DBRS Morningstar Confirms All Ratings of Exantas Capital Corp. 2019-RSO7

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-RSO7 issued by Exantas Capital Corp. 2019-RSO7 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 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 an additional POD stress into its analysis of this transaction and, based on currently available information, expects the rated classes to be insulated from adverse credit implications at this time, warranting the rating confirmations.

At issuance, the pool consisted of 32 floating-rate mortgages secured by 38 transitional properties totaling approximately $687.2 million, excluding approximately $59.4 million of future funding commitments. As of the May 2020 remittance, 30 loans remain in the pool at a current balance of $681.9 million, with approximately $40.6 million in undrawn future funding commitments. Per the May 2020 remittance, there are no loans in special servicing and six loans (20.3% of the current trust balance) are on the servicer’s watchlist. Two loans currently on the watchlist—Brookfield Apartments (Prospectus ID#19, 2.6% of the current trust balance) and Hyatt Place Fair Lawn (Prospectus ID#30, 1.4% of the current trust balance)—are 30–59 days delinquent per May 2020 reporting; in its analysis for this review, DBRS Morningstar increased the POD to reflect the increased risk with these loans. DBRS Morningstar is also monitoring Latham Square (Prospectus ID#3, 6.1% of the current trust balance), secured by a 115,946 sf office property in Oakland, California, given concerns surrounding the property type within a submarket reporting high vacancy and the potential for delayed rent collections and increased vacancy within the next year. DBRS Morningstar will continue to closely monitor updates regarding this loan.

DBRS Morningstar also remains concerned with loans secured by hotel properties, given the coronavirus pandemic and its impact on tourism and travel. The Caliber Hotel Portfolio (Prospectus ID#1, 8.3% of the current trust balance) is the largest loan on the servicer’s watchlist and consists of three hotels, totaling 777 keys, near Phoenix Sky Harbor International Airport. All three properties underwent renovations between 2014 and 2017 after the sponsor acquired them, with plans to increase their average daily rates and occupancies as part of the portfolio’s stabilization. The loan has a $5.8 million aggregate earn-out, with each of the underlying properties able to achieve its allocated maximum loan amount by obtaining both an 11.5% debt yield on a trailing 12-month basis and a DBRS Morningstar As-Is LTV of 70%. The earn-outs are subject to the individual performance of each hotel as well as the performance of the entire portfolio, which must maintain a combined debt yield of 11.50% with no individual property having less than a 10.75% debt yield. Before the effects of the coronavirus took hold, the portfolio had seen its occupancy increase to 82.7% from its issuance occupancy rate of 77.4% and achieved an average revenue per available room growth of 6.3% since issuance. Per commentary from Q1 2020 reporting, the sponsor is projecting $1.5 million in shortfalls after interest on the portfolio for the remainder of 2020 and has furloughed most of its staff and set restrictions on its food and beverage operations. The loan has a current total reserve amount of $2.3 million, of which it has already received approximately $398,000 in May 2020. DBRS Morningstar analyzed this loan with an elevated POD to reflect concerns about the state of the portfolio’s operations, the hospitality industry, and the portfolio’s delayed stabilization.

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#1 – Caliber Hotel Portfolio (8.3% of the pool)
-- Prospectus ID#3 – Latham Square (6.1% of the pool)
-- Prospectus ID#4 – Azul at Baldwin Park (5.1% of the pool)
-- Prospectus ID#10 – Wolf Run (3.8% of the pool)
-- Prospectus ID#14 – Stonelake 1-5 (3.2% of the pool)
-- Prospectus ID#19 – Brookfield Apartments (2.6% of the pool)
-- Prospectus ID#30 – Hyatt Place Fair Lawn (1.4% 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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