DBRS Limited (DBRS Morningstar) placed its ratings on the following six classes of Commercial Mortgage Pass-Through Certificates, Series 2020-RR1 issued by SBLAR Commercial Mortgage 2020-RR1 Under Review with Negative Implications:
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at CCC (sf)
In addition, DBRS Morningstar confirmed its ratings on the remaining classes as follows:
-- Class A-3 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
The trends on Classes A-3, A-AB, A-S, and X-A are Stable. With the Under Review with Negative Implications designation, there are no trends for Classes B, X-B, C, D, E. Additionally, Class F has a rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.
DBRS Morningstar downgraded its rating on Class F during its November 2022 review of this transaction, driven by the increased credit risk associated with the Clarion Suites Anchorage loan (Prospectus ID#7; 3.6% of the pool), which is in default and expected to be liquidated from the pool at a loss. Since that time, the pool’s overall performance has continued to deteriorate, as demonstrated by the considerable increase in concentration of loans in special servicing and on the servicer’s watchlist. The Class A-S certificate has a liquidated credit enhancement of approximately 28.0% based on the analysis for this review, suggesting that class, and the two classes above it in the waterfall (Classes A-3 and A-AB) remain well insulated from loss, supporting the rating confirmations and Stable trends with this review.
Most notably, the largest loan group in the pool, Emerald Bronx Multifamily Portfolio (the Emerald portfolio) (Prospectus ID#s 2, 3, 4, 5, 6, 10, 11, and 13; 27.0% of the pool), continues to report cash flows significantly below issuance expectations. In May and June 2023, six of the eight loans within the group (representing 22.5% of the pool) transferred to special servicing because of imminent monetary default, and, as of the August 2023 reporting, all six are flagged delinquent. The servicer recently finalized appraisals, dated June and August 2023 for the properties backing the six defaulted loans, all of which show sharp value declines from the issuance appraised values.
The transaction is highly exposed to a single sponsor, as both the Emerald portfolio and another group of loans, Gutman and Hoffman Multifamily Portfolio (Prospectus ID#s 9 and 12; 6.6% of the pool), have the same sponsor. That group of loans is also collateralized by the same property type, located in similar area as the Emerald portfolio and those loans are also exhibiting increased risk given the general performance declines for the collateral properties. Collectively, this sponsor’s loans represent 36.9% of the current pool balance. The high concentration makes the pool as a whole particularly vulnerable to issues with the sponsor or related entities handling property management and operations. DBRS Morningstar accounted for these increased risks in its analysis, which are the primary drivers for the negative pressure on the classes placed Under Review with Negative Implications.
As of the August 2023 reporting, 53 of the original 59 loans remain in the pool with an aggregate principal balance of $364.3 million, representing collateral reduction of 8.9% since issuance, as a result of loan amortization, loan repayments, and the liquidation of one loan from the trust. There are 17 loans, representing 29.5% of the pool, on the servicer’s watchlist, and seven loans, representing 26.2% of the pool, in special servicing.
The Emerald portfolio comprises eight loans secured by smaller portfolios of multifamily properties, typically classified as “workforce housing.” In total, the portfolio consists of 28 properties and 747 units in multiple neighborhoods within the Bronx. As previously noted, six of the eight loans transferred to special servicing in May and June 2023 for imminent monetary default with the sponsor, Emerald Equity Group (Emerald Equity) citing nonpaying tenants and inflated expenses as the source of the payment issues. The servicer noted that legal counsel is in the process of drafting a loan modification and, in the meantime, discussions with the sponsor regarding plans for correcting various property condition and general performance issues across the portfolio are ongoing. It is noteworthy that the servicer has stated the sponsor has expressed a willingness to forego litigation and turn the properties over to the lender if they are unable to make progress toward a resolution within an agreed-upon timeframe. DBRS Morningstar notes that the sponsor is having difficulty outside of the subject portfolios, with other defaults reported since 2020. In addition, the subject financing represented an $8.7 million cash out, with equity of just over $500,000 remaining. These factors could limit the overall commitment to cure the outstanding issues.
The most recent appraisals for the properties backing defaulted loans indicate weighted average (WA) value declines of approximately 60.0% when compared with the issuance appraised values. When considering these values in a hypothetical liquidation scenario, the resulting liquidated loss amounts suggest loss severities approaching 40.0% would be realized at disposition, eroding Classes E, F, and G in full and part of Class D. Given the performance declines for the properties backing the nondefaulted loans (with the same sponsor), DBRS Morningstar considers the risk of loss for Classes B and C to be significantly elevated in that liquidation scenario as well. DBRS Morningstar has requested copies of the updated appraisals to understand the valuation approach and drivers for such significant value declines in the few short years since the loan’s closing. At issuance, DBRS Morningstar noted the properties were generally in worn condition with dated fixtures and appliances; however, given the properties’ status as workforce housing, this isn’t necessarily out of the ordinary. It appears the sponsor may not have the experience or liquidity to address the issues outstanding, an additional factor contributing to the overall increased risks from issuance.
The Clarion Suites Anchorage loan is secured by a 112-room limited-service hotel in Anchorage, Alaska. The transaction closed at approximately the same time as government-imposed restrictions took effect in March 2020 because of the Coronavirus Disease (COVID-19) pandemic. The loan transferred to the special servicer in October 2020 and the lender subsequently modified the loan to interest-only (IO) payments for one year. While the loan modification provided temporary relief, performance failed to recover with the lender ultimately obtaining a final foreclosure judgment. The asset became real estate owned in December 2021. The hotel had an outstanding property improvement plan (PIP) that the borrower did not begin addressing before the pandemic, likely contributing to the declines in operational performance and value. The latest PIP cost estimates, which were provided in July 2022, totaled approximately $2.2 million. The special servicer noted that they are unable to fund the entirety of the required PIP with cash-on-hand and as such, discussions regarding a reduction in the scope of work are ongoing. As part of the 20-year franchise agreement signed with Choice Hotels at issuance, the bulk of the PIP is required to be complete by January 2024.
Operating performance has improved from the lows reported during the pandemic, with the property reporting YE2022 occupancy rate, average daily rate, and revenue per available room metrics of 57.5%, $163.6, and $94.1, respectively, which compare favorably with the YE2020 figures of 40.6%, $82.8, and $33.6. However, reported net cash flow (NCF) remains subdued with the YE2022 figure of $970,563, 42.7% lower than the issuance figure of $1.7 million. The most recent appraisal, dated March 2022, valued the property at $16.0 million, substantially lower than the issuance appraisal value of $22.0 million; however, given that occupancy and NCF at the property have remained stressed for an extended period, DBRS Morningstar notes that the collateral’s as-is value has likely declined further, elevating the credit risk to the trust. Based on a haircut to the most recent appraisal, DBRS Morningstar projects a loss severity in excess of 20.0% will be realized at liquidation.
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).
Classes X-A and X-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.
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.
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 firstname.lastname@example.org.
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 rating scale definition indicates that 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.
This rating action includes classes that have been placed Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.
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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 v 126.96.36.199 (https://www.dbrsmorningstar.com/research/410913)
Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)
DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022;
North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)
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)
A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at email@example.com.