DBRS Morningstar Confirms Ratings on M360 2019-CRE2, Ltd., Maintains Negative Trends on Two Classes

DBRS Limited (DBRS Morningstar) confirmed the ratings on the floating-rate notes issued by M360 2019-CRE2, Ltd. (the Issuer) as follows:

-- 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 (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

The trends on Classes F and G remain Negative. The trends on all other classes remain Stables.

The rating confirmations and Stable trends reflect the increased credit enhancement to the bonds as result of successful loan repayment. The Negative trends on Classes F and G reflect the ongoing concern with loans in special servicing as the transaction is subject to adverse selection as eight loans, representing 48.5% of the trust balance, are in special servicing as of the July 2022 remittance. DBRS Morningstar does not anticipate any pending realized loan losses and there is a $38.7 million first loss piece held by the Issuer, which helps to mitigate the specially serviced loan risk. In general, the borrowers on these loans have been unable to execute the respective business plans as expected, with the loans past the scheduled maturity dates. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at [email protected].

The transaction closed in August 2019 and the initial collateral consisted of 32 floating-rate mortgages secured by 32 mostly transitional properties with a maximum trust balance totaling $360.0 million. Per the July 2022 remittance report, there were 19 mortgages secured by 19 properties remaining in the pool with a total trust balance of $185.9 million, representing a 48.4% collateral reduction. The 18-month reinvestment period concluded in April 2021 and the transaction is paying sequentially. Since issuance, 31 loans have been repaid from the pool. The current composition of the transaction is concentrated by property type with six loans secured by office properties, representing 35.2% of the pool, and four loans secured by multifamily assets, representing 18.7% of the pool balance. The loans are secured by properties concentrated in suburban markets with 28.5% of the pool in DBRS Morningstar Market Rank 5 and 26.1% of the pool in DBRS Morningstar Market Rank 4.

Through March 2022, the collateral manager had advanced $26.9 million in loan future funding to 13 individual borrowers to aid in property stabilization efforts. The largest advance, $1.7 million, was made to the borrower of the University Residences loan, which is secured by two multifamily properties loan in the University City neighborhood of Philadelphia. The borrower’s business plan is to complete a capital improvement program to convert the property from a student housing asset to a generic multifamily property. An additional $18.1 million of loan future funding, allocated to 16 borrowers, remains outstanding. Of this amount, $5.0 million is allocated to the borrower of the University Residences loan and $1.8 million is allocated to the borrower of The Villas at the Curve and Eagle Landing loan for further capital improvement costs.

Select borrowers continue to progress toward completing the stated business plans; however, several individual borrowers are behind schedule, particularly those with a loan currently in special servicing. Three additional loans, representing 23.0% of the trust balance, are on the servicer’s watchlist for low debt service coverage ratios (DSCR), occupancy related issues, and upcoming loan maturity. In its analysis, DBRS Morningstar made analytical adjustments to reflect the current credit risk profile of loans where applicable.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

DBRS Morningstar materially deviated from its CMBS North American CMBS Insight Model when determining the ratings to Class G as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan level event risk with the eight loans in special servicing, all of which are past due its respective loan maturities, and three additional loans on the servicer’s watchlist being monitored for performance related issues.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#11 – University Residence (10.7% of the pool)
-- Prospectus ID#5 – Hughes Plaza Office (9.5% of the pool)
-- Prospectus ID#7 – Baytech Research Center (7.9% of the pool)
-- Prospectus ID#9 – Element DFW Airport (7.0% of the pool)
-- Prospectus ID#21 – Menasha Plaza (3.4% of the pool)

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 is the 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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