DBRS Morningstar Confirms Ratings on Ready Capital Mortgage Financing 2022-FL8, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by Ready Capital Mortgage Financing 2022-FL8, 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 evidenced by stable performance and leverage metrics. Additionally, the trust continues to be primarily secured by the multifamily collateral. 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 consisted of 67 floating-rate mortgages secured by 89 mostly transitional properties with a cut-off date balance totaling $1.22 billion. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the August 2023 remittance, the pool comprised 57 loans secured by 78 properties with a cumulative trust balance of $1.05 billion, representing collateral reduction of 4.4% since issuance. Since issuance, 10 loans with a prior cumulative trust balance of $133.4 million have been successfully repaid from the pool, including six loans totaling $103.6 million that have repaid since the previous DBRS Morningstar rating action in November 2022.

The transaction is static with a two-year Permitted Funded Companion Participation Acquisition Period (Acquisition Period), whereby the Issuer can purchase funded loan participations into the trust. The Acquisition Period is scheduled to end with the February 2024 Payment Date, and as of August 2023, the Participation Acquisition Account had a balance of $35.2 million.

The transaction is concentrated by property type as 48 loans, representing 90.3% of the current trust balance, are secured by multifamily properties with eight loans (8.2% of the current trust balance) secured by industrial properties, and one loan (1.5% of the current trust balance) secured by a student housing property. In comparison with the pool at closing, multifamily properties represented 91.3% of the collateral, industrial properties represented 7.3% of the collateral, and student housing properties represented 1.3% of the collateral.

The pool is primarily secured by properties in suburban markets, as defined by DBRS Morningstar, with 51 loans, representing 88.7% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional four loans, representing 8.6% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 and 7, denoting urban markets, while two loans, representing 2.7% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting tertiary markets. In comparison at closing, properties in suburban markets represented 90.1% of the collateral, properties in urban markets represented 7.3% the collateral, and properties in tertiary markets represented 2.6% of the collateral.

Leverage across the pool has remained consistent as of August 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 74.9%, with a current WA stabilized LTV of 65.4%. In comparison, these figures were 74.6% and 65.4%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through August 2023, the lender had advanced cumulative loan future funding of $53.4 million to 42 of the 57 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $4.2 million, has been made to the borrower of the Highland Park and Residences at Turnberry loan. The loan is secured by a portfolio of two multifamily properties, totaling 454 units, in Reynoldsburg, Ohio, and Pickerington, Ohio, respectively. The advanced funds have been used to fund the borrower’s planned $5.7 million planned capital expenditure (capex) plan across the portfolio. An additional $1.5 million of future funding remains available to the borrower to continue its capex plan.

An additional $73.3 million of loan future funding allocated to 52 of the outstanding individual borrowers remains available. The largest portions are allocated to the borrowers of the Chronos Portfolio ($6.6 million) and MN Brownstone Portfolio ($5.4 million) loans. The Chronos Portfolio loan is secured by a portfolio of five multifamily properties totaling 1,070 units throughout the Dallas metro area. The available funds are for the borrower’s capex plan across the portfolio. Through August 2023, the lender had advanced $3.9 million of future funding to the borrower. The MN Brownstone Portfolio is secured by a portfolio of eight multifamily properties totaling 332 units in Minneapolis. The available funds are for the borrower’s capex plan across the portfolio. Through August 2023, the lender had advanced $3.5 million of loan future funding to the borrower.

As of the August 2023 remittance, there are no delinquent loans or loans in special servicing, and there are 21 loans on the servicer’s watchlist, representing 30.9% of the current trust balance. The loans have primarily been flagged for below breakeven debt service coverage ratios and upcoming loan maturity. Performance declines noted in the pool are expected to be temporary as multifamily units are being taken offline by respective borrowers to complete interior renovations. In the next six months, seven loans, representing 3.0% of the current trust balance are scheduled to mature. DBRS Morningstar has not received confirmation from the collateral manager regarding individual borrower’s exit strategies; however, all loans have remaining extension options.

Five loans, representing 14.6% of the current trust balance, are sponsored by Tides Equities (Tides). In a June 2023 article published by The Real Deal, the principals of the firm noted it would likely need to conduct a capital call from its investors in order to fund debt service shortfalls across its portfolio given the rise in floating interest rate debt. All five loans are current, and DBRS Morningstar is not aware that any of the loans have been modified. In its analysis, however, DBRS Morningstar made a negative adjustment to the sponsor strength across all five Tides sponsored loans, resulting in individual loan expected loss levels approximately 1.5 times greater than the overall expected loss for the RCMF 2022-FL8 transaction.

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 the 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.

DBRS, Inc.
22 West Washington Street
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 (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

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