DBRS Morningstar Assigns Provisional Ratings to CoreVest American Finance 2020-3 Trust

DBRS, Inc. (DBRS Morningstar) assigned the following provisional ratings to the Mortgage Pass-Through Certificates (the Certificates) to be issued by CoreVest American Finance 2020-3 Trust (the Issuer):

-- $184.7 million Class A at AAA (sf)
-- $184.7 million Class X-A at AAA (sf)
-- $82.5 million Class X-B at BBB (sf)
-- $42.5 million Class B at AA (low) (sf)
-- $22.7 million Class C at A (low) (sf)
-- $17.2 million Class D at BBB (sf)
-- $4.0 million Class E at BBB (low) (sf)
-- $9.9 million Class F at BB (low) (sf)
-- $1.8 million Class G at B (sf)

The AAA (sf) rating on the Certificates reflects 37.00% of credit enhancement provided by subordinated notes in the pool. The AA (low) (sf), A (low) (sf), BBB (sf), BBB (low) (sf), BB (low) (sf), and B (sf) ratings reflect 22.5%, 14.75%, 8.88%, 7.5%, 4.13%, and 3.5% of credit enhancement, respectively.

Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.

The collateral includes 43 multifamily properties, and two mixed-use properties, which represent 8.5% and 0.3% by cut-off principal balance, respectively. DBRS Morningstar applies the same stresses and assumptions to both property types. DBRS Morningstar makes adjustments in its analysis to account for features unique to multifamily and mixed-use properties, compared with single-family rental properties. For example, we used only the direct-capitalization method for valuing the multifamily and mixed-use properties and did not incorporate our mortgage approach in determining the annual assigned rent.

This transaction is backed by loans to borrowers who invest in single-family rental properties. Multiborrower single-family rental transactions lack ample historical data for tenant management, operational efficiencies, and cost containment, and have yet to be established among the smaller noninstitutional borrowers.

DBRS Morningstar believes that the net cash flow (NCF) from the rented properties and the value of the properties at the balloon payment dates will support the Certificates. DBRS Morningstar applies base stresses to the underwritten income and expenses on each property. While this results in the DBRS Morningstar debt service coverage ratio (DSCR) averaging less than 1.0 times (x) for the mortgage pool, in each rating scenario, the Certificates receive timely interest and the stressed values of the properties at the end of the loan terms are enough to repay the remaining principal on the Certificates. DBRS Morningstar’s assumed base-case NCF is $12.8 million, which is 49.7% lower than the Issuer’s underwritten NCF of $25.4 million. Stressing the NCF during the term of the loan and at the maturity date reflects worsening economic conditions that are consistent with DBRS Morningstar’s rating stresses. See Appendix A for a summary of the DBRS Morningstar Single-Family Rental Subordination Model. Please see the Cash Flow Analysis section for further detail on the components of the NCF.

DBRS Morningstar does not rely solely on the actual rent provided in the data tape. Instead, DBRS Morningstar used an assigned rent incorporating the actual rent, concession adjustments, third-party rental data points, and a mortgage payment assumption. DBRS Morningstar’s annual assigned rent for this pool is $41.9 million compared with the Issuer’s underwritten gross potential annual rent of $45.9 million.

Gross rental yield measured by gross potential rent (GPR)/Issuer value is 10.0%. Gross rental yield using DBRS Morningstar’s annual GPR/Issuer value is 9.7%. Net rental yields for the pool using DBRS Morningstar’s BBB rating stress assumptions are at 2.9%. Rental yield is an important metric for potential single-family rental investors to consider. Gross rental yields on the properties in the pool are generally higher than those of previous single-family rental transactions. Please see the Rent Yields section in the presale report for further detail on gross and net rental yields.

The Trust’s 2,403 properties are in 30 states with the largest concentration by allocated loan amount in Texas (21.2%). The largest metropolitan statistical area (MSA) by allocated loan amount is Salt Lake City (15.5%), followed by Houston (14.0%). The geographic concentration dictates the home price stresses applied to the portfolio. Please see Exhibit 5 for further detail on the home price index (HPI) stresses applied on the top five MSAs.

Based on the cut-off date principal balance, 63.4% of the properties backing the loans were valued using full appraisals, which are generally more comprehensive than other valuation sources. DBRS Morningstar made additional adjustments to the HPI declines for valuations using full appraisals; however, DBRS Morningstar applied higher stresses to properties valued using other valuation methods because, in general, these valuations may be less comprehensive than a valuation based on a full appraisal.

DBRS Morningstar’s operational risk assessments group does not review individual property managers in multiborrower transactions; however, DBRS Morningstar conducted an on-site review of the loan originator, CoreVest American Finance Lender LLC (CoreVest), formerly Colony American Finance Lender, LLC, a specialty finance company that offers recourse and nonrecourse mortgages to investors of residential rental properties. DBRS Morningstar performed a phone review of CoreVest’s originations platform and believes the company is an acceptable single-family rental aggregator and originator. Please see the Transaction Participants Summary in the presale report for further detail on CoreVest.

For more information regarding rating methodologies and the Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press releases and commentary: “DBRS Morningstar Provides Update on Rating Methodologies in Light of Measures to Contain Coronavirus Disease (COVID-19),” dated March 12, 2020; “DBRS Morningstar Global Structured Finance Rating Methodologies and Coronavirus Disease (COVID-19),” dated March 20, 2020; and “Global Macroeconomic Scenarios: Implications for Credit Ratings,” dated September 10, 2020.

The transaction allows for discretionary substitutions of up to 38.55% of the number of properties as of the closing date, as long as certain restrictions are met.

The Sponsor intends to satisfy its risk retention obligations under the U.S. Risk Retention Rules by holding the Class E, F, G, and H Certificates, either directly or through a majority-owned affiliate.

The rating assigned to Class G below differs from the ratings implied by the quantitative model. DBRS Morningstar considers this difference to be a material deviation, but in this case, the ratings of the subject note reflect limited historical performance as well as certain risks that constrain the quantitative model output.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is U.S. Single-Family Rental Securitization Ratings Methodology (May 28, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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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