DBRS Morningstar Assigns Provisional Ratings to LCCM 2021-FL2 Trust

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Notes to be issued by LCCM 2021-FL2 Trust (LCCM 2021-FL2 or 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.

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, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed income markets. 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.

The initial collateral consists of 23 floating-rate mortgage loans or pari passu participation interests in mortgage loans secured by 27 mostly transitional assets with a cut-off balance of $607.5 million excluding approximately $125.8 million of future funding commitments. The pool consists of nine multifamily properties representing 31.4% of the pool balance, three office properties with 23.3% of the pool balance, four mixed-use properties totaling 23.2% of the pool balance, three manufactured housing communities totaling 9.2% of the pool balance, three retail properties totaling 6.0% of the pool balance, and one hotel totaling 4.9% of the pool balance.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or 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 the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 20 loans, totaling 94.4% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Furthermore, the DBRS Morningstar Stabilized DSCRs for 10 loans, representing 43.9% of the initial pool balance, are below 1.00x.

All of the rated classes of the LCCM 2021-FL2 transaction have been conveyed into a trust by Ladder Capital Corp. (Ladder Capital) to issue corresponding classes of Secured Floating Rate Notes. All DBRS Morningstar-rated classes will be subject to ongoing surveillance, confirmations, upgrades, or downgrades by DBRS Morningstar after the date of issuance. An affiliate of Ladder Capital, an indirect wholly owned subsidiary of the Sponsor (as retention holder), will acquire the Class F, G, and H notes, representing the most subordinate 18% of the transaction by principal balance.

DBRS Morningstar completed a cash flow review and cash flow stability and structural review on 15 of the 23 loans, representing 83.0% of the pool by loan balance. Overall, the Issuer’s cash flows were generally recent, from early 2021, and reflective of recent conditions. For the loans not subject to NCF review, DBRS Morningstar applied NCF variances of -32.7% and -26.0% to the Issuer’s as-is and stabilized NCFs, respectively, which are based on average sampled NCF variances.

Seven of the 23 loans, representing 33.2% of the pool are in areas with DBRS Morningstar Market Ranks of 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. DBRS Morningstar Market Ranks of 7 and 8 benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include Los Angeles, Seattle, New York, and Miami. Six loans, representing 23.0% of the pool balance, have collateral in Metropolitan Statistical (MSA) Group 3, which is the best performing group in terms of historical commercial mortgage-backed securities (CMBS) default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is 10.8 percentage points lower than the overall CMBS historical default rate of 28.0%.

Based on the initial pool balances, the overall weighted-average (WA) DBRS Morningstar As-Is DSCR of 0.57x and WA DBRS Morningstar As-Is Loan-to-Value Ratio (LTV) of 81.1% generally reflect high-leverage financing. When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.02x, suggesting that the properties are likely to have improved NCFs once the sponsors’ business plans have been implemented. DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, 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 rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss severity given default LGD based on the as-is LTV, assuming the loan is fully funded.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 – Citigroup Center (10.7% of the pool)
-- Prospectus ID#2 – One Metropolitan Square (10.5% of the pool)
-- Prospectus ID#3 – 7th and Hill (9.3% of the pool)
-- Prospectus ID#4 – The Met (9.0% of the pool)
-- Prospectus ID#5 – Southside Works (8.8% of the pool)
-- Prospectus ID#6 – Sheraton Imperial RDU (4.9% of the pool)
-- Prospectus ID#7 – Alista Apartments (4.4% of the pool)
-- Prospectus ID#8 – Timber Ridge Apartments (4.3% of the pool)
-- Prospectus ID#9 – Stirling & Biscayne Portfolio (4.0% of the pool)
-- Prospectus ID#10 – Airline MHP (4.0% 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 (March 26, 2021), 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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