DBRS Morningstar Assigns Provisional Ratings to SBALR Commercial Mortgage 2020-RR1 Trust

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-RR1 to be issued by SBALR Commercial Mortgage 2020-RR1 Trust:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The collateral consists of 59 fixed-rate loans secured by 91 commercial and multifamily properties. Two separate groups of loans, the Emerald Bronx Multifamily Portfolio loans and the Gutman and Hoffman Multifamily Portfolio loans, each have the same sponsor, property type, and assets located in the same or similar submarkets. Although these two groups of loans are not crosscollateralized or crossdefaulted, the DBRS Morningstar analysis of this transaction incorporates these groups of loans as single loans, resulting in a modified loan count of 51, and the loan number referenced within this report reflects this total. The transaction employs a sequential pass-through structure. The pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Morningstar Stabilized Net Cash Flow (NCF) and their respective actual constants, the initial DBRS Morningstar Weighted Average (WA) Debt Service Coverage Ratio (DSCR) of the pool was 1.39 times (x), and 22 loans, representing 29.4% of the pool, had a DBRS Morningstar DSCR below 1.30x, a threshold indicative of a higher likelihood of midterm default. One loan, representing 1.0% of the pool, had a DBRS Morningstar DSCR below 1.00x. The pool additionally includes 17 loans comprising a combined 23.1% of the pool balance with a DBRS Morningstar Loan-to-Value (LTV) ratio in excess of 67.0%, a threshold generally indicative of above-average default frequency. The WA DBRS Morningstar LTV of the pool at issuance was 65.5%, and the pool is scheduled to amortize down to a DBRS Morningstar WA LTV of 58.2% at maturity.

The property has 24 loans, representing 62.2% of the pool balance, that are secured by multifamily properties. Multifamily properties typically have low NCF volatility because of granular rent rolls despite the short-term nature of the leases. In addition, multifamily loans have exhibited lower default frequency, resulting in lower expected losses.

The deal has favorable credit metrics as evidenced by a WA DBRS Morningstar LTV and Balloon WA LTV of 65.5% and 58.2%, respectively. In addition, only four loans, representing 5.5% of the trust balance, have an issuance LTV of 75.0% or higher. Historical data generally demonstrates that loans with lower LTVs at issuance have a lower probability of default.

The pool has 32 loans, representing 41.8% of the pool balance, that should amortize down by 10.0% to 20.0% over their respective terms. In addition, there are 12 loans, representing 17.9% of the pool balance, that have expected amortization in excess of 20.0% of the original loan balance. The transaction’s scheduled amortization by maturity is 10.9%, which is much higher than recent traditional conduit transactions. Loan amortization is correlated with lower levels of refinance risk.

The pool is heavily concentrated based on loan size, as the largest loan group in the pool (the Emerald Bronx Multifamily Portfolio) alone constitutes 27.5% of the pool balance. Together with the Gutman and Hoffman Multifamily Portfolio, the top two loan groups represent 33.5% of the pool balance. Although the pool has 51 modeled loan groups, it has a concentration profile similar to a pool of 11 equally sized loans. In addition, the eight Emerald Bronx Multifamily Portfolio loans and the two Gutman and Hoffman Multifamily Portfolio loans are not crosscollateralized and crossdefaulted, exposing them to selective default risk.

By treating them each as single loans because of their sponsorship, locations, and property types, DBRS Morningstar is amplifying the concentration effects of these loans on the pool in the pooling simulation analysis within the CMBS Insight Model, which implicitly accounts for loan concentration, resulting in high AAA loss estimates. Compared with a pool that has a concentration profile similar to a pool of 20 equally sized loans but a WA expected loss equal to the subject transaction, the subject transaction’s AAA loss estimate is several points higher.

Thirty loans, representing 38.4% of the pool, are secured by properties located in DBRS Morningstar Market Ranks of 3 or 4, which are considered lighter suburban in nature, including four of the top 10 loans (Hurstbourne Landings and Oak Run Apartments, Kingsley Building, Crystal Townhomes, and University Plaza). Properties located in these light suburban locations have historically performed poorly and often have limited barriers to entry or minimal growth in the metropolitan statistical area. Areas with a Market Rank of 7 or 8 are generally more urban and can benefit from greater liquidity, even during times of economic stress.

However, two loans, representing 29.9% of the pool are located in markets with a DBRS Morningstar Market Rank of 7. These loans are the largest two in the pool, the Emerald Bronx Portfolio and the Gutman and Hoffman Multifamily Portfolio. Market Rank 7 represents dense urban areas that benefit from greater liquidity, even in times of stress, and these areas have historically performed very well. This urban concentration brings up the WA DBRS Morningstar Market Rank to a relatively strong 4.55.

Eight loans, representing 11.6% of the pool by allocated loan balance, are secured by hospitality properties. Hotels have the highest cash flow volatility of all property types, as their income—which is derived from daily contracts rather than multiyear leases and their expenses, which are often mostly fixed—account for a relatively large proportion of revenue. As a result, revenue can decline sharply in the event of a downturn and cash flow may decline more exponentially because of high operating leverage.

These loans have modest going-in leverage with a WA DBRS Morningstar LTV of only 64.00% and benefit from substantial amortization, resulting in a low WA DBRS Morningstar Balloon LTV of 51.04%.

Classes X-A and X-B are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- The Emerald Bronx Multifamily Portfolio
-- Gutman and Hoffman Multifamily Portfolio
-- Winner’s Circle at Saratoga Apartments
-- Clarion Suites Anchorage
-- Hurstborne Landing and Oak Run Apartments
-- The Sandy Building
-- Kingsley Building
-- Crystal Townhomes
-- University Plaza
-- 811 Lasalle Avenue
-- Crystal Heights Apartments
-- Doshi Medical Office Portfolio
-- Windy Hill Shopping Center
-- Balfour Chastain
-- Innerbelt Lofts
-- Quality Inn Duluth
-- Metrocenter
-- First Federal of Lakewood

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan-level 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 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 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.

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 [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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