originated with terrorism insurance. Additionally, only 27 loans, representing 5.8% of the pool, are located in urban markets, which are believed to have higher risk. There are 87 loans, representing 16.5% of the pool, that are located in California, for which DBRS applied a penalty to the loss severity to mitigate the potential risk. Limited property-level information was available for DBRS to review. Property condition reports, Phase I/II environmental reports and/or updated appraisal reports were not provided in conjunction with this securitization. Furthermore, a limited number of credit memos from origination and historical financial statements were provided. DBRS did receive an updated appraisal (for two loans) or a BOV for the remaining loans in the DBRS sample. Given the lack of updated information, DBRS applied conservative assumptions in its NCF analysis.

The DBRS sample included 36 of the 452 loans in the pool. Site inspections were performed on 62 of the 460 properties in the pool (22.8% of the pool by allocated loan balance). A cash-flow underwriting review and a cash flow stability and structural review were completed on 36 of the 452 loans, representing 16.2% of the pool by loan balance. The DBRS sample had an average NCF variance of -14.3% and ranged from -100.0% to 95.2%. Three loans had extreme NCFs resulting in variances of -100.0%, 95.2% and n/a since a BOV NCF was not provided. Excluding these three loans, the DBRS sample ranged from -45.3% to 28.4%, with an average of -15.5%, which was applied to the non-sampled loans.

The Class A Notes will be privately placed.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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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. 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.

The rated entity or its related entities did not 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.