DBRS Finalizes Provisional Ratings on LoanCore 2019-CRE3 Issuer Ltd.

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of floating-rate notes issued by LoanCore 2019-CRE3 Issuer Ltd. (the Issuer):

-- Class A Senior Secured Floating Rate Notes at AAA (sf)
-- Class AS Secured Floating Rate Notes at AAA (sf)
-- Class B Secured Floating Rate Notes at AA (low) (sf)
-- Class C Secured Floating Rate Notes at A (low) (sf)
-- Class D Secured Floating Rate Notes at BBB (low) (sf)
-- Class E Floating Rate Notes at BB (low) (sf)
-- Class F Floating Rate Notes at B (low) (sf)

All trends are Stable.

Classes E and F will be non-offered notes and retained by the seller.

The initial collateral consists of 22 floating-rate mortgages secured by 38 mostly transitional properties with a cut-off balance totaling approximately $415.9 million, excluding approximately $60.7 million of future funding commitments and $52.2 million of funded companion participations. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Funded Companion Acquisition Period, the Issuer may acquire funded Future Funding Participations and Funded Companion Participations with principal repayment proceeds.

Because of the floating-rate nature of the loans, DBRS used the one-month LIBOR index, which 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), 20 loans, comprising 92.6% of the initial pool 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 13 loans, comprising 55.3% of the initial pool balance, is 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 pro rata principal pay structure on the first reduction of 10.0% of the aggregate collateral interest cut-off balance then revert to a sequential-pay structure.

The properties are primarily located in core markets, with the overall pool’s weighted-average (WA) DBRS Market Rank at a very high 5.4. Four loans, totaling 18.2% of the pool, are in markets with a DBRS Market Rank of 8, while seven loans, totaling 31.8% of the pool, are in markets with a DBRS Market Rank of 7 and 6. The market ranks correspond to zip codes that are more urbanized in nature. The loans are generally secured by traditional property types (i.e., retail, multifamily, office, hotel and industrial). Additionally, only one multifamily loan in the pool is currently secured by a student housing property, which often exhibit higher cash flow volatility than traditional multifamily properties, and only one loan is secured by a hotel property. Four loans in the pool, totaling 21.6% of the total pool balance, are backed by a property with a quality deemed to be Above Average by DBRS. Furthermore, two loans, totaling 13.2% of the pool, are backed by properties considered to have Average + property quality.

All loans have floating interest rates with original term ranges of 24 months to 36 months, creating interest rate risk. All loans are short-term loans and, even with extension options, have a fully extended maximum loan term of five years. The borrowers of all 22 loans have purchased LIBOR rate caps ranging between 3.0% and 4.0% to protect against rising interest rates over the term of the loan. Furthermore, DBRS applied the lessor of the interest rate cap or the DBRS stressed forward interest rate based on the DBRS “Interest Rate Stresses for U.S. Structured Finance Transactions” methodology. Additionally, all have extension options, and in order to qualify for these options, the loans must meet minimum DSCR and loan-to-value (LTV) requirements. The transaction is structured with the first 10.0% of principal paid on a pro rata basis. DBRS stressed the model by paying off the best 10.0% performing loan(s), effectively neutralizing credit drift and diversity deterioration.

Based on the weighted initial pool balances, the overall WA DBRS As-Is DSCR and DBRS Stabilized DSCR of 0.64x and 1.03x, 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 6.1%, which is greater than the current WA interest rate of 5.6% (based on 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 also improve the overall debt yield of the loans. DBRS associates its loss given default (LGD) based on the assets’ DBRS As-Is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize but does account for the loan’s being fully funded. The DBRS As-Is LTV is considered reasonable at 76.0%, given the credit enhancement levels at each rating category and the excellent mix of markets exhibited by the pool.

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 LGD based on the DBRS As-Is LTV assuming that the loan is fully funded.

Thirteen loans, totaling only 57.9% of the initial pool balance, represent refinance financing. The refinance financings within this securitization generally do not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a lower sponsor cost basis in the underlying collateral. Six of the 13 refinance loans, representing 47.8% of the pool, have a current occupancy of less than 80.0%, and eight of the refinance loans account for $28.4 million, or 46.7%, of the $60.7 million of future funding. This suggests that at least half of the refinance loans are near stabilization, which would partially mitigate the higher risk associated with a sponsor’s lower cost basis.

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 the North American CMBS Multi-borrower Rating Methodology, which can be found on www.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.

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.

DBRS, Inc.
333 West Wacker Drive, Suite 1800
Chicago, IL 60606 USA