DBRS Morningstar Confirms Credit Ratings on All Classes of Ready Capital Mortgage Financing 2021-FL7, LLC

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by Ready Capital Mortgage Financing 2021-FL7, LLC as follows:

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

All trends are Stable.

The credit 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 76 floating-rate mortgages secured by 89 mostly transitional properties with a cut-off date balance totaling $927.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the September 2023 remittance, the pool comprised 54 loans secured by 67 properties with a cumulative trust balance of $849.8 million, representing collateral reduction of 8.4% since issuance. Since issuance, 22 loans with a prior cumulative trust balance of $163.3 million have been successfully repaid from the pool, including 13 loans totaling $103.1 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 November 2023 Payment Date, and, as of September 2023, the Participation Acquisition Account had a balance of $8.7 million.

The transaction is concentrated by property type as 46 loans, representing 91.0% of the current trust balance, are secured by multifamily properties with six loans (5.6% of the current trust balance) secured by industrial properties, one loan (2.3% of the current trust balance) secured by a limited service hotel, and one loan (1.1% of the pool) secured by a self-storage property. In comparison with the pool at closing, multifamily properties represented 91.7% of the collateral, industrial properties represented 4.4% of the collateral, lodging properties represented 1.9% of the collateral, and self-storage properties represented 1.0% of the collateral.

The pool is primarily secured by properties in suburban markets, as defined by DBRS Morningstar, with 44 loans, representing 75.0% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional five loans, representing 14.1% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 and 7, denoting urban markets, while five loans, representing 10.8% 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 77.6% of the collateral, properties in urban markets represented 11.9% the collateral, and properties in tertiary markets represented 10.4% of the collateral.

Leverage across the pool has remained consistent as of September 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 72.2%, with a current WA stabilized LTV of 64.8%. In comparison, these figures were 72.9% and 65.3%, 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 September 2023, the lender had advanced cumulative loan future funding of $71.1 million to 46 of the 54 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $7.7 million, has been made to the borrower of the 835-864 West Barry Avenue loan (Prospectus ID#9, 3.8% of the pool). The loan is secured by a 115-unit apartment complex in Chicago. The advanced funds have been used to fund the borrower’s planned $10.3 million planned capital expenditure (capex) plan across the portfolio. Less than $100,000 of future funding remains available to the borrower to complete its capex plan.

An additional $44.5 million of loan future funding allocated to 46 individual borrowers remains available. The largest portions are allocated to the borrowers of the Lofts at the River (Prospectus ID#41, 1.1% of the pool) ($6.8 million) and Main Street Village (Prospectus ID#1, 7.6% of the pool) ($2.9 million) loans. The Lofts at the River loan is secured by a 119-unit multifamily property in Reno, Nevada. The available funds are to be used for unit-interior renovations totaling $10.4 million ($74,000 per unit) across all 119 units. The sponsor will spend an additional $1.3 million to convert the first floor retail space into 22 loft style studio apartments. Through August 2023, the lender had advanced $710,000 of future funding to the borrower. The Main Street Village loan is secured by a 400-unit multifamily property in Granger, Indiana. The sponsor’s business plan is to invest $6.0 million toward capital improvements across the property, consisting of $3.4 million toward unit interiors to 305 apartments, $1.9 million toward deferred maintenance, and approximately $628,000 toward property-wide upgrades. Through September 2023, the lender had advanced $3.0 million of loan future funding to the borrower.

As of the September 2023 remittance, there are three loans, representing 6.3% of the pool that are delinquent and one loan, representing 2.0% of the pool, that is in special servicing. Additionally, there are 19 loans, representing 26.4% of the pool, that are being monitored on the servicer’s watchlist. The loans have primarily been flagged by the servicer for below breakeven debt service coverage ratios, low occupancy rates, deferred maintenance issues, 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.

The one loan in special servicing, Highland Midtown (Prospectus ID#19, 2.0% of the pool), is secured by a 165-unit Class B, high-rise multifamily property in Little Rock, Arkansas. The sponsor’s business plan entails full renovations to 71 units ($10,000 per unit) and partial renovations to the other 94 units ($5,000 per unit). Per special servicer commentary, the loan transferred to special servicing in February 2023 for imminent monetary default, shortly after the borrower sent a hardship letter requesting that 2023 interest payments, rate cap escrow requirements, and the February 2023 debt yield test be forgiven or waived. According to the May 2023 rent roll, the property was 65.0% occupied with an average rental rate of $982 per unit, as compared with issuance when the property was 85.2% occupied with average in-place rental rate of $977 per unit. As of September 2023, approximately $544,000 of future funding had been advanced to the borrower, with $1.1 million still outstanding. The special servicer is reportedly still negotiating with the borrower and a workout strategy is still to be determined. In its analysis for this review, DBRS Morningstar applied increased probability of defaults to all three delinquent loans, resulting in a weighted-average expected loss that was approximately 1.7 times greater than the pool average.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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 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 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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 protected].