DBRS Morningstar Downgrades One Class of Ready Capital Mortgage Financing 2019-FL3

DBRS, Inc. (DBRS Morningstar) downgraded its rating on one class of Commercial Mortgage-Backed Notes, Series 2019-FL3 issued by Ready Capital Mortgage Financing 2019-FL3 as follows:

-- Class F to CCC (sf) from B (low) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes as follows:

-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (low) (sf)

In addition, DBRS Morningstar changed the trend on Class E to Negative from Stable while the trends on Classes B, C, and D remain Stable. Class F has a rating that does not carry a trend. 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 rating downgrade on Class F reflects projected credit support erosion to bond as a result of resolutions to select specially serviced loans in the transaction. As of January 2023 reporting, four loans, representing 85.1% of the current trust balance, are delinquent and in special serving, and DBRS Morningstar expects two of the loans to be resolved with realized losses to the trust. The trend change on Class E similarly reflects the increased stress to the bond as a result of the specially serviced loan concentration as well as the concern that outstanding interest shortfalls to the bond may increase as delinquent loans persist in the transaction. As of January 2023 reporting, Class E had outstanding interest shortfalls of $141,072, while Class F had outstanding interest shortfalls of $105,248.

The transaction closed in April 2019 with an initial collateral pool of 43 floating-rate mortgage loans secured by 44 transitional real estate properties, totaling approximately $320.8 million, excluding approximately $101.3 million of future funding commitments. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is static and did not include a ramp-up acquisition period or Reinvestment Period.

As of the January 2023 remittance, the pool comprises six loans secured by six properties with a cumulative trust balance of $114.8 million. Since issuance, 37 loans with a former cumulative trust balance of $252.1 million have been successfully repaid from the pool, resulting in a collateral reduction of 65.0%. In general, the borrowers for the remaining loans have to date been unable to execute the stated business plans at issuance as four loans, representing 85.1% of the current pool balance, are in special servicing and delinquent while the remaining two loans are on the servicer’s watchlist.

Of the remaining loan collateral, two loans, representing 53.3% of the current pool balance, are secured by mixed-use properties; two loans, representing 29.4% of the current pool balance, are secured by office properties; and two loans, representing 17.3% of the current pool balance, are secured by multifamily properties. The remaining collateral is also predominantly located in urban markets, which DBRS Morningstar defines as having Market Rank of 6, 7, or 8. These properties secure four loans representing 61.5% of the current pool balance; however, three of these loans (56.8% of the current pool balance) are currently in special servicing. While loan resolution strategies are ongoing, the traditional higher investor demand and liquidity may be a risk mitigant for these defaulted loans.

Given the elevated concentration of loan delinquencies and updated appraised property valuations from closing, leverage across the transaction is elevated as the weighted-average (WA) appraised as-is loan-to-value ratio (LTV) is 97.7%, up from 70.4% at issuance. Similarly, the WA appraised stabilized LTV is 70.5%, up from 61.3% at issuance.

Through January 2023, the collateral manager had advanced $45.9 million in loan future funding to the remaining six individual borrowers to aid in property stabilization efforts. Only $1.8 million of unadvanced loan future funding proceeds allocated to the borrower of the Capitol Center loan remains outstanding. The loan is secured by an office property in downtown Denver, Colorado, with the remaining funds allocated for leasing costs; however, the loan is in special servicing after the borrower did not repay the loan at maturity in December 2022. According to the servicer, the borrower is also entertaining the idea of converting the property to multifamily use. As such, DBRS Morningstar is uncertain as to whether the remaining funds would be available to the borrower given the significant change in the business plan combined with the maturity default.

The largest loan in special servicing, Mural Park (Prospectus ID#8; 28.3% of the current trust balance), is secured by two redeveloped mixed-use buildings (office and retail) in the Pilsen neighborhood on the southwest side of Chicago. The loan transferred to special serving in May 2022 after the borrower was unable to close a loan with a new lender, which would have refinanced the subject debt in full. The loan remains outstanding for the January 2022 debt service payment, with total advances outstanding of $3.1 million. The property was re-appraised in June 2022 with an in-place valuation of $34.9 million, equating to a current total loan-exposure-to-value ratio of 101.8%. At this time, there is no projected resolution date for the loan; however, the servicer is dual tracking foreclosure and a workout with the borrower strategies. The June 2022 appraisal also provided a projected stabilized value of $49.3 million by July 2025; however, DBRS Morningstar notes the heightened execution risk for the sponsor as it has been unable to stabilize the property to date and has no available future funding dollars to execute additional new leases. DBRS Morningstar liquidated the loan from the trust in its most recent analysis, resulting in a loss severity approaching 20.0%.

The second-largest loan in special servicing, 158 Lafayette (Prospectus ID#4; 25.0% of the current trust balance), is secured by a six-story, mixed-use (office with ground floor retail) building in the Soho neighborhood of Lower Manhattan. The loan transferred to special servicing in May 2021 because of delinquent payments; however, the borrower had a history of late payment issues with an initial forbearance executed in July 2020. The loan remains pending for the November 2020 payment, and according to a January 2023 update from the servicer, it is pursuing a foreclosure resolution strategy, which was filed in February 2022 and is expected to be granted in Q2 2023. The property was last re-appraised in November 2021 with an in-place valuation of $19.0 million, equating to a current total loan exposure ratio of 169.5%. DBRS Morningstar liquidated the loan from the trust in its most recent analysis, resulting in a loss severity approaching 60.0%.

The remaining two loans are on the servicer’s watchlist, the largest of which, ArrowPoint II & III (Prospectus ID#12; 10.3% of the current pool balance), is secured by an office property in Charlotte, North Carolina. The loan was flagged for its upcoming January 2023 maturity date. According to the servicer, the borrower and lender have agreed to terms to allow the borrower to exercise the second, and final, one-year loan extension option to January 2024. Terms have not been made public but are expected to include a curtailment of the loan, deposits into the debt service shortfalls and leasing costs reserves, and the purchase of a 12-month interest rate cap agreement on the floating-rate loan.

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 (May 17, 2022).

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. 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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