DBRS Morningstar Confirms Ratings on All Classes of Ready Capital Mortgage Financing 2019-FL3, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage-Backed Notes, Series 2019-FL3 issued by Ready Capital Mortgage Financing 2019-FL3 (the Issuer) as follows:

-- 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on April 9, 2020.

The rating confirmations reflect the overall stable performance of the transaction since issuance. In its analysis of the transaction, DBRS Morningstar applied probability of default (POD) adjustments to loans with confirmed issues partially related to the stressed real estate environment caused by the Coronavirus Disease (COVID-19) pandemic. Because of the transitional nature of the underlying collateral, proposed business plans that are necessary to bring the assets to stabilization may be delayed and, in some cases, borrowers may request relief from the Issuer. DBRS Morningstar has built additional POD stress into its analysis of this transaction and, based on currently available information, DBRS Morningstar expects the rated classes to be insulated from adverse credit implications at this time, warranting the rating confirmations.

At issuance, the collateral consisted of 43 floating-rate mortgages secured by 44 transitional properties totalling approximately $320.8 million, excluding approximately $101.3 million of future funding commitments held outside the trust. As of the April 2020 remittance, 37 loans remain in the pool with approximately $50.7 million of future funding commitments purchased by the trust as of March 2020.

As of the April 2020 remittance, 10 loans, representing 20.9% of the pool, are on the servicer’s watchlist and two loans, representing 3.7% of the pool, are in special servicing. The Bungalows at Queen Anne (Prospectus ID#13; 2.4% of the pool) transferred to special servicing in April 2020 after the borrower made a hardship request because of the coronavirus. The loan’s business plan contemplates adding two floors to an existing two-storey multifamily and retail property. Previous residential units have been demolished to make way for the new construction, leaving just the ground-floor retail tenants in occupancy. Because of the coronavirus, renovation work stopped on March 25, 2020.

Arbor Grove (Prospectus ID#25; 1.3% of the pool), secured by a multifamily property in Canton, Ohio, transferred to special servicing in February 2020 after the loan failed to secure refinancing at its November 2019 maturity. The borrower’s business plan called for increases to occupancy, at which time it would target permanent refinancing via a Freddie Mac exit; however, according to servicer commentary, the property was mismanaged, which resulted in a decline from its occupancy of 75% at issuance. The borrower remained current on its debt service obligations from the originally stated maturity date until April 2020 when the loan was classified as a nonperforming matured balloon. DBRS Morningstar analyzed both specially serviced loans with elevated PODs to reflect their increased risk profile.

DBRS Morningstar remains concerned with loans secured by hotel properties, given the coronavirus pandemic and its impact on tourism and travel. The Tapestry by Hilton Daytona Beach (Prospectus ID#22; 2.8% of the pool) is the only loan in the pool secured by a lodging property. The loan’s business plan contemplates a $4.3 million ($39,000 per key) property improvement plan to reflag the hotel as a Tapestry by Hilton. Because of the ongoing coronavirus pandemic, the hotel has temporarily closed to reduce expenses and to speed up renovations. As of April 2020, the renovations are over 40% completed. The hotel, which is located in Daytona Beach, Florida, relies heavily on tourism and the pandemic will continue to negatively affect the hotel as the broader hospitality industry experiences occupancy rates of nearly 0%. DBRS Morningstar analyzed this loan with an elevated POD to reflect concerns with the hospitality industry and the subject’s delayed stabilization. For additional information on these loans, please see the respective loan commentaries on the DBRS Viewpoint platform.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

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

-- Prospectus ID#4 – 158 Lafayette (7.1% of the pool)
-- Prospectus ID#22 – Tapestry by Hilton Daytona Beach (2.8% of the pool)
-- Prospectus ID#13 – The Bungalows at Queen Anne (2.4% of the pool)
-- Prospectus ID#25 – Arbor Grove (1.3% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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.

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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. Please 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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