DBRS Morningstar Confirms Ratings on All Classes and Changes Trends on Two Classes of M360 2019-CRE2, Ltd.

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

-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

With this review, DBRS Morningstar changed the trends on Classes F and G to Stable from Negative.

The rating confirmations and trend changes reflect the increased credit support to the bonds as successful loan repayments continue to insulate the remaining rated bonds from potential adverse impacts from the ultimate resolution of specially serviced loans. As of January 2023 reporting, the transaction had amortized 59.5% since issuance and there were five loans, representing 34.4% of the current outstanding trust balance, in special servicing. 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. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral pool consisted of 32 floating-rate mortgages secured by 32 mostly transitional properties with a maximum trust balance totaling $360.0 million. The transaction included an 18-month reinvestment period that expired in April 2021, at which point the bonds began to amortize sequentially with loan repayment and scheduled loan amortization. As of January 2023, the transaction consisted of 14 loans, secured by 14 properties, with a cumulative trust balance of $141.5 million.

Four of the remaining loans, representing 30.9% of the current trust balance, are secured by office properties while three loans, representing 23.1% of the current trust balance, are secured by multifamily properties. The remaining seven loans are secured by hotel, retail, mixed-use, industrial, and student-housing properties. In terms of property location, the transaction is concentrated by properties in suburban markets, which DBRS Morningstar defines as markets with a DBRS Morningstar Market Rank of 3, 4, or 5. As of January 2023, there were 12 loans, representing 86.4% of the cumulative loan balance, secured by properties in suburban markets.

Eleven of the 14 remaining loans were structured with future funding components totaling $41.5 million to assist individual borrowers in the respective business plans, which included funds for property renovations, accretive leasing costs, and performance-based earn-outs. Through YE2022, the lender had advanced a total of $30.9 million to all 11 individual borrowers. The largest advance, $10.9 million, was provided to the borrower of the University Residences loan (Prospectus ID#11, 14.0% of the current pool balance), which is secured by two multifamily buildings in West Philadelphia. Of the $10.9 million advanced, the borrower has used $3.9 million to fund debt service payments, with the remaining amount used for capital improvements. Coincidentally, the loan also accounts for the largest loan with unfunded future funding remaining. Overall, the deal has $10.6 million remaining allocated to 10 individual borrowers with $4.3 million remaining available for the University Residences Philadelphia loan to fund additional capital expenditures to convert the property to traditional multifamily from student housing.

As noted above, there are five loans in special servicing. The largest of which, the aforementioned University Residences loan, transferred to special servicing in April 2022 for maturity default after the borrower’s business plan stalled amid work stoppages caused by the Coronavirus Disease (COVID-19) pandemic. According to the collateral manager, construction is expected to resume shortly and is scheduled to be completed by July 2023. While in special servicing the loan was modified to extend the loan through October 2023, allowing the borrower additional time to complete the construction of the renovation plan; however, the loan remains in default after the borrower failed to fund the required financial obligations of the modification. Despite these concerns, the property securing the loan was recently appraised in April 2022 at a value of $39.0 million, an increase from the as-is value of $14.5 million at issuance.

The second-largest loan in special servicing, Baytech Research Center (Prospectus ID#7, 10.4% of the current pool balance), is secured by a two-story suburban research and development office building in San Jose, California. The loan has been in special servicing since July 2021 as the loan originally matured in August 2021. Prior to maturity, the borrower and lender agreed to multiple loan modifications, necessitated by the effects of the pandemic. According to the servicer, the borrower has executed a short-term maturity extension through April 2023 as it attempts to refinance the property. The property is leased to a single tenant through September 2026 and includes an average rental rate of $17.20/psf through the term of the lease.

As of January 2023, there were an additional six loans, representing 48.5% of the current pool balance, on the servicer’s watchlist, which have been flagged for upcoming loan maturity as well as poor financial performance. The largest loan, Lafayette University Place (Prospectus ID#15, 10.6% of the current pool balance), is secured by a 342-bed, Class C student-housing property located two blocks from the University of Louisiana Lafayette in Lafeyette, Louisiana. The borrower exercised the first loan extension option in May 2022, extending loan maturity to May 2023. The loan continues to be monitored on the servicer’s watchlist for performance concerns after occupancy decreased to 66.1% as of the September 2022 rent roll from 81.6% at issuance. As of September 2022, the property had an average rental rate of $514/bed, below the average rental rate at issuance of $628/bed. In addition, the property is reporting negative cash flow though the borrower has accessed nearly 100% of the loan’s future funding dollars. Given the property has failed to reach stabilization, DBRS Morningstar anticipates the borrower will need to exercise the final 12-month extension option in May 2023 and will likely be required by the lender to contribute additional equity to the transaction.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (May 17, 2022).

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Class E, Class F, and Class G as the quantitative results suggested higher ratings. These material deviations are warranted given loan-level event risk as there are loans in special servicing, which are expected to have extended resolution time frames.

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), 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.

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

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