DBRS Morningstar Confirms Ratings, Assigns Negative Trends to M360 2019-CRE2, Ltd.

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of floating-rate notes issued by M360 2019-CRE2, Ltd. (the Issuer):

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (high) (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

Additionally, DBRS Morningstar changed the trends on all classes to Negative from Stable.

The Negative trends reflect the ongoing challenges faced by several loans in the pool that have been significantly affected by the Coronavirus Disease (COVID-19) pandemic and/or have been unable to make progress toward the stated business plans at loan origination to achieve property stabilization. Two loans, Forum Center and Shops at Mauna Lai, representing 9.2% of the current pool balance, are over 90 days delinquent and a total of six loans, representing 23.1% of the current pool balance, have been granted forbearances.

The transaction closed in August 2019, with the initial collateral consisting of 32 floating-rate mortgages secured by 32 mostly transitional properties with a cut-off balance totalling $306.0 million, excluding approximately $71.7 million of future funding commitments. The transaction featured a 90-day Ramp-Up Period at closing with a maximum pool balance of $360.0 million. Most of the loans in the transaction are in a period of transition with plans to stabilize and improve the asset values. Since issuance, the Issuer has contributed an additional 13 loans to the transaction for a current loan count of 36 loans totalling $353.4 million, as of the September 2020 remittance. The 18-month Reinvestment Period ends in April 2021, at which point the transaction will pay sequentially.

As of the September 2020 reporting, the current pool composition by asset type was 34.8% office, 26.2% mixed-use, 16.3% retail, 14.6% multifamily, 3.7% hotel, and 4.4% of industrial and self-storage combined. Properties securing 21 loans, representing 58.6% of the current pool balance, are located in tertiary markets defined by DBRS Morningstar with a market rank of 1 to 3; 13 loans, representing 35.6% of the pool, are located in suburban markets with a DBRS Morningstar market rank 4 or 5; and two loans, representing of 5.8% of the pool, are located in urban markets with a DBRS Morningstar market rank of 7.

As of the September 2020 reporting, 16 loans, representing 44.2% of the current pool balance, are on the servicer’s watchlist. Nine of those loans, representing 25.8% of the current pool balance, are flagged for a low debt service coverage ratio (DSCR) and other performance-related issues, including the second-largest loan (Pros ID#4 Shops at Mauna Lani). Three additional loans, representing 10.0% of the current pool balance, are flagged for an increased level of risk; two loans, representing of 3.1% of the current pool balance, are flagged for occupancy related issues; and one loan, representing 3.3% of the current pool balance, is flagged for an upcoming loan maturity.

Only 18 loans, representing 54.9% of the current pool balance, have reported YE2019 DSCR figures: those loans have a weighted-average (WA) DSCR of 0.42 times. Those same loans reported a WA occupancy rate of 39.2%. For all loans currently in the pool, the WA as-is loan-to-value ratio (LTV) at contribution is 88.5% while the WA stabilized LTV for those same loans is 65.9%.

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.

DBRS Morningstar materially deviated from its principal methodology when determining the rating assigned to Class A-S. The material deviation is warranted given the structural feature (loan or transaction) and/or provisions in other relevant methodologies outweigh the quantitative model output.

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#4 – Shops at Mauna Lani (5.6% of the pool)
-- Prospectus ID#12 – Christiansburg Marketplace (5.3% of the pool)
-- Prospectus ID#11 – University Residences (5.2% of the pool)
-- Prospectus ID#7 – Baytech Research Center (4.2% of the pool)
-- Prospectus ID#39 – Lockwood Medical II (3.9% of the pool)
-- Prospectus ID#9 – Element DFW (3.7% of the pool)
-- Prospectus ID#18 – St. Paul Athletic Club Building (2.1% 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 the 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

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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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