DBRS Morningstar Downgrades One Class of Ready Capital Mortgage Financing 2022-FL9, LLC

DBRS, Inc. (DBRS Morningstar) downgraded its rating on one Class of Ready Capital Mortgage Financing 2022-FL9, LLC as follows:

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

DBRS Morningstar also confirmed its ratings on the remaining classes 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)

All classes have Stable trends with the exception of Class G as its rating 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 G is the result of ongoing accumulated interest shortfalls, which have persisted since August 2022. In April 2023, DBRS Morningstar placed the rating on Class G Under Review with Negative Implications as the interest shortfalls had been outstanding for more than six consecutive months. As per DBRS Morningstar’s Structured Finance and Covered Bonds Ratings Committee Global Procedure dated October 2022, the tolerance threshold for a DBRS Morningstar credit rating in the BB or B rating category is six months. The shortfalls stem from the difference in the floating interest rate benchmark between the bonds and some of the individual loans remaining in the transaction. As of July 2023 reporting, cumulative interest shortfalls on the Class F Notes were repaid; however, cumulative interest shortfalls on Class G total $1.5 million.

DBRS Morningstar notes there are no delinquent or specially serviced loans in the transaction and the rating downgrade to Class G is strictly related to the outstanding interest shortfalls rather than credit concerns with the outstanding collateral. According to the collateral manager, all remaining loans in the transaction are expected to transition to the Secured Overnight Financing Rate, the same benchmark rate on the rated bonds, in the near term. As this occurs, the outstanding interest shortfalls to Class G are expected to recouped over time. DBRS Morningstar expects to revisit the rating of Class G once the cumulative interest shortfall is fully recouped.

The initial collateral consisted of 25 floating-rate mortgages secured by 75 transitional properties totaling $754.2 million, excluding $82.3 million of remaining future funding commitments. Most loans were in a period of transition with plans to stabilize and improve asset value. The collateral pool for the transaction is static with no ramp-up period or reinvestment period; however, the Issuer can acquire funded loan participation interests into the trust subject to stated criteria. The Permitted Funded Companion Participation Acquisition Period ends with the June 2024 Payment Date.

As of the July 2023 remittance, the pool comprises 21 loans secured by 70 properties with a cumulative trust balance of $650.4 million. The balance of the Permitted Funded Companion Participation Acquisition Account is $58.6 million. Since issuance, four loans with a former cumulative trust balance of $134.3 million have been successfully repaid from the pool, resulting in collateral reduction of 5.5%. The transaction is concentrated by property type as 18 loans are secured by multifamily properties, totaling 86.1% of the current cumulative trust loan balance, while the remaining three loans secured by self-storage, student housing, and industrial properties, totaling 9.3% of the current cumulative trust loan balance.

The loans are primarily secured by properties in suburban markets. Sixteen loans, representing 80.2% of the current cumulative trust loan balance, 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 four loans, representing 12.4% of the current cumulative trust loan balance, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market, while one loan, representing 2.8% of the pool, is secured by a property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, at issuance, properties in suburban markets represented 78.7% of the collateral, properties in urban markets represented 12.8% of the collateral, and properties tertiary markets represented 8.4% of the collateral.

Leverage across the pool has also remained consistent from the pool as of July 2023 reporting as the current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 67.5%, with a current WA stabilized LTV of 63.0%. In comparison, these figures were 71.6% and 67.4%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through July 2023, the lender had advanced cumulative loan future funding of $29.4 million to 13 of the 19 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $8.8 million, has been made to the borrower of the Renaissance Business Park loan, which is secured by a Class B industrial property totaling 360,458 square feet in Fort Pierce, Florida. Funds were advanced to the borrower to complete various capital expenditure items and fund leasing costs. As of the March 2023 rent roll, the property was 60.4% occupied, up from 50.9% at issuance.

An additional $41.0 million of loan future funding allocated to all 19 individual borrowers remains available. The largest portion of available funds, $13.0 million, is allocated to the borrower of the Premier Apartments and 300 Riverside loan, which is secured by two adjoining multifamily properties totaling 500 units in Austell, Georgia. The loan future funding is available to the borrower to fund interior and exterior upgrades across both properties.

As of the July 2023 remittance, there are no delinquent or specially serviced loans; however, there are 10 loans on the servicer’s watchlist, representing 33.5% of the current trust balance. The loans have been flagged for a variety of reasons including upcoming maturity dates and low occupancy rates or cash flow, which may or may not have resulted in cash flow sweeps being initiated. The largest loan on the servicer’s watchlist, Trail Run Apartments, is secured by a 312-unit multifamily property in Vernon, Connecticut. The loan is currently on the servicer’s watchlist for the July 2023 maturity date; however, according to servicer commentary, the borrower will exercise the first of two six-month extension options as it continues to season operations prior to completing its business plan to secure agency take-out financing. As of YE2022, the property was 92.3% occupied.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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.

DBRS, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit 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 (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687

-- 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].