DBRS Morningstar Takes Rating Actions on 10 Single-Family Rental Multi-Borrower Transactions

DBRS, Inc. (DBRS Morningstar) reviewed 72 classes in 10 multi-borrower single-family rental (MB SFR) transactions following the update of the Rating and Monitoring U.S. Single-Family Rental Securtization Methodology (Methodology). As noted in the Methodology, DBRS Morningstar typically uses the North American CMBS Multi-Borrower Rating Methodology (CMBS MB Methodology) to rate MB SFR transactions.

Of the 72 classes, DBSR Morningstar confirmed its ratings on 48 classes, upgraded its ratings on 17 classes, and discontinued two classes because of repayment. In addition, DBRS Morningstar placed five classes in one transaction Under Review with Negative Implications (Under Review-Negative), as outlined below. As DBRS Morningstar ratings for commercial mortgage-backed securities (CMBS) typically include trends for classes rated B (sf) and above, DBRS Morningstar assigned trends to classes not placed Under Review-Negative. In all cases, the assigned trends were Stable.

The full listing of the ratings of the classes in these transactions is found at the end of this press release.

MB SFR transactions are conduit-style securitizations collateralized by multiple mortgage loans (typically around 75 to 125 loans) made to small institutional investors and/or wealthy individuals. Each of the mortgage loans is secured by a first lien on one or more mortgaged properties (usually between 20 and 100 properties) which generally include single-family residential properties along with multifamily properties in increasing concentration in recent vintages, and mixed-use properties. The MB SFR transactions contemplated herein present issuer underwriting, servicing, operations, and legal document standards that are substantially in accordance with CMBS market standards.

The transition to the CMBS MB Methodology for MB SFR transactions is supported by the similarity of MB SFR collateral property portfolios to multifamily properties and property portfolios currently included and contemplated within the CMBS MB Methodology, such as loans secured by multifamily properties in CMBS conduit collateral pools, small balance commercial real estate collateral pools, and pools predominantly backed by loans secured by multifamily properties, including agency multifamily CMBS transactions, such as the Freddie Mac K series.

Key credit risks are substantially similar to the key risk factors in CMBS transactions rated using the CMBS MB Methodology. Among those risk factors, collateral quality, sponsor strength and concentration, and the composition of operating cash flows may pose relatively elevated risks in MB SFR transactions that are addressed using the inputs provided for within the CMBS MB Methodology.

Collateral quality can be, on average, lower than typical for CMBS transactions. The CMBS MB Methodology contemplates a collateral quality assessment as part of the property analysis, which is applied as needed in loan-level inputs to the DBRS Morningstar CMBS Insight Model (CMBS Insight Model).

Sponsors in the MB SFR transactions are typically of lower credit quality than sponsors in CMBS transactions. Sponsor strength assessment is part of the loan analysis and is applied, as needed, in loan-level inputs to the CMBS Insight Model. Inputs to the sponsor strength assessment include sponsor net worth and credit score information, which are typically part of the data tape provided by the issuer.

Sponsor concentration can be higher than typical for CMBS transactions. Loan-level roll-ups by sponsor/guarantor are applied as needed to account for any increased sponsor concentration.

The DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (Property Cash Flow Criteria) serves as the basis for deriving a property’s net cash flow (NCF) and the corresponding NCF haircut used in the CMBS MB Methodology. DBRS Morningstar uses the multifamily property analysis in the Property Cash Flow Criteria as the basis for MB SFR property portfolio analysis. Generally, the cash flow analysis in the MB SFR origination process has been similar to CMBS lenders’ cash flow analysis, focusing on gross potential rent, deductions for vacancy, standard expense line items, and an allowance for capital expenditures. Individual line items for MB SFR property-level cash flow analysis may be weighted differently when compared with the corresponding cash flow analysis for CMBS multifamily properties; for example, capital expenditures on MB SFR properties are generally elevated compared with typical CMBS multifamily properties. Such differences in the property level cash flow analysis line items are taken into consideration when assessing MB SFR property cash flow.

DBRS Morningstar used the CMBS MB Methodology, Rating North American CMBS Interest-Only Certificates Methodology (NA CMBS IO Methodology), Property Cash Flow Criteria, and the North American CMBS Surveillance Methodology (Surveillance Methodology) in its analysis of the MB SFR transactions. DBRS Morningstar reviewed a sample of each transaction’s issuance data and applied a minimum NCF haircut of 18% to each of the unsampled loans in the MB SFR transactions. No credit was given to seasoning of the collateral where cash flows may have been reported to have improved. The loans were assigned the multifamily property type considering they are secured by portfolios of SFR homes. Property quality was derived based on average property condition and age within each property portfolio. DBRS Morningstar determined the sponsor strength to be generally Weak, based on the sponsor’s management tenure, net worth, liquidity, financial flexibility, and transparency associated with disclosure of financial condition. Where identifiable, loans with related borrower groups were consolidated to address obligor concentrations. DBRS Morningstar used the Surveillance Methodology in its review of each transaction’s current performance as of the January 2023 remittance reports, taking into consideration delinquencies, updated valuations, and/or commentaries from the servicer, in addition to watchlist details.

In the case of larger loans that were exhibiting performance declines from issuance and/or were reporting payment or maturity defaults, probability of default (PoD) adjustments were made on a sliding scale, with the severity of the PoD penalty increasing based on the specifics of the increased risks. In some cases, loss given default (LGD) adjustments were also made, reflecting DBRS Morningstar’s concerns surrounding potential value declines from the issuance figures. In the case of one transaction, B2R 2016-1, a liquidation scenario was assumed for one small loan in default as the servicer’s comments suggested a full loss could be realized at resolution.

The January 2023 remittance reports showed servicer’s watchlist concentrations between 10.2% and 48.6%, with concentrations of delinquent loans between 0% and 26.1%. Realized losses to date across all 10 transactions have been generally minimal, ranging between 0% and 1.7% of the original pool balances. Historically, liquidations across these pools have shown somewhat binary outcomes, with many loans reporting no or very small losses at disposition, while other loans report high loss severities that can sometimes even exceed 100%. Weighted-average loss severities across the 10 transactions ranged between 0% and 52.8%.

The CAFL 2017-1 transaction reported the highest delinquency rate across the 10 transactions. The delinquency rate of 26.1% is fully contained to three matured nonperforming loans, all of which are with the special server in various stages of workout. Two of the loans, representing 20.4% of the pool balance, are expected to be resolved via foreclosure. DBRS Morningstar notes that both of those loans reflect low leverage financing with going-in loan-to-value ratios (LTVs) between 45.4% and 51.0%, reducing the likelihood of loss at disposition. While the third loan in special servicing has had an appraisal reduction since issuance, with the implied value in that analysis suggesting an LTV of nearly 90%, DBRS Morningstar expects any loss associated with the workout of the loan to be contained to the nonrated Class H. All three loans were analyzed with adjustments to increase the PoD and stress the expected loss in the CMBS Insight Model.

DBRS Morningstar placed five classes in the CAF 2018-2 transaction Under Review-Negative. This transaction reported the highest watchlist concentration across the 10 pools (29 loans totaling 48.6% of the outstanding pool balance), with watchlist reasons including cash flow declines, late financial reporting, and significant deferred maintenance problems observed at the servicer’s site inspections. In addition to the high watchlist concentration, the pool reports the second-highest delinquency rate of the 10 transactions reviewed, at 6.8%. To date, the trust has experienced a net loss of only 0.53%; however, DBRS Morningstar is concerned the large number of watchlist loans and relatively high delinquency rate could translate to increased losses over the near to moderate term. Consequently, DBRS Morningstar intends to monitor the collateral over the next several reporting periods to better evaluate the possible outcomes.

For the interest-only classes (IO classes) in each of these transactions (with the exception of the CAF 2018-2 transaction), the rating upgrades reflect DBRS Morningstar’s use of the Rating North American CMBS Interest Only Certificates Methodology, which contemplates a rating for the IO classes that is, typically, a pass-through of the rating of the applicable reference obligation(s), possibly adjusted upward by one notch. In the case of the CAF 2018-2 transaction, the IO Class X-B rating was placed Under Review-Negative as the lowest rated applicable reference obligation, the Class D certificate, was also placed Under Review-Negative.

ENVIRONMENTAL, SOCIAL, GOVERNANCE 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

DBRS Morningstar materially deviated from its CMBS Insight Model when determining the ratings assigned to Class B of the CAF 2018-2 transaction, as the quantitative results suggested lower ratings. These material deviations are warranted given uncertain loan-level event risk, as well as the high credit support for the Class B certificate and DBRS Morningstar’s expectation that the five classes further down in the bond stack which were placed Under Review-Negative are most exposed to the increased risks in that pool.

Classes that 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022; https://www.dbrsmorningstar.com/research/403563), 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 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.

Five classes in the CAF 2018-2 transaction were placed Under Review-Negative. Generally, the conditions that lead to the assignment of Under Review are resolved within a 90-day period; however, in this case, DBRS Morningstar notes that the resolution period may extend further given the possibility of delays in obtaining the necessary information from the servicer and/or a longer resolution time for the events affecting troubled loans.

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

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