DBRS Assigns Provisional Ratings to Exantas Capital Corp. 2019-RSO7

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-RSO7 to be issued by Exantas Capital Corp. 2019-RSO7 (the Issuer):

-- 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 32 floating-rate mortgages secured by 38 transitional properties totaling approximately $687.2 million, excluding approximately $59.4 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, 25 have future funding participations that the Issuer may acquire with principal repayment proceeds for a total of approximately $59.4 million in the future. Please see the chart below for participations that the Issuer will be allowed to acquire.

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), 27 loans, comprising 87.2% had a DBRS As-Is debt service coverage ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Stabilized DSCR for 22 loans, comprising 77.5% of the initial pool balance, are below 1.00x, which is indicative of elevated refinance 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 self-storage). Additionally, only one of the multifamily loans in the pool is currently secured by student or military housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Twenty-three loans, totaling 69.6% of the initial pool balance, represent acquisition financing with borrowers contributing cash equity to the transaction.

The properties are primarily located in core markets with the overall pool’s weighted-average DBRS Market Rank at 4.4. Four loans, totaling 13.5% of the pool, are in markets with a DBRS Market Rank of 7 and another two are within markets with a Market Rank of 6, totaling 8.5% of the pool. Both of the ranks correspond to zip codes that are more urbanized in nature.

The deal is concentrated by property type with 20 loans, representing 61.8% of the mortgage loan cut-off date balance, secured by multifamily properties. Of the multifamily property concentration, one loan totaling 3.3% of the multifamily concentration is located in a DBRS Market Rank of 7. Another four loans, representing 11.5% of the concentration, are located in a DBRS Market Rank of 5. Additionally, DBRS sampled 69.6% of the pool, representing 69.1% coverage of the total multifamily 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.

All loans have floating interest rates and all loans are interest-only during the original term and have original term ranges from 24 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 a maximum of five years. Additionally, all but one loan, representing 3.6% of the pool, have extension options and in order to qualify for these options, the loans must meet minimum DSCR and loan-to-value requirements. Twenty-four loans, representing 77.4% of the total pool, amortize during all or a portion of their extension period.

The DBRS sample included 17 loans and site inspections were performed on 14 of the 38 properties in the pool, representing 59.4% of the pool by allocated cut-off loan balance. DBRS conducted meetings with the on-site property manager, leasing agent or representative of the borrowing entity for 14 loans.

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.

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.

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 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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