DBRS Assigns Provisional Ratings to Ready Capital Mortgage Financing 2019-FL3

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage-Backed Notes, Series 2019-FL3 to be issued by Ready Capital Mortgage Financing 2019-FL3:

-- 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 (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The initial collateral consists of 43 floating-rate mortgages secured by 44 transitional properties totaling approximately $320.8 million, excluding approximately $101.3 million of future funding commitments. Most loans are in a period of transition with plans to stabilize and improve the asset value. Of these loans, 36 have future funding participations that the Issuer may acquire with principal repayment proceeds for a total of approximately $101.3 million in the future.

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 As-Is net cash flow (NCF), all loans had a DBRS Term debt service coverage ratio (DSCR) below 1.00x, a threshold indicative of a higher likelihood of term default. Additionally, the DBRS Stabilized DSCR for 28 loans, comprising 67.6% of the initial pool balance, are below 1.00x, a threshold indicative of default risk. The properties are often transitioning with potential upside in 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 are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets to stabilize above market levels. The transaction will have a sequential-pay structure.

The loans are generally secured by traditional property types (i.e., retail, multifamily, office, hotel and industrial). Additionally, 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. Thirty-three loans, totaling 76.4% of the initial pool balance, represent acquisition financing with borrowers contributing cash equity to the transaction. The properties are primarily located in core markets – 29.7% in super-dense urban and urban – that benefit from greater liquidity. The borrowers of 36 loans have purchased LIBOR rate caps that have a range of 3.0% up to 4.0% to protect against rising interest rates over the term of the loan.

The deal is concentrated by property type with 24 loans, representing 61.8% of the mortgage loan cut-off date balance, secured by multifamily properties or mixed-use properties that are predominantly multifamily (multifamily property concentration). Of the multifamily property concentration, 95.8% of the loans are located in urban and suburban markets. Additionally, DBRS sampled 73.1% of the pool, representing 78.2% coverage of the total office loan cut-off balance, thereby providing comfort for the DBRS NCF. 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.

Three loans, representing 3.9% of the pool, have sponsorship and/or loan collateral with a prior or pending litigation issue related to real estate. DBRS increased the probability of default (POD) for loans with identified sponsorship concerns. This includes four of the top 15 loans. All loans have floating interest rates and are interest only (IO) during the original term. The loans that are IO during the original term have original terms ranges from 18 months to 36 months, creating interest rate risk. All loans are short-term loans and, even with extension options, have a fully extended loan term of maximum five years. Additionally, all loans have extension options and, in order to qualify for the extension options, the loans must meet minimum DSCR and loan-to-value (LTV) ratio requirements. Of the loans that are IO during the original term, 35 loans, representing 93.3% of these loans, have fixed amortization during the extensions.

Based on the weighted initial pool balances, the overall weighted-average (WA) DBRS As-Is DSCR and DBRS Stabilized DSCR of 0.43x and 0.92x, respectively, reflect high-leverage financing. The DBRS As-Is DSCR is based on the DBRS In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 6.8%, which is greater than the current WA interest rate of 6.3% (based on WA mortgage spread and an assumed 2.5% one-month LIBOR index). Regarding the refinance risk indicated by the DBRS Stabilized DSCR of 0.92x, the credit enhancement levels reflect 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 loss given default based on the assets’ in-place cash flow, which does not assume that the stabilization plan and cash flow growth will ever materialize.

Of the 21 loans DBRS sampled, six loans, representing 21.4% of the pool (29.3% 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. DBRS increased the POD for these loans to account for the elevated risk. Additionally, ten loans have a straight-line average DBRS Stabilized DSCR of 1.04x and Stabilized Balloon LTV of 60.4%, which is substantially better than the pool’s WA DBRS Stabilized DSCR and Stabilized Balloon LTV of 0.92x and 61.3%, respectively.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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 a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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

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

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