DBRS Morningstar Assigns Provisional Ratings to TRTX 2019-FL3 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Notes to be issued by TRTX 2019-FL3 Issuer, 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 (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable. Classes F and G will be privately placed.

The initial collateral consists of 22 floating-rate mortgage loans secured by 98 mostly transitional real estate properties, with a cut-off pool balance totaling more than $1.2 billion, excluding approximately $231.8 million of future funding commitments. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Permitted Funded Companion Participation Acquisition Period, the Issuer may acquire future funding commitments and additional eligible loans subject to the Eligibility Criteria. The transaction stipulates a $5.0 million threshold on pari passu acquisitions before a rating agency confirmation is required if there is already a participation of the underlying loan in the trust.

For all floating-rate loans, DBRS Morningstar used the one-month LIBOR index, which is based on the lower of a DBRS Morningstar 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 pool exhibited a relatively modestly high weighted-average (WA) issuance loan to value ratio (LTV) of 69.4%, though the WA issuance LTV is estimated to improve to 64.4% through stabilization. When the cut-off date balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), ten loans, representing 47.7% of the cut-off date pool balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of high default risk. Additionally, the DBRS Morningstar Stabilized DSCR for four loans, representing 18.5% of the initial pool balance, was below 1.00x, a threshold indicative of elevated refinance risk. The properties are often transitional with potential upside in cash flow. However, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

The loans are generally secured by traditional property types (i.e., retail, multifamily and office). Additionally, none of the multifamily loans in the pool are currently secured by student-housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Eight loans, representing 44.9% of the cut-off date pool balance, exhibited either Average (+) or Above Average property quality. Six of the loans were within the top ten loans. Additionally, only two loans, representing 7.7% of the cut-off date pool balance, exhibited either Average (-) or Below Average property quality. These loans were the Jersey Portfolio II and Alister and Emerson Apartments, respectively.

Eight loans, comprising nearly 39.0% of the cut-off date pool balance, are secured by properties located in areas with a DBRS Market Rank of 6, 7 or 8, which are characterized as urbanized locations. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand. Such markets therefore tend to benefit from lower default frequencies than less dense suburban, tertiary or rural markets. Areas with a DBRS Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity. Five loans, comprising 24.5% of the cut-off date pool balance. are secured by properties located in these areas.

The borrowers of all 22 floating-rate loans have purchased LIBOR rate caps that range from 2.5% to 4.5% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest-rate cap protection through the duration of the respectively exercised option.

The pool consists of transitional assets. Given the nature of the assets, DBRS Morningstar determined a sample size, representing 79.2% of the cut-off date pool balance. This is higher than the typical sample size for a traditional conduit commercial mortgage-backed securities (CMBS) transaction. Physical site inspections were also performed, including management meetings. DBRS Morningstar also notes that when DBRS Morningstar analysts are visiting the markets in the future, they may 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.

Based on the weighted initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 1.00x is generally reflective of high-leverage financing. Fortunately, 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 Morningstar associates its loss given default based on the assets’ as-is LTV that does not assume that the stabilization plan and cash flow growth will ever materialize.

The pool is heavily concentrated by property type with nine loans, comprising 41.9% of the cut-off date pool balance, secured by multifamily properties and eight loans, comprising 33.5% of the cut-off date pool balance, secured by office properties. However, loans secured by multifamily properties generally exhibit lower average default frequencies relative to other commercial property types. Additionally, no loans are secured by student-housing multifamily properties, which often exhibit higher cash flow volatility than traditional multifamily properties. As well, traditional property types such as office, retail, industrial and multifamily benefit from more readily available conventional take-out financing than non-traditional property types such as hospitality, self-storage and manufactured housing. The pool features only two loans, comprising 10.6% of the cut-off date pool balance, that are secured by hospitality properties, exclusive of the Rockville Town Center loan, which is secured by a mixed-use multifamily, hotel and retail property.

Twenty-two loans, comprising 100.0% of the cut-off date pool balance, have floating interest rates. The aforementioned loans are interest only during the original term and have original terms ranging from 23 to 48 months, creating interest-rate risk.

All but one of the identified floating rate loans are short-term loans with fully extended maximum loan terms of five years or less. The single outlier (Lenox Park Portfolio) also has a relatively short six-year fully extended loan term. Additionally, for all floating-rate loans, DBRS Morningstar used the one-month LIBOR index, which is based on the lower of a DBRS Morningstar 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. All identified floating-rate loans have extension options and, in order to qualify for these options, the loans must generally meet minimum leverage requirements.

Twelve loans comprising 62.0% of the cut-off date 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 12 refinance loans, only three loans, comprising 19.5% of the pool, reported occupancy of less than 80.0%. Additionally, the 12 refinance loans exhibited a WA growth between as-is and stabilized appraised value estimates of 7.1% compared with the overall WA appraised value growth of 20.5% for the pool. This suggests that the refinance loans are generally closer to stabilization than the acquisition loans, partially mitigating the higher risk associated with a sponsor’s lower cost basis.

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

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS Morningstar will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

As part of this review, DBRS Morningstar has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Florida Multifamily Collection
-- Lenox Park Portfolio
-- Kirby Collection
-- 888 Broadway
-- Westin Charlotte
-- 212 Clayton
-- Jersey City Portfolio II
-- Rockville Town Center
-- Summerly at Zanjero
-- 500 Station Boulevard
-- Hilton Garden Inn Mountain View
-- The Curtis
-- Southeast Office Portfolio
-- Quadrangle
-- Algarita Apartments

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS Morningstar-rated transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS Morningstar did not require due diligence services outlined in Form-15E, DBRS Morningstar did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is the North American Multi-borrower CMBS 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 on www.dbrs.com. 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 Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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