DBRS Morningstar Confirms All Ratings on CLNC 2019-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by CLNC 2019-FL1, Ltd. as follows:

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

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 37.2% since issuance. The collateral reduction serves as a mitigant to the increased concentration of loans secured by office properties across the transaction, as the borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at loan maturity. As of March 2023 reporting, there are seven loans secured by office properties in the transaction, representing 41.7% of the current trust balance. 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 pool’s collateral initially consisted of 21 floating-rate loans secured by cash flowing assets, many of which were in a period of transition with plans to stabilize and improve asset values. At issuance, the cut-off balance was $1.0 billion, with an additional $124.9 million of available future funding commitments held outside of the trust. The transaction included a 24-month reinvestment period, which expired in October 2021. Following this date, the bonds began to amortize sequentially with loan repayments and scheduled loan amortization.

As of the March 2023 remittance, there were 17 loans in the transaction with a current trust balance of $632.6 million. Since DBRS Morningstar’s previous rating action in November 2022, five loans (Spice Creek, Turing at the Fields, Paragon LIC, Sierra Vista, and Watermarket), totaling $233.3 million, have been repaid from the transaction. Only six of the original 21 loans, which represent 52.3% of the current trust balance, remain in the transaction. Beyond the office concentration in the transaction noted above, there are seven multifamily properties, representing 30.5% of the current pool balance, and one hotel property, representing 15.8% of the current pool balance. In comparison with the pool composition in April 2022, 13 loans, representing 46.1% of the trust, were secured by multifamily properties, six loans, representing 34.5% of the trust, were secured by office properties, and one loan, representing 11.0% of the trust, was secured by a hotel property.

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 March 2023, there were 13 loans, representing 74.9% of the cumulative loan balance, secured by properties in suburban markets. The remaining four loans, representing 25.1% of the cumulative loan balance, are located in urban markets, defined by DBRS Morningstar as markets with a DBRS Morningstar Market Rank of 6, 7, or 8. These markets historically have shown greater liquidity and demand.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 70.0% and a WA stabilized LTV of 61.2%. In comparison, these figures were 68.3% and 66.5%, respectively, at closing. As many of these appraisals were conducted prior to transaction issuance in 2019, there is the possibility that select property values may have decreased given the current interest rate and capitalization rate environment.

Through February 2023, the collateral manager advanced $61.5 million in loan future funding to 14 individual borrowers to aid in property stabilization efforts. The largest advance ($12.6 million) was made to the borrower of the Central Park Plaza loan, which is secured by a six-building office complex totaling 302,471 square feet (sf) in San Jose, California. The borrower used advanced loan proceeds to fund various capital expenditures to improve the property’s overall quality as well as to fund leasing costs. An additional $45.6 million of unadvanced loan future funding allocated to 15 individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars ($7.7 million) is allocated to the borrower of the 1201 Connecticut loan, which is secured by a Class B office property in the Dupont Circle neighborhood of Washington, D.C. The loan represents the largest loan on the servicer’s watchlist and is being monitored for performance-related concerns after the occupancy rate decreased to 58.4% as of December 2022 from 66.0% at issuance. The drop in occupancy along with declining tenant rents have resulted in a debt service coverage ratio (DSCR) of 0.41 times (x) as of September 2022. In addition to the performance concerns, the loan also has maturity risk as it matured in February 2023. According to the collateral manager, the servicer and borrower continue to negotiate loan extension terms. As part of its analysis and given the ongoing concerns with office properties, DBRS Morningstar applied a 30% haircut to the pre-pandemic projected stabilized appraisal value, which resulted in a loan expected loss in excess of 12.0%.

As of March 2023, there were no loans in special servicing; however, there were five loans on the servicer’s watchlist, representing 33.2% of the pool balance. The second-largest loan on the servicer’s watchlist, Hill Carlsbad Office Portfolio, is being monitored for maturity risk as the loan matured in March 2023. At issuance, the loan was secured by four Class B+ office and flex research and development buildings totaling 531,873 sf in Carlsbad, California. In January 2023, the 2210 Research Building was sold, resulting in a principal paydown of $29.1 million. DBRS Morningstar expects the borrower and lender to agree to loan extension terms as the borrower made a principal payment in the amount of $5.8 million, which was reflected in the March 2023 remittance. The property was 86.2% occupied as of the January 2023 rent roll, and the YE2022 DSCR was 1.31x. In its analysis, DBRS Morningstar applied a 30% haircut to the pre-pandemic projected stabilized appraisal value, which resulted in a loan expected loss of approximately 8.0%.

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).

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 (March 16, 2023), 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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