DBRS Morningstar Finalizes Provisional Ratings to Ready Capital Mortgage Financing 2021-FL7, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings to the following classes of notes issued by Ready Capital Mortgage Financing 2021-FL7, LLC (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 (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable.

The initial collateral consists of 76 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $927.2 million secured by 89 mortgaged properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $135.2 million. The holder of the future funding companion participations, Ready Capital Subsidiary REIT I, LLC, has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is static with no ramp-up period or reinvestment period. However, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations subject to stated criteria during the Permitted Funded Companion Participation Acquisition Period, which ends on or about November 2023 (subject to a 120-day extension for binding commitments entered during the Permitted Funded Companion Participation Acquisition Period). Acquisitions of future funding participations of $1.0 million or greater will require rating agency confirmation. Interest can be deferred for the Class F and Class G Notes, and interest deferral will not result in an event of default. The transaction will have a sequential-pay structure.

Of the 89 properties, 80 are multifamily assets (91.7% of the mortgage asset cutoff date balance). The remaining loans are secured by industrial properties (five loans, 3.2% of the pool), office properties (two loans, 2.2% of the pool), hotel (one loan, 1.9% of the pool), and self-storage (one loan, 1.0% of the pool).

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. Four loans, Sinatra Tampa Portfolio, Timber Court, 633 Alton Rd, and 303-325 Midland Ave, are whole loans and the other 72 loans (93.4% of the mortgage asset cutoff date balance) are participations with companion participations that have remaining future funding commitments totaling $135.2 million. The future funding for each loan is generally to be used for capital expenditures to renovate the property or build out space for new tenants.

All of the loans in the pool have floating interest rates initially indexed to Libor. Seventy-five loans are interest only (IO) through their initial terms; one loan, 633 Alton Rd, is IO for the first 36 months of its 48-month initial loan term and then amortizes on a 300-month schedule thereafter. As such, to determine a stressed interest rate over the loan term, 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. 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 transaction is sponsored by Ready Capital Corporation, a publicly traded mortgage real estate investment trust, externally managed by Waterfall Asset Management, LLC, a New York-based SEC-registered investment advisor. The sponsor has strong origination practices and substantial experience in originating loans and managing commercial real estate properties, with an emphasis on small business lending. The sponsor has provided more than $9.9 billion in capital across all of its commercial real estate lending programs through October 31, 2021 (approximately $3.5 billion in 2021), and generally lends from $2.0 million to $45 million for commercial real estate loans.

The Depositor, Ready Capital Mortgage Depositor VI, LLC, which is a majority-owned affiliate and subsidiary of the sponsor, expects to retain the Class F, G, and H Notes, collectively representing the most subordinate 18.75% of the transaction by principal balance.

The pool is mostly composed of multifamily assets (91.7% of the mortgage asset cutoff date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall commercial mortgage-backed securities (CMBS) universe.

Except for three loans, Palihotel Hollywood, 4440 Von Karman, and Brickstone Villas, all loans were originated in 2021 and take into consideration any impacts from the pandemic. The weighted-average (WA) remaining fully extended term is 31 months, which gives the Sponsor enough time to execute its business plans without risk of imminent maturity. In addition, the appraisal and financial data provided for all loans are reflective of conditions after the onset of the pandemic.

Sixty-nine loans, representing 92.0% of the pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral and aligns the financial interests between the sponsor and lender.

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 a related loan sponsor will not successfully execute its business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing Coronavirus Disease (COVID-19) pandemic and its impact on the overall economy. The loan sponsor’s failure to execute the business plans 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 plans to be rational and the loan structure to be sufficient to substantially implement such plans. In addition, DBRS Morningstar analyzes loss severity given default (LGD) based on the as-is credit metrics, assuming the loan is fully funded with no net cash flow or value upside. Future funding companion participations will be held by affiliates of Ready Capital Subsidiary REIT I, LLC and have the obligation to make future advances. Ready Capital Subsidiary REIT I, LLC agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Ready Capital Subsidiary REIT I, LLC will be required to meet certain liquidity requirements on a quarterly basis.

Twenty-two loans, comprising 42.0% of the trust balance, are in DBRS Morningstar Metropolitan Statistical Area (MSA) Group 1. Historically, loans in this MSA Group have demonstrated higher probabilities of default (PODs) and LGDs, resulting in higher individual loan-level expected losses than the WA pool expected loss. Five of these 22 loans (10.1% of the pool) are in DBRS Morningstar Market Rank 5 or higher. Additionally, these loans represent a WA occupancy of 91.7%.

Thirty-one loans, representing 46.1% of the trust balance, have DBRS Morningstar As-Is Loan-to-Value Ratios (LTVs) (fully funded loan amount) greater than 85.0%, which represents significantly high leverage. Six of those loans, 21.0% of the trust balance, are among the 10 largest loans in the pool. All 21 loans were originated in 2021 and have sufficient time to reach stabilization. Additionally, all the loans have DBRS Morningstar Stabilized LTVs of 75.9% or less indicating improvements to value based on the related sponsors’ business plans. The WA DBRS Morningstar Stabilized LTV for the pool is 65.3% and no loans have a DBRS Morningstar Stabilized LTV greater than 75.9%.

All 76 loans have floating interest rates, and 75 loans are IO during their original terms of 24 months to 48 months, creating interest rate risk. Seventy loans (89.6% of the mortgage asset cutoff date balance) amortize during extension options. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five years. For the floating-rate loans, DBRS Morningstar adjusted the one-month Libor index, 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. The borrowers of 61 floating-rate loans, 93.7% of the initial pool balance, have purchased Libor rate caps with strike prices that range from 0.50% to 3.25% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercising any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

DBRS Morningstar conducted only three site inspections and one management tour because of health and safety constraints associated with the ongoing coronavirus pandemic. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned to each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos.

Six loans, representing 17.1% of the initial cutoff pool balance, were deemed to have Weak sponsorship strength while two loans (4.3% of the pool) were deemed to have Bad (Litigious) sponsorship because of negative credit history and/or limited financial wherewithal. Loans with Weak or Bad (Litigious) sponsorship treatment were modeled with increased PODs.

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#01 – Main Street Village (6.6% of the pool)
-- Prospectus ID#02 – Skylar Pointe (4.1% of the pool)
-- Prospectus ID#03 – Sinatra Tampa Portfolio (3.8% of the pool)
-- Prospectus ID#04 – 23Thirty Cobb (3.6% of the pool)
-- Prospectus ID#05 – Uptown at Cole Park (3.5% of the pool)
-- Prospectus ID#06 – Asher Apartments (2.9% of the pool)
-- Prospectus ID#07 – Canyon Grove Apartments (2.8% of the pool)
-- Prospectus ID#08 – Sunflower & Veranda Apartments (2.8% of the pool)
-- Prospectus ID#09 – 835-864 West Barry Avenue (2.6% of the pool)
-- Prospectus ID#10 – Melia Apartments (2.5% 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 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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