DBRS Morningstar Confirms All Classes of LoanCore 2019-CRE2 Issuer Ltd.

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of floating-rate notes issued by LoanCore 2019-CRE2 Issuer Ltd. (the Issuer):

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

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 50.9% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as five loans are secured by office properties (41.0% of the current pool 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, resulting in lower than expected cash flows. 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 April 2023 remittance, the trust reported an outstanding balance of $519.5 million with 13 loans remaining in the trust. Of the 13 loans in the transaction, five loans, representing 46.6% of the current pool balance, have pari passu companion notes securitized in the LoanCore 2019-CRE3 transaction, also rated by DBRS Morningstar. Since issuance, 32 loans have repaid in full, and as the Reinvestment Period ended in May 2021, loan payoffs were used to subsequently pay down the transaction sequentially. Since the previous DBRS Morningstar rating action in November 2022, there has been collateral reduction of $34.9 million, including the full repayment of six loans. The remaining loans in the transaction beyond the office concentration noted above include three loans secured by hotel properties (22.5% of the current trust balance), two loans secured by multifamily properties (17.7% of the current trust balance), two loans secured by mixed-use properties (12.9% of the current trust balance), and one loan secured by a retail property (6.0% of the current pool balance).

Ten of the 13 loans, representing 84.6% of the current trust balance, have scheduled maturity dates in 2023. Of these loans, four are structured with additional extension options of 12 months, provided the loan meets the required performance-based minimum debt service coverage ratio (DSCR), minimum debt yield and/or maximum loan-to-value ratio (LTV) tests. Of the six loans that do not have extension options, one loan, 60 Tenth Avenue (Prospectus ID#41, 6.1% of the current pool) is past its maturity date and has transferred to special servicing. The loan is secured by an unanchored retail property in the Meatpacking District of Manhattan that is currently 100% vacant. The remaining five loans with 2023 maturity dates are either in the process of securing refinancing or negotiating loan modifications in order to extend the loan to provide more time to stabilize their respective properties. While loan modification discussions are in preliminary stages it is likely that any potential maturity extension will require an additional cash equity infusion.

The remaining loans are primarily secured by properties in urban and suburban markets. Nine loans representing 81.2% 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 three loans representing 18.8% of the pool are secured by properties with a DBRS Morningstar Market Rank of 3 or 4, which denotes a light suburban market. In comparison with the pool, composition at issuance properties in urban markets represented 61.1% of the collateral, and properties in suburban markets represented 38.9% 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.

As of March 2023, the lender has advanced $34.1 million in loan future funding to six of the remaining individual borrowers to aid in property stabilization efforts, with the largest advances made to the borrowers of the El Centro ($15.6 million) and 183 Madison Avenue ($9.5 million) loans. A majority of the future funding advanced for the El Centro loan was used to cover debt service payment shortfalls in order to give the sponsor time to lease the property up to stabilized levels. Future funding for the 183 Madison Avenue property was primarily used for TI/LC funds. Across the eight loans that are structured with future funding, approximately $42.8 million remains outstanding as of March 2023. These funds are mainly to be used to fund capital expenditures, leasing costs, and operating shortfalls.

As of the April 2023 remittance, there is one loan, representing 6.0% of the pool, in special servicing, and three loans, representing 29.1% of the pool, on the servicer’s watchlist. All but one loan have received some form of loan modification or forbearance over the past three years, largely stemming from impacts of the COVID-19 pandemic. Loan modifications have included terms such as waivers on certain extension option conditions and the allowance of borrowers to access funds held in reserves to cover shortfalls or rent relief for certain tenants. The aforementioned 60 Tenth Avenue loan, transferred to special servicing in April 2023 for imminent maturity default. The unanchored retail property has largely operated as incubator and “pop up” space for retailers as commitments have generally ranged from one week to six months. The sponsor is targeting more permanent users but has not been successful in generating any leasing activity as the property remains vacant as of April 2023. The three loans on the servicer’s watchlist are all being monitored for upcoming maturities. In addition to the three watchlist loans, there is also one loan, Sunset PCH (Prospectus ID#13, 6.1% of the current trust balance), that is flagged as delinquent. This loan is secured by an office property in Los Angeles. The sponsor’s business plan was to leverage the property’s recent renovation and to increase occupancy to market levels. The property’s former largest tenant, Bay Club (previously 21.1% of net rentable area), vacated upon its lease expiration in June 2022, which decreased occupancy to 26.5%. The sponsor is reportedly negotiating with a replacement gym tenant that will pay significantly more base rent than Bay Club had paid. DSCR was reported at just 0.27 times as of the trailing 12-month period ended November 30, 2022, and cash flow remains well below the DBRS Morningstar stabilized figure.

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 (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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0, https://www.dbrsmorningstar.com/research/410913

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022), https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022), https://www.dbrsmorningstar.com/research/407008

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