DBRS Morningstar Finalizes Provisional Ratings of Ready Capital Mortgage Financing 2020-FL4, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings of the following classes of notes issued by Ready Capital Mortgage Financing 2020-FL4, LLC (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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable. Classes E, F, and G have been privately placed.

The initial collateral consists of 56 floating-rate mortgages secured by 63 mostly transitional real estate properties, with a cut-off date pool balance of approximately $405.3 million, excluding $147.5 million of outstanding future funding commitments. Most properties are in a period of transition with plans to stabilize and improve the asset value. Fifty-one of the mortgages (representing 82.5% of the cut-off date pool balance) have future funding participations that the Issuer may acquire with principal repayment proceeds. During the Permitted Funded Companion Participation Acquisition Period, the Issuer may acquire future funding participations without being subject to rating agency confirmation. Acquisitions of Permitted Funded Companion Participations will be limited to a $65.0 million cumulative limit on the aggregate amount of future funding that may be acquired into the trust. The transaction will have a sequential-pay structure.

The pool consists of mostly transitional assets. Given the nature of the assets, DBRS Morningstar determined a sample size, representing 65.7% of the pool cut-off date balance. Physical site inspections were also performed, some of which included management meetings. DBRS Morningstar also notes that when DBRS Morningstar analysts visit the markets, they 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.

The loans are generally secured by traditional property types (i.e., retail, multifamily, and office) with no loans secured by hospitality properties. Additionally, only one of the multifamily loans in the pool (MySuite Coliving Portfolio, representing 2.9% of the cut-off date pool balance) is secured by a student housing property. Loans secured by student housing properties often exhibit higher cash flow volatility than traditional multifamily properties.

Only six loans, representing a combined 5.6% of the initial pool balance, are secured by properties located in an area with a DBRS Morningstar Market Rank of 2 or lower. Areas with a DBRS Morningstar Market Rank of 2 or lower are generally considered to be tertiary or rural markets. Additionally, 13 loans, representing 30.9% of the initial pool balance, are secured by properties located in areas with a DBRS Morningstar Market Rank of 6 or higher. Areas with a DBRS Morningstar Market Rank of six or higher are generally characterized as urbanized locations. These markets benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Areas with a DBRS Morningstar Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity. Eleven loans representing a collective 28.8% of the initial pool balance are secured by properties located in such areas.

The outstanding future funding amount of $147.5 million represents a relatively high 36.4% of the initial pool balance. By contrast, outstanding future funding represented 14.1% of the initial pool balance for the recent MF1 2020-FL3, Ltd. (MF1 2020-FL3) commercial real estate/collateralized loan obligation (CRE/CLO) transaction and 9.5% of the initial pool balance for the recent Grand Avenue CRE 2020-FL2 Ltd. (GACM 2020-FL2) CRE/CLO transaction. Outstanding future funding commitments represented 31.6% of the initial pool balance securitized by Ready Capital Mortgage Financing 2019-FL3. Acquisitions of Permitted Funded Companion Participations will be limited to a $65.0 million cumulative limit on the aggregate amount of future funding that may be acquired into the trust. The cumulative participation acquisition threshold of $65.0 million represents 16.0% of the initial pool balance, which is generally more in line with recent CRE/CLO securitizations. The significant level of future funding associated with the trust is generally reflected in the average DBRS Morningstar Business Plan Score of 2.53, which is greater than the average DBRS Morningstar Business Plan Score of 1.94 for the MF1 2020-FL3 CRE/CLO transaction and the average DBRS Morningstar Business Plan Score of 2.07 for the GACM 2020-FL2 CRE/CLO transaction.

Based on the initial pool balances, the overall Weighted-Average (WA) DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) of 0.56 times and the WA Issuance Loan-to-Value Ratio (LTV), which includes all future funding in the calculation, of 87.8% are reflective of the highly transitional nature of the pool as well as the generally high leverage financing. The assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its loss severity given default (LGD) based on the assets’ as-is LTV that does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is Net Cash Flow (NCF) was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for.

The pool includes 14 loans, representing 20.2% of the initial pool balance, that exhibited negative or $0 Issuer As-Is NCFs. In most instances, the Issuer’s As-Is NCF reflected the most recent performance of the underlying collateral, indicating in these instances that 14 loans in the pool are secured by properties with negative or near-$0 cash flows upon securitization. Of the 14 loans identified to have negative or near-$0 cash flows at issuance, nine loans (representing 66.3% of the identified negative or near-$0 issuance cash flow loans) represent acquisition financings, which generally required the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loans, resulting in a higher sponsor cost basis in the underlying collateral. All 14 of the identified loans are structured with upfront debt service reserves. When the DBRS Morningstar stressed interest-only debt service at issuance was measured against the upfront debt service reserve, upfront debt service reserves were sufficient to cover anywhere from two months to almost 28 months of scheduled debt service payments for the 14 identified loans.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsor will not execute its business plans as 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. 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 the loan is fully funded.

With regard to the Coronavirus Disease (COVID-19), the magnitude and extent of performance stress posed 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 crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example 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 regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.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:

-- Prospectus ID#1 - 55 East Jackson (11.0% of the initial pool)
-- Prospectus ID#2 - Park 217 (7.0% of the initial pool)
-- Prospectus ID#3 - Concord Business Park (5.2% of the initial pool)
-- Prospectus ID#4 - RealOp & Bain Portfolio (5.1% of the initial pool)
-- Prospectus ID#5 - 19 South LaSalle (4.8% of the initial pool)
-- Prospectus ID#6 - Sacramento Portfolio (4.3% of the initial pool)
-- Prospectus ID#7 - Parkwood Plaza (3.5% of the initial pool)
-- Prospectus ID#8 - Yorkshire Village (3.5% of the initial pool)
-- Prospectus ID#9 - Pine Forest Apartments (3.3% of the initial pool)
-- Prospectus ID#10 - General Assembly (2.9% of the initial pool)
-- Prospectus ID#11 - MySuite Coliving Portfolio (2.9% of the initial pool)
-- Prospectus ID#12 - 3032 Wilshire (2.6% of the initial pool)
-- Prospectus ID#15 - 7031 Koll Center (2.1% of the initial pool)
-- Prospectus ID#17 - 700 & 716 Colorado (1.9% of the initial pool)
-- Prospectus ID#24 - 2nd & Madison (1.3% of the initial pool)
-- Prospectus ID#29 - 422 East 81st Street (1.1% of the initial pool)
-- Prospectus ID#37 - The Kennedy Buildings (0.8% of the initial pool)
-- Prospectus ID#38 - Amelia Apartments (0.8% of the initial pool)
-- Prospectus ID#41 - 446 West 167th Street (0.7% of the initial pool)
-- Prospectus ID#46 - French Quarter Apartments (0.5% of the initial pool)
-- Prospectus ID#49 - Dryfield Apartments (0.4% of the initial 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.

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 (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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 [email protected].

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