DBRS Finalizes Provisional Ratings on PFP 2019-5, Ltd.

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of secured floating-rate notes issued by PFP 2019-5, Ltd. (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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

All classes have been privately placed.

The initial collateral consists of 35 floating-rate mortgages secured by 39 transitional properties totaling $764.2 million (87.4% of the total fully funded balance), excluding the $109.9 million of remaining future funding commitments. The loans are secured by currently cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Of these loans, 29 have remaining future funding participations that may be acquired by the Issuer in the future with principal repayment proceeds for a total of $109.9 million. The initial future funding commitments totaled $115.5 million, of which approximately $5.6 million has been funded to date. 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, then PFP Holding Company VI, LLC will be required to promptly repurchase such related funded companion participation at the same price as the Issuer paid to acquire it.

The loans were all sourced by an affiliate of the Issuer that has strong origination practices. PFP 2019-5 Depositor, LLC, a wholly owned subsidiary of PFP Holding Company VI, LLC, will retain 100.0% of the Class F notes, Class G notes and Preferred Shares, accounting for approximately 13.5% of the initial pool balance. Additionally, an affiliate of PFP Holding Company VI, LLC is expected to retain 100.0% of the Class E notes.

Given 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), 24 loans (79.1% of the mortgage loan cut-off date balance) 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 16 loans, comprising 53.1% 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 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 are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS generally does not assume the assets will stabilize above market levels. The transaction will have a sequential-pay structure.

The deal is concentrated by property type with 15 loans, representing 44.7% of the mortgage loan cut-off date balance, secured by multifamily properties. Four of these loans, comprising 8.9% of the trust balance, are backed by student housing properties, which often exhibit higher cash flow volatility than traditional 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. Four loans, totaling 18.9% of the total multifamily cut-off balance, are secured by properties located in a DBRS Market Rank of 7. An additional loan, representing 2.7% of the multifamily concentration, is located in a DBRS Market Rank of 6. More importantly, DBRS sampled 69.5% of the pool, representing 79.0% coverage of the total multifamily loan cut-off balance, thereby providing comfort for the DBRS NCF. Student housing properties are modeled with an elevated probability of default compared with traditional multifamily properties. No loans are secured by military housing properties, which also often exhibit higher cash flow volatility than traditional multifamily properties.

Nine loans, totaling 27.6% of the trust balance, are secured by properties in a DBRS Market Rank of 2. An additional loan, representing 0.9% of the pool, is backed by a property in a DBRS Market Rank of 1. Compared with sought-after gateway markets, these locations often suffer from lower investor demand and liquidity, particularly during times of economic stress. The properties securing the loans are primarily located in core markets with the overall pool’s weighted-average (WA) DBRS Market Rank at 4.0. Furthermore, six loans, totaling 19.6% of the trust balance, are in markets with a DBRS Market Rank of 7, and another three are within markets with a Market Rank of 6, totaling 8.3% of the pool. Both of the ranks correspond to zip codes that are more urbanized in nature.

DBRS has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. 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 loss given default (LGD) based on the As-Is Loan-to-Value (LTV) ratio.

Based on the weighted initial pool balances, the overall WA DBRS As-Is DSCR and DBRS Stabilized DSCR of 0.73x and 1.00x, respectively, are reflective of 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 6.56%, which is greater than the current WA interest rate of 5.85% (based on a WA mortgage spread and an assumed 2.5% one-month LIBOR index). The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS associates its LGD based on the assets’ As-Is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The As-Is LTV is considered reasonable at 78.7% given the credit enhancement levels at each rating category.

All loans have floating interest rates, and there are 30 loans, comprising 87.6% of the trust balance, that are IO during the initial term that range from 24 months to 36 months, creating interest rate risk. The borrowers of all 35 loans have purchased LIBOR rate caps that have a range of 2.75% to 3.50% to protect against a rise in interest rates over the term of the loan. All loans are short term and, even with extension options, have a fully extended loan term of five years maximum. Additionally, all loans have extension options, and in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Twenty-nine of the loans, representing 88.6% of the total pool, amortize on fixed schedules during all or a portion of their extension period.

The DBRS sample included 18 loans, and site inspections were performed on 20 of the 39 properties in the pool, representing 65.1% 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 19 properties, comprising 63.9% of the initial pool balance.

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.

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.

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