DBRS Morningstar Confirms All Ratings on Ready Capital Mortgage Financing 2021-FL6, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by Ready Capital Mortgage Financing 2021-FL6, LLC (the Issuer) as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance, as well as the increased credit support to the bonds since issuance as a result of successful loan repayment. Since issuance, there has been collateral reduction of 9.0%. 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 52 floating-rate mortgage assets with an aggregate cutoff date balance of $652.5 million secured by 55 mortgaged properties. The majority of assets were in transition with stated business plans to increase property cash flow and value. The collateral pool for the transaction is static; however, the Issuer has the right to use principal proceeds to acquire funded loan future funding participations subject to stated criteria during the Permitted Funded Companion Participation Acquisition Period. This period is expected to end with the July 2023 Payment Date. As of the May 2023 remittance, the pool comprises 30 loans secured by 31 properties with a cumulative trust balance of $571.9 million. There was approximately $22.2 million in the Permitted Funded Companion Participation Account.

The transaction is concentrated by property type, as 26 loans are secured by multifamily properties, representing 93.9% of the current cumulative trust loan balance. The remaining loans are secured by mixed-use, retail, and industrial collateral. The transaction benefits as no loans are secured by office properties. In comparison, as of the March 2022 reporting, loans secured by multifamily properties represented 90.7% of the trust balance while loans secured by industrial properties represented 5.3% of the trust balance.

The remaining loans are primarily secured by properties in suburban markets. Twenty-two loans, representing 81.1% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional five loans, representing 13.3% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market. In comparison, in March 2022, properties in suburban markets represented 80.6% of the collateral and properties in urban markets represented 12.6% of the collateral.

Leverage across the pool has remained relatively in line with issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 74.5%, with a current WA stabilized LTV ratio of 66.2%. In comparison, these figures were 73.2% and 65.5%, respectively, at issuance and 73.4% and 65.6%, respectively, as of March 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through April 2023, the lender has advanced cumulative loan future funding of $36.6 million to 28 of the remaining 30 individual borrowers to aid in property stabilization efforts, excluding any funds advanced at loan closing as working capital. The largest advance ($5.8 million) has been made to the borrower of the 79 Metcalf Apartments loan, which is secured by a multifamily property in Overland Park, Kansas. Funds were advanced to the borrower to complete capital improvements across the property as its business plan is to renovate all existing units, convert previous storage space to 20 additional units, and upgrade common areas and property exteriors. The loan is currently on the servicer’s watchlist for a low debt service coverage ratio (DSCR), which was 0.53 times at YE2022. Business interruption was expected at issuance as the borrower progresses through its business plan to upgrade units and bring down units back online. At YE2022, the property was 85.0% occupied with an average rental rate of $1,037/unit. The loan remains current as the borrower is funding shortfalls out of pocket. The loan was also modified in April 2022 to provide the borrower with an additional $100,000 into the working capital reserve, which DBRS Morningstar views as credit neutral.

An additional $26.2 million of the loan future funding allocated to 29 of the remaining individual borrowers remains available. The largest portion of available funds, $3.6 million, is allocated to the borrower of the Desert Gardens loan, which is secured by a multifamily property in Glendale, Arizona. The available funds are for the borrower’s total $5.3 million capital improvement plan, which includes the renovation of all unit interiors as well as upgrades to property amenities and exteriors. Total loan future funding of $6.9 million included a $1.7 million earnout that was released to the borrower 30 days after loan closing to accommodate a 1031 exchange.

As of the May 2023 remittance, no loans are in special serving and eight loans are on the servicer’s watchlist, representing 21.7% of the current trust balance. The loans have been flagged for poor financial performance with below breakeven DSCRs and declining occupancy rates; however, all loans remain current and performance is ultimately expected to improve as borrowers complete their business plans to increase rental rates, occupancy and cash flow.

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 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

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/North American CMBS Insight Model Version 1.1.0.0 (March 16, 2023)
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].