DBRS Morningstar Confirms Ratings on All Classes of TRTX 2019-FL3 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by TRTX 2019-FL3 Issuer, Ltd. as follows:

-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (high) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (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 60.6% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as seven loans are secured by office properties (64.0% of the current trust balance). As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. While all loans remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. 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].

As of the March 2023 remittance, the trust reported an outstanding balance of $485.2 million with nine loans remaining in the trust. The transaction had a 24-month reinvestment period that ended in October 2021. Two of the remaining nine loans, representing 17.0% of the current trust balance, were in the transaction at closing. Since the previous DBRS Morningstar rating action in November 2022, there has been collateral reduction of $229.4 million, including the full repayment of four loans. The remaining loans in the transaction beyond the office concentration noted above include one loan secured by a mixed-use property (22.6% of the current trust balance) and one loan secured by a portfolio of multifamily properties (13.4% of the current trust balance). The transaction’s property type concentration has remained relatively stable since June 2022 when 64.4% of the trust balance was secured by office collateral, 13.2% of the trust balance was secured by hotel collateral, 12.4% of the trust balance was secured by mixed-use collateral, and 10.1% of the trust balance was secured by multifamily collateral.

Seven of the 10 loans, representing 78.0% of the current trust balance, have scheduled maturity dates in 2023. Of these loans, three are structured with additional extension options of 12 months, which the borrower may exercise if its respective property meets the required performance-based minimum debt service coverage ratio (DSCR), minimum debt yield, and/or maximum loan-to-value ratio tests. Loans that no longer have an extension option remaining include 1825 Park, 300 Lafayette, 888 Broadway, and Lenox Park Portfolio, which cumulatively account for 40.6% of the current trust balance.

The 1825 Park loan (Prospectus ID#28; 1.0% of the current trust balance) is secured by an office property in the Harlem neighborhood of Manhattan, New York. The loan matures in April 2023 after the borrower and lender agreed to a 60-day extension in February 2023. The loan is currently on the servicer’s watchlist for the upcoming maturity and the property was 81.0% occupied as of YE2022, according to the collateral manager; however, property operations currently do not cover debt service. DBRS Morningstar did not receive confirmation regarding the borrower’s exit strategy; however, the collateral manager noted that further loan extensions are possible if terms between the lender and borrower are mutually beneficial, subject to the servicing standard.

The 300 Lafayette loan (Prospectus ID#23; 22.6% of the current trust balance) is secured by a mixed-use property in the SoHo neighborhood of Lower Manhattan, New York. The loan matures in September 2023 and is discussed in greater detail below as it is the largest loan on the servicer’s watchlist.

The 888 Broadway loan (Prospectus ID#4; 13.4% of the current trust balance) is secured by an office property in the Gramercy Park/Union Square neighborhood of Manhattan. The loan matures in December 2023 and, according to the collateral manager, the property was 72.9% leased to three tenants at YE2022. The collateral manager provided a YE2022 net operating income (NOI) of $13.0 million based on trailing one-month revenue and trailing 12-month expenses, equating to a 1.15 times (x) DSCR. The borrower appears committed to the property as it has paid the loan down by $25.0 million over multiple extensions, as the loan has a current A note balance of $175.0 million. The property was valued at $240.0 million at loan closing in 2019, implying a 5.4% capitalization rate using the NOI noted above. While the current market value may be lower, DBRS Morningstar believes there remains sufficient market equity in the transaction.

The Lenox Park Portfolio loan (Prospectus ID#2; 3.5% of the current trust balance) is secured by four office properties in Brookhaven, Georgia. The portfolio originally consisted of five properties; however, one of the larger assets was sold in Q2 2022, and the A note was paid down by $72.0 million and an additional $65.3 million was swept into a leasing reserve. In March 2023, the A note was paid down by an additional $75.6 million from existing reserves, resulting in a currently funded A note balance of $72.4 million. In conjunction with the paydown of the loan, existing loan future funding for accretive leasing was reduced to $10.0 million from $42.3 million. The collateral manager report noted the YE2022 leased rate across the property was 81.8% and the YE2022 NOI was $12.0 million based on trailing one-month revenue and trailing 12-month expenses, equating to a 2.39x DSCR taking into account the recent loan repayment. The four remaining properties had a combined property value of $174.5 million at loan closing in 2018, implying a 6.9% capitalization rate using the NOI noted above. While the current market value may be lower, DBRS Morningstar also believes there remains sufficient market equity in the transaction.

The remaining loans are primarily secured by properties in urban and suburban markets. Seven loans, representing 81.9% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6, 7, or 8, and two loans representing 18.1% of the pool are secured by properties with a DBRS Morningstar Market Rank of 4 or 5, which denotes a suburban market. In comparison with the pool composition in June 2022, properties in urban markets represented 61.2% of the collateral, and properties in suburban markets represented 38.8% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

In total, the lender has advanced $165.2 million in loan future funding to eight of the remaining individual borrowers to aid in property stabilization efforts, with the largest advances made to the borrowers of the 888 Broadway ($43.6 million), 300 Lafayette ($36.2 million), and 575 Fifth Avenue ($32.5 million) loans. All loans are secured by office or mixed-use properties in Manhattan with the advanced funds used to pay for capital improvements and leasing costs. An additional $52.3 million of loan future funding allocated to eight borrowers remains outstanding. The largest portion of available dollars ($14.5 million) is allocated to the borrower of the 1525 Wilson loan for capital improvements and leasing costs. The loan is secured by an office property in Arlington, Virginia.

No loans are in special servicing; however, two loans, representing 23.6% of the current trust balance, are on the servicer’s watchlist for upcoming maturity or performance issues. The loans are generally on the servicer’s watchlist for upcoming maturity. Additionally, seven of the remaining loans, representing 57.1% of the current trust balance, have either been modified or the borrowers have received a forbearance since loan origination. Loan modifications and forbearances were the preferred resolution strategy at the onset of the pandemic when commercial property operations were stressed as well as at loan maturity, as the required performance-based tests to extend loans were often waived.

The 300 Lafayette loan was flagged for a May 2023 maturity; however, according to the Q4 2022 collateral manager report, it appears the loan was modified in September 2022 when the borrower made a $2.0 million loan principal curtailment, and the loan maturity was extended to September 2023. The report also noted the loan was in technical default as the borrower had not provided proof of a new interest rate cap agreement; however, according to an update from the collateral manager, a rate cap agreement with a 3.50% strike price is in place. The property remains 77.1% occupied, as Microsoft occupies the entire office component on a long-term lease expiring in June 2036, while the retail component remains vacant. According to the collateral manager, the property reported YE2022 NOI of $3.6 million based on trailing one-month revenue and trailing 12-month expenses, equating to a DSCR of 0.45x. The loan was originally structured with $28.5 million of future funding for debt service shortfalls, and as of YE2022, $2.0 million of debt service advances remained available to the borrower, equal to roughly three months’ worth of debt service payments. There is also $6.5 million of loan future funding available to the borrower to fund leasing costs for the vacant retail space, equating to $345.00 per square foot (psf). In its original analysis, DBRS Morningstar assumed necessary leasing costs ranging from $100.00 psf to $225.00 psf for the three ground-floor retail spaces and $100.00 psf for the below-grade space. The assumptions were based on 15-year lease terms with starting rental rates ranging from $300.00 psf to $500.00 psf for ground-floor space and $100.00 psf for below-grade space.

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; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)
https://www.dbrsmorningstar.com/research/410913/north-american-cmbs-multi-borrower-rating-methodology

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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