DBRS Morningstar Assigns Provisional Ratings to PFP 2019-6, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of secured floating-rate notes to be issued by PFP 2019-6, 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.

All classes will be privately placed.

The initial collateral consists of 36 floating-rate mortgages secured by 37 transitional properties totaling $760.1 million (90.4% of the total fully funded balance), excluding the $80.7 million of remaining future funding commitments. Of the 36 loans, there are three unclosed loans as of November 18, 2019, representing 8.5% of the initial pool balance (#9, Barrett Pavilion; #13, 5 Wood Hollow Road; and #18, Tiffany Retro Apartments). The loans are mostly 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, 22 have remaining future funding participations that may be acquired by the Issuer in the future with principal repayment proceeds for a total of $80.7 million. The initial future funding commitments totaled $83.2 million, of which approximately $2.5 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 Morningstar, PFP Holding Company VI, LLC (PFP Holding) 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, which has strong origination practices. Classes E, F, G and the Preferred Shares (collectively, the retained securities) will be purchased by a wholly owned subsidiary of PFP, Inc. Classes F, G and the Preferred Shares represent 15.3% of the initial pool balance.

Given the floating-rate nature of the loans, the index DBRS Morningstar used (one-month LIBOR) was the lower of (1) a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or (2) 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 Net Cash Flow (NCF), 28 loans (74.0% of the mortgage loan cut-off date balance) 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 20 loans, comprising 60.3% 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 the 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 structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels. The transaction will have a sequential-pay structure.

Ten loans, representing 23.9% of the pool, are in areas identified as DBRS Morningstar Market Ranks 6, 7 and 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity that is driven by consistently strong investor demand, even during times of economic stress. Markets ranked six through eight benefit from lower default frequencies than less dense suburban, tertiary and rural markets. Urban markets represented in the deal include New York; Philadelphia; Cleveland; Seattle; Portland, Oregon; San Francisco; and Oakland, California. Additionally, there are only three loans, representing 10.1% of the pool, in markets ranked one or two, which are considered more rural or tertiary in nature and often suffer from lower investor demand and liquidity, particularly during times of economic stress.

Five loans, comprising 29.0% of the total pool balance, are secured by properties deemed by DBRS Morningstar to be Above Average in quality. Five additional loans, totaling 9.8% of the total pool balance, are secured by properties identified as Average (+) in quality. Equally important, only one loan, representing 1.2% of the total pool balance, is secured by a property deemed by DBRS Morningstar to be Below Average.

Only one loan, representing 2.2% of the initial pool balance, is secured by a hotel property. Hotels have the highest cash flow volatility of all property types, as their income (which is derived from daily contracts rather than multi-year leases) and their expenses (which are often mostly fixed) account for a relatively large proportion of revenue. As a result, cash revenue can decline swiftly in the event of a downturn and cash flow may decline more exponentially because of high operating leverage. In addition, the one hospitality loan in the pool is in an area with a DBRS Morningstar Market Rank of 7, which benefits from strong investor demand and increased liquidity.

The deal is concentrated by property type with 14 loans, representing 48.5% of the mortgage loan cut-off date balance, secured by multifamily properties. One of these loans, comprising 1.1% of the trust balance, is backed by a student housing property, which often exhibit higher cash flow volatility than traditional multifamily properties. Additionally, 12 loans, representing 34.9% of the mortgage loan cut-off balance, are secured by office 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. Furthermore, the average expected loss of the loans secured by multifamily properties is roughly 30% lower than average expected loss of the overall pool. DBRS Morningstar sampled 75.9% of the pool, representing 84.2% coverage of the total multifamily loan cut-off balance and 77.5% of the total office loan cut-off balance, thereby providing comfort for the DBRS Morningstar NCF. Student housing properties are modeled with an elevated probability of default compared with traditional multifamily.

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 loan-to-value (LTV) ratio.

All loans have floating interest rates, and there are 34 loans, representing 95.5% of the initial pool balance, that are IO during the initial loan term, which ranges from 24 months to 48 months, creating interest-rate risk. The borrowers of all 36 loans have purchased LIBOR rate caps that have a range of 3.25% 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 maximum loan term of six years. Additionally, all loans have extension options, and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. Twenty-six of the loans, representing 77.3% of the total pool, amortize on fixed schedules during all or a portion of their extension period.

The DBRS Morningstar sample included 21 loans, and DBRS Morningstar performed site inspections on 16 of the 37 properties in the pool, representing 67.8% of the pool by allocated cut-off loan balance. DBRS Morningstar conducted meetings with the on-site property manager, leasing agent or representative of the borrowing entity for 11 properties, comprising 59.0% 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 Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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 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 Morningstar 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.

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

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