DBRS Morningstar Assigns Provisional Ratings to LoanCore 2021-CRE6 Issuer Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by LoanCore 2021-CRE6 Issuer 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The initial collateral consists of 31 floating-rate mortgages secured by 46 mostly transitional properties with a cut-off date balance of $1.25 billion, excluding approximately $188.8 million of future funding participations and $674.8 million of funded companion participations. Included in the initial collateral amount are two Targeted Mortgage Assets, which are expected to close on or prior to the closing date or within 90 days after the closing date. In addition, there is a two-year Reinvestment period during which the Issuer may use principal proceeds to acquire additional eligible loans, subject to the Eligibility Criteria, the Acquisition Criteria, and other conditions. If a Targeted Mortgage Asset is not likely to close or fund prior to the purchase termination date or if the terms are materially different from the terms described in the offering memorandum, then such Targeted Mortgage Asset may be acquired in accordance with the terms applicable to acquisitions of Reinvestment Mortgage Assets, including satisfaction of the Eligibility Criteria. During the Reinvestment period, the Issuer may acquire future funding commitments, funded companion participations, and additional eligible loans subject to the Eligibility Criteria, the Acquisition Criteria, and other conditions. The transaction stipulates a $1.0 million threshold on companion participation acquisitions before a No Downgrade Confirmation is required if there is already a participation of the underlying loan in the trust.

The loans are mostly secured by currently cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 21 loans, representing 74.7% of the trust balance, have remaining future funding participations totaling $188.8 million, which the Issuer may acquire in the future.

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), 22 loans, representing 68.3% 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. However, the DBRS Morningstar Stabilized DSCRs for only four loans, representing 6.6% of the initial pool balance, are below 1.00x. 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 other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels. The transaction will have a sequential-pay structure.

The transaction’s sponsor is LCC REIT, which is managed by a LoanCore Capital Credit Advisor LLC, a wholly owned subsidiary of LoanCore Capital (LoanCore). LoanCore is a leading investor and commercial real estate lender with a credit-focused alternative asset management platform that manages LLC REIT and LoanCore Capital Markets (LCM). As of October 12, 2021, LoanCore had $14.6 billion in assets under management between LCC REIT and LCM. This transaction represents LoanCore’s seventh commercial real estate collateralized loan obligation (CRE CLO) since 2013, and there have been no realized losses to date in any of its issued CRE CLOs on approximately $6.7 billion of mortgage assets contributed including reinvestments.

An affiliate of LCC REIT, an indirect wholly owned subsidiary of the Sponsor (as retention holder), will acquire the Class F Notes, the Class G Notes, and the Preferred Shares (Retained Securities), representing the most subordinate 16.375% of the transaction by principal balance. Approximately 15.2% of the pool is located in a DBRS Morningstar Mark Rank 8 (Beverly Hills, California, and New York City). Approximately 51.2% of the pool is located in a DBRS Morningstar Metropolitan Statistical Area Group 2 or 3. These geographic locations have historically experienced lower probabilities of default and loss given defaults (LGD).

Nine loans, representing 30.9% of the mortgage asset cut-off date balance, had Above Average or Average + property quality scores based on physical attributes and/or a desirable location within their respective markets. Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance. No loans in the DBRS Morningstar sample had property quality scores below Average.

Twenty-two of the 31 loans, representing 72.5% of the mortgage asset cut-off date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. Cash equity infusions from a sponsor typically result in the lender and borrower having a greater alignment of interests, especially compared with a refinancing scenario where the sponsor may be withdrawing equity from the transaction. Furthermore, the majority of the acquisitions occurred in 2021 and take into consideration any Coronavirus Disease (COVID-19) impacts.

Based on the initial pool balances, the overall weighted-average (WA) DBRS Morningstar As-Is DSCR of 0.92x and WA As-Is Loan-to-Value (LTV) of 76.9% generally reflect high-leverage financing. Most of 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 LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR for each loan at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is 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. When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.26x, suggesting that the properties are likely to have improved NCFs once the sponsors’ business plans have been implemented.

The transaction is managed and includes a reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The Collateral Manager also has the option of acquiring future loans secured by a variety of property types, including Office up to 40%, Industrial up to 40%, Retail up to 25%, and Hospitality up to 20.0%. The risk of negative migration is partially offset by eligibility criteria (detailed in the transaction documents) that outline DSCR, LTV, Herfindahl score minimum, property type, and loan size limitations for Reinvestment assets. The pool must maintain a 40.0% Multifamily property type minimum. New Reinvestment loans and companion participations of $1.0 million or greater require a No Downgrade Confirmation from DBRS Morningstar. DBRS Morningstar will analyze these loans for potential impacts on ratings. Deal reporting includes standard monthly CRE Finance Council reporting and quarterly business plan updates. DBRS Morningstar will monitor this transaction on a regular basis.

DBRS Morningstar 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 sampled a large portion of the loans, representing 71.1% of the of the mortgage asset cut-off date balance. The transaction’s WA DBRS Morningstar Business Plan Score of 1.96 is generally in the range of recently rated CRE CLO transactions by DBRS Morningstar. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside. Future funding companion participations will be held by affiliates of LLC REIT and have the obligation to make future advances. LLC REIT agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, LLC REIT will be required to meet certain liquidity requirements on a quarterly basis. Eight loans, representing 18.8% of the pool balance, have a debt service reserve to cover any interest shortfalls.

All loans are floating rate, indexed to the Libor one-month rate. In the event the underlying interest rate index increases, a higher debt service payment will be due from the borrower and defaults could increase. Furthermore, the Libor index will be retired in June 2023, affected loans will transition from Libor to a replacement index. DBRS Morningstar incorporates a stressed interest rate into the calculation of the DSCR rate for each loan. The stressed rate takes into consideration potential interest rate fluctuations, with consideration for rate floors and caps as applicable. The borrowers of all loans have purchased Libor rate caps with strike prices that range from 1.00% to 3.50% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be Term Secured Overnight Financing Rate.

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.

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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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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