DBRS Morningstar Assigns Provisional Ratings to Grand Avenue CRE 2020-FL2 Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by Grand Avenue CRE 2020-FL2 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

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

The initial collateral consists of 18 floating-rate mortgages secured by 27 mostly transitional properties with a cut-off balance totaling $418.8 million, excluding approximately $39.7 million of unfunded companion future funding participations, which the Issuer may acquire for the pool during the participation acquisition period.

For the floating-rate loans, the index DBRS Morningstar used (one-month Libor) was 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 Net Cash Flow, 13 loans, comprising 64.1% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of elevated term default risk. Additionally, the DBRS Morningstar Stabilized DSCR for six loans, comprising 30.3% of the initial pool balance, are below 1.00x, which is indicative of elevated refinance risk. The majority of the properties are transitioning 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 in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels. The transaction will have a sequential-pay structure.

The loans are generally secured by traditional property types (i.e., retail, multifamily, and office). Additionally, only one of the multifamily loans in the pool, The Tradition, comprising 7.2% of the initial pool balance, is currently secured by student housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties.

Two loans, comprising 17.9% of the pool balance, are secured by properties that are primarily located in core urban markets with a DBRS Morningstar Market Rank of 8 and 6. These higher DBRS Morningstar Market Ranks correspond with zip codes that are more urbanized in nature.

Four loans in the pool, totaling 45.6% of the DBRS Morningstar sample by cut-off-date pool balance, are backed by a property whose quality DBRS Morningstar deemed to be Average (+) or Above Average.

Sixteen loans, representing 82.4% of the initial pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral.

The pool consists of mostly transitional assets. Given the nature of the assets, DBRS Morningstar determined a sample size, representing 88.1% of the pool cut-off-date balance. This is higher than the typical sample size for traditional conduit commercial mortgage-backed security (CMBS) transactions. DBRS Morningstar also performed physical site inspections, including management meetings. When DBRS Morningstar visits these markets, it may actually 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 weighted-average (WA) DBRS Morningstar As-Is Loan-to-Value (LTV) of 76.5% and WA DBRS Morningstar As-Is DSCR of 0.84x are reflective of high-leverage financing. The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset rising interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its loss given default (LGD) with the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize.

Additionally, including all future funding in the calculation, the WA as-stabilized LTV is low at 67.6%. The WA as-stabilized LTV reflects downward stabilized value adjustments that DBRS Morningstar made to two loans. All loans in the pool have floating interest rates. Six loans, comprising 40.4% of the pool balance, are interest-only during the original term and have original terms ranging from 24 months to 48 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 DSCR and LTV requirements.

DBRS Morningstar analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. The sponsors may not execute their business plans as expected, and the higher stabilized cash flow may 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 LGD based on the as-is LTV, assuming that the loan is fully funded.

The magnitude and extent of performance stress posed by the Coronavirus Disease (COVID-19) pandemic to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the pandemic on global economies. Some regions, jurisdictions, and asset classes are, however, experiencing more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impacts on both the commercial real estate sector and the global fixed-income markets. Accordingly, DBRS Morningstar may apply additional short term stresses to its rating analysis (e.g., by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations). For more information, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com.

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

-- Prospectus ID#1 – Cape Coral Portfolio (15.3% of the pool)
-- Prospectus ID#2 – 2500 Biscayne (9.5% of the pool)
-- Prospectus ID#3 – 9300 Wilshire (8.4% of the pool)
-- Prospectus ID#4 – The View at Encino Commons (8.1% of the pool)
-- Prospectus ID#5 – Summerlin Whole Foods/CVS Anchored Center (7.3% of the pool)
-- Prospectus ID#6 – Panther Portfolio Mixed (7.3% of the pool)
-- Prospectus ID#7 – The Tradition (7.2% of the pool)
-- Prospectus ID#8 – West Little Rock Apartments Portfolio (6.2% of the pool)
-- Prospectus ID#9 – The Standard on 29th (5.8% of the pool)
-- Prospectus ID#10 – Stonebridge at City Park (4.9% of the pool)
-- Prospectus ID#12 – Skyline Parc (3.3% of the pool)
-- Prospectus ID#16 – Cedar Meadows Apartments (2.5% of the pool)
-- Prospectus ID#17 – Verandas at Bear Creek (2.2% 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.

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.

DBRS Morningstar notes that the presale report associated with the above press release was amended on July 13, 2020, to update the Rating Agency Confirmations section. The previous version incorrectly referenced that Rating Agency Confirmations were required for companion participation acquisitions of over $1 million.

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 (March 9, 2020), which can be found on www.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 www.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 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.dbrsmorningstar.com or contact us at [email protected].

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