DBRS Morningstar Finalizes Its Provisional Ratings on Ready Capital Mortgage Financing 2022-FL8, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Ready Capital Mortgage Financing 2022-FL8, 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 67 short-term, floating-rate mortgage assets with an aggregate cut-off date balance of $1.22 billion secured by 89 mortgaged properties. The aggregate unfunded future funding commitment of the future funding participations as of the cut-off date is approximately $137.8 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 begins on the closing date and ends on the payment date. Acquisitions of future funding participations of $1.0 million or greater will require rating agency confirmation. Interest can be deferred for the Class F Notes 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, 76 are multifamily assets (92.7% of the mortgage asset cut-off date balance). The remaining loans are secured by 13 industrial properties (7.3% of the pool). Two loans, Tierra Santa (#2) and Sierra Grande (#18), representing a combined 6.4% of the total pool balance, were modeled as a portfolio titled Arizona Portfolio. The loans share the same sponsor and are located in close proximity to one another.

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. Six loans, representing 7.4% of the total pool balance, are whole loans, and the other 61 loans (92.6% of the mortgage asset cut-off date balance) are participations with companion participations that have remaining future funding commitments totaling $137.8 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. There are 15 loans (31.4% of the pool) that are full-term interest only (IO) through the fully extended loan term. The remaining 52 loans are all IO through the initial loan term with a mix of IO extension options and amortization. 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 investment advisor registered with the Securities and Exchange Commission. The sponsor has strong origination practices and substantial experience in originating loans and managing commercial real estate (CRE) properties, with an emphasis on small business lending. The sponsor has provided approximately $11.0 billion in capital across all of its CRE lending programs through February 11, 2022 ($606 million year-to-date), and generally lends from $2.0 million to $45 million for CRE 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 (92.7% of the mortgage asset cut-off date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall commercial mortgage-backed securities (CMBS) universe.

All loans were originated in 2021–22 and take into consideration any impacts from the Coronavirus Disease (COVID-19) pandemic. The weighted-average (WA) remaining fully extended term is 59 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 reflect the conditions after the onset of the pandemic.

There are 64 loans, 97.4% of the pool balance, that 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 the 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 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.

There are 27 loans, comprising 51.2% of the trust balance, 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. Six of these 27 loans (9.3% of the pool) are in DBRS Morningstar Market Rank 5 or higher. Additionally, these loans represent a WA occupancy of 90.7%.

There are 23 loans, representing 38.4% of the trust balance, that have DBRS Morningstar as-is loan-to-value ratios (LTVs) (fully funded loan amount) equal to or greater than 85.0%, representing significantly high leverage. Five of those loans, 19.9% of the trust balance, are among the 10 largest loans in the pool. All 23 loans were originated in 2021 and have sufficient time to reach stabilization. Additionally, all the loans, except one, have DBRS Morningstar Stabilized LTVs of 75.9% or less, indicating improvements to value based on the related sponsors’ business plans.

All 67 loans have floating interest rates, and all loans are IO during their original terms of 24 months to 48 months, creating interest rate risk. Fifty-two loans (68.6% of the mortgage asset cut-off 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 55 floating-rate loans, 95.0% of the initial pool balance, have purchased Libor rate caps with strike prices that range from 0.50% to 2.75% 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 did not conduct any site inspections 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.
Five loans, representing 12.1% of the initial cut-off pool balance, were deemed to have Weak sponsorship strength. Loans with Weak 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 – Chronos Portfolio (5.4% of the pool)
-- Prospectus ID#02 – Tierra Santa (4.3% of the pool)
-- Prospectus ID#03 – Highland Park and Residences at Turnberry (4.3% of the pool)
-- Prospectus ID#04 – Marble Creek Apartments (4.1% of the pool)
-- Prospectus ID#05 – Renew Redlands (3.3% of the pool)
-- Prospectus ID#06 – KC Loft Portfolio (3.0% of the pool)
-- Prospectus ID#07 – Sunrise Springs (2.9% of the pool)
-- Prospectus ID#08 – La Cresenta (2.9% of the pool)
-- Prospectus ID#09 – Salem Glenn Apartments (2.9% of the pool)
-- Prospectus ID#10 – Turtle Point Apartments (2.8% 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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