DBRS Morningstar Upgrades Six Classes of Ready Capital Mortgage Trust 2019-6

DBRS Limited (DBRS Morningstar) upgraded its ratings on six classes of Commercial Mortgage Pass-Through Certificates issued by Ready Capital Mortgage Trust 2019-6 as follows:

-- Class C to AA (sf) from AA (low) (sf)
-- Class D to A (sf) from A (low) (sf)
-- Class E to BBB (sf) from BBB (low) (sf)
-- Class F to BB (sf) from BB (low) (sf)
-- Class G to B (high) (sf) from B (low) (sf)
-- Class IO-B/C to AA (high) (sf) from AA (sf)

In addition, DBRS Morningstar confirmed the following ratings:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class IO-A at AAA (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of loan repayments, scheduled loan amortization, and proceeds received from one loan that was liquidated from the trust. As of the May 2022 remittance, 63 of the original 89 loans remain in the pool, representing a collateral reduction of 34.5% since issuance. The Glowzone loan (Prospectus ID#44) was liquidated from the trust in October 2021 at a loss of $1.3 million, but the loss was contained to the nonrated Class H.

Loans secured by mixed-use properties represent the greatest property type concentration, accounting for 33.1% of the current pool balance, followed by multifamily properties at 24.1%. The pool contains a mix of stabilized properties along with short-term bridge loans, secured by properties in a period of transition with plans to stabilize. Although the majority of loans are fixed rate, the loans backing transitional properties have a hybrid interest rate structure that features a fixed rate for the loan portion held within the trust but a floating rate for the future funding component outside of the trust. At issuance, five loans had future funding components; however, four such loans have repaid from the trust, with the Back Bay Center loan (Prospectus ID#6, 5.9% of the pool balance) remaining. There is one loan in special servicing and 13 loans on the servicer’s watchlist, representing 0.4% and 27.3% of the current pool balance, respectively.

The loan in special servicing, Lakeland Medical Office Building (Prospectus ID#81, 0.4% of the pool balance), is secured by medical office property in Niles, Michigan. The loan transferred to special servicing for imminent default with the last debt service payment remitted by the borrower in November 2020. A receiver was appointed in September 2021, and the special servicer is currently working through a deed in lieu of foreclosure with the borrower. According to the March 2022 appraisal, the property was valued at $1.0 million, a 59.0% decline from the issuance value of $2.4 million. With this review, DBRS Morningstar analyzed the loan with a liquidation scenario resulting in a loss severity in excess of 45.0%, with the loss contained to the nonrated bond, Class H.

The largest loan on the servicer’s watchlist, 1001 Ross (Prospectus ID#2, 8.8% of the pool balance), is secured by a mixed-use property consisting of 201 multifamily units and 30,165 square feet (sf) of ground-level retail in downtown Dallas. The loan was added to the servicer’s watchlist because of a decline in net cash flow. At issuance, the sponsor’s business plan was to implement a $3.5 million capital improvement plan to modernize interior and exterior finishes, including $2.4 million ($16,597 per unit) for apartment interiors. DBRS Morningstar requested an update regarding the renovations from the servicer, but it was previously noted that upgrades had slowed during the Coronavirus Disease (COVID-19) pandemic as the sponsor shifted its focus on retaining tenants and maintaining occupancy, determining it would upgrade units upon tenant turnover. The largest retail tenant, CVS, vacated in January 2020, and the sponsor planned to use $1.4 million held in an available leasing reserve to backfill the space; however, no replacement tenant has been identified to date.

According to the January 2022 rent roll, the property was 73.5% occupied, compared with the YE2020 occupancy rate of 85.8%. The multifamily portion was 72.1% occupied with an average rental rate of $1,284 per unit, compared with the issuance occupancy rate of 95.0% and average rental rate of $1,276 per unit. The retail portion of the property was 44.3% occupied with an average rental rate of $20.32 per sf (psf), compared with the issuance occupancy rate of 38.9% and average rental rate of $19.49 psf. According to Reis, multifamily properties in the Central Dallas submarket reported a Q1 2022 vacancy rate of 7.5% and asking rental rate of $2,729 per unit, while properties of similar vintage reported a vacancy rate of 5.5% and an asking rental rate of $2,544 per unit. The loan reported a YE2021 debt service coverage ratio (DSCR) of 0.69 times (x), compared with the YE2020 DSCR of 0.55x and DBRS Morningstar Stabilized DSCR of 1.15x. Given the general delay in executing the business plan and that the current rental rates remain similar to the levels at issuance and continue to be below market, DBRS Morningstar analyzed this loan with a stressed probability of default (POD) to increase the loan’s expected loss with this review.

The second-largest loan on the servicer’s watchlist is 777 East 12th Street (Prospectus ID#5, 6.7% of the pool balance), which is secured by a four-storey, mixed-use property in the Fashion District of Los Angeles. The ground-floor spaces are leased to tenants in the wholesale retail market with relatively small unit sizes. The loan is on the servicer’s watchlist because of a low DSCR, with the trailing nine-month ended September 30, 2021, DSCR reported at 0.91x. The figure compares unfavourably with the YE2020 DSCR of 1.14x and YE2019 DSCR of 1.73x. The January 2021 occupancy rate was 70.5% with an average rental rate of $55.13 psf, compared with the March 2020 occupancy rate of 83.6% and average rental rate of $53.30 psf. Pacific City Bank is the largest tenant, occupying 18.8% of the net rentable area on a lease that expired in December 2021, although it appears the tenant continues to operate at the property based on online searches conducted by DBRS Morningstar. Considering that the current occupancy rate is unclear and the net cash flow has declined below break-even with the most recent reporting, DBRS Morningstar analyzed this loan with a stressed POD to increase the loan’s expected loss with this review.

ESG CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929.

Classes IO-A and IO-B/C are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology North American CMBS Surveillance Methodology (March 4, 2022), 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.

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 [email protected].

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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