DBRS Assigns Provisional Ratings to STWD 2019-FL1

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Floating-Rate Notes, Series 2019-FL1 to be issued by STWD 2019-FL1, Ltd.:

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable.

The initial collateral consists of 20 floating-rate mortgages and one fixed-rate mortgage secured by 38 mostly transitional properties, with a cut-off balance totaling $1.1 billion, excluding approximately $116 million of future funding commitments. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Reinvestment Period, the Issuer may acquire future funding commitments and additional eligible loans subject to the Eligibility Criteria. The transaction stipulates a $5 million threshold on pari passu participation acquisitions before a rating agency confirmation is required if there is already a participation of the underlying loan in the trust.

For the floating-rate loans, DBRS used the one-month LIBOR index, which is based on 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), nine loans, comprising 37.7% of the initial pool, 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 two loans, comprising 6.5% 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 and hotel). Additionally, none of the multifamily loans in the pool is currently secured by a student housing property, which often exhibit higher cash flow volatility than traditional multifamily properties. 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. Five loans, totaling 32.5% 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 16.4% of the pool. These higher DBRS Market Ranks correspond to zip codes that are more urbanized in nature. As-measured including all future funding in the calculation, the WA As-Is loan-to-value (LTV) is low at 76.8%. Further, the WA As-Stabilized LTV is also quite low at 65.3%. The WA As-Is LTV and the WA As-Stabilized LTV reflect downward as-is and stabilized value adjustments made to three loans by DBRS. Please see the model adjustment section in the related presale report for more on the above-mentioned adjustments. Nine loans in the pool, totaling 65.3% of the DBRS sample by cut-off date pool balance, are backed by a property with a quality deemed to be Average (+) by DBRS. The borrowers of all 20 floating-rate loans have purchased LIBOR rate caps that have a range of between 2.5% up to 3.5% to protect against rising interest rates over the term of the loan. The Class F Notes, Class G Notes and Preferred Shares will be retained by STWD CLO Retention Holder, LLC, an affiliate of the trust asset seller. The Class F Notes, Class G Notes and Preferred Shares represent 14.9% of the transaction balance.

The pool consists of mostly transitional assets. Given the nature of the assets, DBRS determined a sample size, representing 81.0% of the pool cut-off date balance. This is higher than the typical sample size for traditional conduit CMBS transactions. Physical site inspections were also performed, including management meetings. DBRS also notes that when DBRS analysts are visiting the markets, they may actually visit properties more than once to follow the progress (or lack thereof) toward stabilization. The servicer is also in constant contact with the borrowers to track progress.

Twenty loans, comprising 91.0% of the cut-off date pool balance, have floating interest rates, and the aforementioned loans are interest-only during the original term and have original term ranges from 15 months to 60 months, creating interest rate risk. Of the floating-interest rate loans, 73.1% are short-term loans, and even with extension options, they have a fully extended maximum loan term of five years. Additionally, for the floating-rate loans, DBRS used the one-month LIBOR index, which is based on 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. The floating-rate loans have extension options, and in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements.

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

Thirteen loans, totaling only 67.5% 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. Of the 20 refinance loans, four loans representing 26.1% of the pool have a current occupancy of less than 80.0%, and four of the refinance loans account for $67.5 million of the $116 million of future funding (58.2%). 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 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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