DBRS Morningstar Finalizes Provisional Ratings on Exantas Capital Corp. 2020-RSO9, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Exantas Capital Corp. 2020-RSO9, 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 have been privately placed.

DBRS Morningstar analyzed the pool to determine the final ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. The $297.0 million transaction includes a cut-off date mortgage asset balance of $275.4 million and aggregate future advance obligations of $21.6 million held in a reserve account. The reserve account can be used exclusively to fund preapproved future funding of the mortgage assets in accordance with the underlying mortgage documents. The collateral pool for the transaction is static with no ramp-up period to add additional assets and no ability to reinvest.

The transaction will have a sequential-pay structure. Interest can be deferred for Note C, Note D, Note E, and Note F and interest deferral will not result in an event of default. Excess amounts in the future funding reserve account may be applied to principal payments on the Class A, Class B, Class C, Class D, Class E, and Class F Notes and the Preferred Shares, pro rata, unless the excess occurs as a result of the disposition of a defaulted mortgage asset, in which case the funds will be applied sequentially to the note classes.

The collateral consists of 32 loans secured by 34 commercial properties. A total of four underlying loans are cross-collateralized and cross-defaulted into two separate portfolios. In addition, there are nine underlying loans in four separate groups of affiliated borrowers. The asset classes in the pool are multifamily properties (48.8%), including one student-housing property (3.8%); office properties (14.6%); self-storage (13.5%); retail properties (9.1%); manufactured housing properties (7.1%); and one limited-service hotel (4.7%). The loans are mostly secured by cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Of these loans, 18 have remaining future funding commitments totaling $21.6 million. The future funding is generally to be used for property improvements and/or for leasing costs, including tenant improvements and leasing commissions. Please see the chart below for loans with future funding commitments and their uses. DBRS Morningstar modeled $15.7 million of additional capacity as part of the paydown analysis, which was conducted in order to bring future funded loan facilities into the trust.

All of the loans in the pool have floating interest rates and are interest-only through their initial terms. As such, DBRS Morningstar used the one-month Libor index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and 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 measuring the cut-off date balances against the DBRS Morningstar As-Is Net Cash Flow (NCF), nine loans, representing 15.6% of the mortgage loan cut-off date balance, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for five loans, comprising 11.6% of the initial pool balance, is below 1.00x, which indicates elevated refinance risk. The properties are often 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 the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The pool consists of moderately leveraged loans based on the appraised as-is and stabilized values, with most of the loans backed by the sponsor cash equity that was contributed at origination. The weighted-average (WA) as-is and stabilized appraised loan-to-value (LTV) ratios, based on the most recent appraisal reports and inclusive of future funding participations, are 67.4% and 63.2%, respectively. These LTVs compare slightly favorably with commercial real estate collateralized loan obligation transactions that DBRS Morningstar rated in 2019–20.

The collateral for the underlying loans primarily consists of traditional property types, including multifamily, office, and self-storage, with limited exposure to assets having very high expense ratios, such as hotels, or property types where conventional takeout financing may not be as readily available. Twenty-five loans, comprising 72.6% of the initial trust balance, represent acquisition financing wherein sponsors contributed cash equity as a source of funding in conjunction with the mortgage loan. The cash equity in the deal will incentivize the sponsor to perform on the loan and protect their equity.

In some cases, loans included in the pool are several years seasoned and the original business plans have not materialized as expected, significantly increasing the loans’ risk profile. Given the nature of the assets, DBRS Morningstar sampled a large portion of the pool at 83.9% of the cut-off date balance. This sample size is higher than the typical sample for traditional conduit commercial mortgage-backed securities (CMBS) transactions. DBRS Morningstar also performed physical site inspections, including management meetings, for all the sampled loans. Fourteen loans, comprising 32.9% of the pool balance, have fully extended maturity dates in 2021. The risk of these loans not fully achieving their business plans or being stabilized is elevated. For modeling purposes, DBRS Morningstar also excluded future funding from the NCF analysis and the whole-loan balance for these loans. DBRS Morningstar also used only the as-is appraised values of the properties to determine the loan leverage in the model.

There is an inherent conflict of interest between the special servicer and the seller as they are related entities. Given that the special servicer is typically responsible for pursuing remedies from the seller for breaches of the representations and warranties, this conflict could be disadvantageous to the noteholders. While the special servicer is classified as the enforcing transaction party, if a loan repurchase request is received, the trustee and originator shall be notified and the originator is required to correct the material breach or defect or repurchase the affected loan within a maximum period of 90 days. The repurchase price would amount to the outstanding principal balance and unpaid interest less relevant Issuer expenses and protective advances made by the servicer. Furthermore, the issuer retains 17.25% equity in the transaction holding the first-loss piece.

In some instances, DBRS Morningstar estimated stabilized cash flows that are above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s 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 achievable and the future funding amounts to be sufficient to execute such plans. The WA DBRS Morningstar business plan score is 2.31, which is in the middle of the range and indicates that DBRS Morningstar determined the business plans to be generally reasonable. However, for the purpose of modeling, DBRS Morningstar increased the WA business plan score to 3.31, effectively increasing the weight of the as-is analysis over the as-stabilized analysis. DBRS Morningstar also assumes no cash flow or value upside when determining the loan-level loss severity given default (LGD). Furthermore, the credit metrics that DBRS Morningstar used for determining the LGD assume future funding facilities are fully funded and add additional conservatism.

With regard to the Coronavirus Disease (COVID-19) pandemic, 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.

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 - Wexford Village at Devonshire (12.4% of the pool)
-- Prospectus ID#2 - Stratus Apartments (8.1% of the pool)
-- Prospectus ID#3 - Windrush Apartments (7.6% of the pool)
-- Prospectus ID#4 - 12000 Biscayne Boulevard (6.4% of the pool)
-- Prospectus ID#5 - 1680 Meridian (6.4% of the pool)
-- Prospectus ID#6 - Oak Lawn Heights (4.6% of the pool)
-- Prospectus ID#7 - Berkshire Oaks Power Center (5.2% of the pool)
-- Prospectus ID#8 - Doubletree Park City (4.7% of the pool)
-- Prospectus ID#9 - Victory on Portland (3.8% of the pool)
-- Prospectus ID#10 - Orange Grove Self Storage (3.6% of the pool)
-- Prospectus ID#11 - Hunt Highway Self Storage (3.5% of the pool)
-- Prospectus ID#12 - Village at Sandhill Town Center Phase I (3.9% of the pool)
-- Prospectus ID#13 - Evergreen Manor (3% of the pool)
-- Prospectus ID#14 - Monterey Village (2.1% of the pool)
-- Prospectus ID#15 - Plaza One 89 (2.3% of the pool)
-- Prospectus ID#18 - Western Insurance Building (1.9% of the pool)
-- Prospectus ID#23 - Bellecrest & Ridgeview MHCs (1.5% of the pool)
-- Prospectus ID#24 - Palmer Apartments (1.2% of the pool)
-- Prospectus ID#28 - Atlantic Surf Apartments (1% of the pool)
-- Prospectus ID#29 - Cresthaven MHC (0.9% 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.

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 (August 7, 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.

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.

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

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