DBRS Morningstar Assigns Provisional Ratings to CLNC 2019-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Notes to be issued by CLNC 2019-FL1, 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. Classes A, A-S, B, C and D represent the offered certificates. Classes E, F, G and the Preferred Shares are non-offered certificates and will be retained by the Issuer. Classes F-E and G-E represent the principal and interest MASCOT notes that will be exchangeable with the Class F and Class G notes, respectively. The combined interest rate on the notes will be equal to the original note interest rate, with the interest rates of the MASCOT notes determined by the holder of the original notes being exchanged.

The initial collateral consists of 21 floating-rate mortgages secured by 39 mostly transitional properties with a cut-off balance totaling $1.01 billion, excluding approximately $124.9 million of future funding commitments attributed to 16 loans. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the 24-month Reinvestment 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 participation acquisitions before a Rating Agency Condition is required if there is already a participation of the underlying loan in the trust.

For the 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 with 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 Morningstar As-Is NCF, 19 loans, comprising 81.2% of the initial pool, had a DBRS Morningstar As-Is Debt-Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for five loans, comprising 28.4% of the initial pool balance, is below 1.00x, which is indicative of elevated refinance risk. The properties are often transitioning with a 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 in place 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, office and industrial), though there are two loans, representing 19.9% of the pool, that are secured by hotels. Additionally, only one of the multifamily loans (Aspen Heights Trio; representing 2.5% of the initial pool balance) in the pool is currently secured by a student-housing property, which often exhibit higher cash flow volatility than traditional multifamily properties.

Nine loans in the pool, totaling 56.0% of the DBRS Morningstar sample by cut-off date pool balance, are backed by a property with a quality deemed to be Above Average or Average (+) by DBRS Morningstar. Fifteen loans, representing 60.6% of the pool, represent acquisition financing wherein sponsors contributed material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a moderately high sponsor cost basis in the underlying collateral.

The Weighted-Average (WA) DBRS Morningstar As-Is Loan-to-Value (LTV), which includes all future funding in the calculation, is moderately high at 76.1%, reflecting the highly transitional nature of the pool with substantial future funding as well as the generally high leverage. The high LTV results in a WA DBRS Morningstar Expected Loss of 4.8% for the pool, which translates to credit-enhancement levels at each rating category that are generally in line with other commercial real estate (CRE) collateralized loan obligations (CLOs).

The pool is heavily concentrated geographically. Seven loans, representing 52.5% of the pool, are located in California. Further, of those loans located in California, there is a high concentration in northern California, with six loans representing 46.5% of the pool. The particular MSAs represented in this concentration are considered to be strong markets with good liquidity.

All 21 loans have floating interest rates and all loans are interest only during the original term with original terms ranging from 12 months to 36 months, creating interest-rate risk. All loans 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 Morningstar used the one-month LIBOR index, which is based on the lower of a DBRS Morningstar Stressed Rate that corresponded with 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. Additionally, all have extension options and, in order to qualify for these options, the loans must meet minimum leverage requirements.

The participations conveyed to the Issuer will not include record title to the underlying mortgage in the name of the Issuer, but instead will include help from the Seller. This is contrary to standard CRE CLO structures, where the issuer or institutional custodian generally holds title to the participation loans. In the case of a bankruptcy, the Issuer has a lesser claim to the loan since it does not own the title. As a result, the Issuer’s ability to recover under such participation is subject to the credit risk of the entity that holds legal title to the underlying collateral. Payments to the Issuer will be affected if the legal title holder of the participated assets files bankruptcy or is declared insolvent. Added language will be provided in the seller’s organization documents to limit the seller to only acquiring mortgage loans and participations therein and not engaging in any other business through the entity. Additionally, there will be language on limitations on indebtedness to only that debt arising in connection with the loan participations.

DBRS Morningstar 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 Morningstar 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 Morningstar analyzes loss given default based on the As-Is LTV, assuming the loan is fully funded.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Turing at the Fields
-- Fairmont San Jose
-- Fairmont Claremont
-- Burlingame Bay
-- Central Park Plaza
-- Hill Carlsbad Office Portfolio
-- Paragon LIC
-- 1201 Connecticut
-- Collins Portfolio
-- Park at Deer Valley
-- The Blanchard Building
-- Clock Tower Village Apartments
-- Adobe Ranch
-- Mi Casita
-- Aspen Heights Trio
-- Pinewood Crossing

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 most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored 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 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 Morningstar’s methodology, DBRS Morningstar 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 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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. lease note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar 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 [email protected].

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

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