DBRS Morningstar Assigns Provisional Ratings to Hamlet Securitization Trust 2020-CRE1

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-CRE1 to be issued by Hamlet Securitization Trust 2020-CRE1 (Hamlet 2020-CRE1):

-- Class A 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 (high) (sf)
-- Class F-RR at B (low) (sf)

All trends are Stable.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain 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 crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

Furthermore, as of the date of this press release, DBRS Morningstar does not have any specific market or loan-level data that would support an adjustment to its loan-level net cash flow analysis. If any information DBRS Morningstar deems relevant to this transaction becomes available before the transaction closes, DBRS Morningstar will incorporate that data into its finalized ratings.

The collateral consists of 23 fixed-rate loans secured by 48 properties. The composition of properties includes 46.3% office, 19.3% multifamily, 10.4% full-service hotel, 7.2% industrial, 4.1% self-storage, and 3.0% retail. All loans within the transaction have various loan terms, ranging from five years to 15 years. Two loans, totaling 12.1% of the pool balance, represent acquisition financing with the borrowers contributing equity to the transaction. Fifteen loans, totaling 12.1% of the pool balance, represent recapitalization financing. One loan, totaling 2.1% of the pool balance, represents acquisition/refinance financing. The remaining 15 loans, totaling 64.0% of the initial pool balance, represent refinancing financing. The refinance financings within this securitization generally do not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in lower sponsor cost basis in the underlying collateral. The transaction is a sequential-pay pass-through structure. DBRS Morningstar analyzed the conduit pool to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. Additionally, DBRS Morningstar analyzed four transitional loans in the pool by estimating a stabilized cash flow that is, in some instances, above the current in-place cash flow. It is possible that the sponsors for these transitional loans will not execute their business plans as they 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. For the four transitional loans, DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational.

The deal exhibits favorable credit metrics, with a weighted-average (WA) DBRS Morningstar Issuance Loan-to-Value Ratio (LTV) and a WA DBRS Morningstar Balloon LTV of 59.9% and 57.9%, respectively. Additionally, the deal exhibits a favorable WA DBRS Morningstar Term Debt Service Coverage Ratio (DSCR) of 1.73x. This is the result of 19 loans, representing a combined 86.7% of the cut-off date loan balance, having full-term interest-only (IO) periods. This DSCR cushion from the full-term IO structure could prove beneficial given current economic conditions and the uncertainty surrounding the ultimate impact of the coronavirus on the economy, though it does come at a cost of not deleveraging the loans modestly over time. An additional two loans, representing 6.8% of the cut-off date pool balance and including one of the top 10 loans, have partial IO periods ranging from 36 months to 60 months. DBRS Morningstar calculated the probability of default (POD) using a DSCR that includes amortizing debt service as well as the Balloon LTV. Furthermore, DBRS Morningstar’s model penalizes partial IO loans.

The transaction has a large concentration of loans in New York, representing 32.2% of the pool. Other state concentrations include 12.5% of loans in Illinois and 11.0% in Connecticut, with the remaining 44.9% across 13 states and an additional loan in Puerto Rico. Additionally, the pool also suffers from elevated loan size concentration risk. With only 23 loans, the pool represents a relatively low Herfindahl score of only 15.0. As a result, the transaction’s AAA credit enhancement of 28.375% equates to a high 8.09x loss multiple.

The deal also exhibits a favorable WA DBRS Morningstar Market Rank of 5.6, which indicates properties are in core urban markets such as New York City, Los Angeles, Chicago, Denver, and Philadelphia, among others. Four loans, totaling 18.6% of the pool, are in markets with a DBRS Morningstar Market Rank of 8; four loans, totaling 14.3% of the pool, are in a Market Rank of 7; four loans, totaling 24.3% of the pool, are in a Market Rank of 6; four loans, totaling 13.2% of the pool, are in a Market Rank of 5; four loans, totaling 18.7% of the pool, are in a Market Rank of 4; two loans, totaling 8.5% of the pool, are in a Market Rank of 3; and one loan, totaling 2.4% of the pool, is in a Market Rank of 1.

Three loans, representing a combined 10.4% of the cut-off date pool balance, are secured by hotel properties. The pandemic has had a substantial negative economic impact, which is especially felt by the hospitality industry. Hotels are experiencing a myriad of challenges including event cancellations, staff reduction, single-digit occupancy levels, and negative cash flow. Because all of the hotel properties in the pool are full-service hotels with food and beverage (F&B) outlets and various amenities, the properties will also be expected to abide by increased health measures and social-distancing guidelines that are expected to remain in place for the undetermined future. The hotels in the pool are open for business, although each has experienced a drastic reduction in occupancy, conference and group travel cancellations, and the closing of F&B outlets. Borrowers have also requested financial relief as a result of the pandemic. Because of the uncertainty of hotel operations in the short-term, these hotel properties are at a highly elevated risk of default. The WA expected loss for the three hotel loans is 6.1%, which is significantly above the remaining pool WA expected loss of 3.5%.

Three loans, representing a combined 9.8% of the cut-off date pool balance, are secured by properties with a student tenant concentration. Given the current environment in which most universities are not holding in-person classes, and the lack of certainty around convening in-person classes in the fall 2020 semester, these properties with high student concentrations could be at higher risk of default.

In addition, the issuer has received formal forbearance requests from the borrowers of several loans and discussions are ongoing between the issuer and sponsors on whether forbearance will be offered and the potential terms.

Because of the pandemic, DBRS Morningstar did not perform any on-site property visits with regards to this transaction. DBRS Morningstar determined a property’s quality and position in its respective market based on appraisals, property condition reports, and other third-party sources. For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

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 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 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.

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

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