DBRS Morningstar Confirms Credit Ratings on All Classes of CLNC 2019-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by CLNC 2019-FL1, Ltd. 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 increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 51.2% since issuance. The collateral reduction serves as a mitigant to the increased concentration of loans secured by office properties across the transaction, as the borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at respective loan maturity. As of November 2023 reporting, there are six loans secured by office properties in the transaction, representing 39.8% of the current trust balance. 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 as well as 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 pool’s collateral initially consisted of 21 floating-rate loans secured by cash-flowing assets, many of which were in a period of transition with plans to stabilize and improve asset values. At issuance, the cut-off balance was $1.0 billion, with an additional $124.9 million of available future funding commitments held outside of the trust. The transaction included a 24-month reinvestment period, which expired in October 2021. Following this date, the bonds began to amortize sequentially with loan repayments and scheduled loan amortization.

As of the November 2023 remittance, there were 15 loans in the transaction with a current trust balance of $491.0 million. Since DBRS Morningstar’s previous credit rating action in March 2023, three loans (The Blanchard Building, Fairmont Claremont, and 1201 Connecticut), totaling $197.7 million, have been repaid from the transaction. In addition, the Issuer completed a credit risk exchange and substituted the aforementioned 1201 Connecticut loan with the $52.3 million Hilton Inverness loan, which is secured by a 302-key, full-service resort hotel in Englewood, Colorado. Only three of the original 21 loans, which represent 27.0% of the current trust balance, remain in the transaction.

Beyond the office concentration noted above, there are seven multifamily properties, representing 39.3% of the current pool balance, followed by one hotel property, representing 10.7% of the current pool balance, and one mixed-use property, representing 10.2% of the current pool balance. In comparison with the pool composition in March 2023, seven loans, representing 41.7% of the trust, were secured by office properties; seven loans, representing 30.5% of the trust, were secured by multifamily properties; two loans, representing 12.0% of the trust, were secured by a mixed-use property; and one loan, representing 15.8% of the trust, was secured by a hotel.

In terms of property location, the transaction is concentrated by properties in suburban markets, which DBRS Morningstar defines as markets with a DBRS Morningstar Market Rank of 3, 4, or 5. As of November 2023, there were 13 loans, representing 87.3% of the cumulative loan balance, secured by properties in suburban markets. The remaining two loans, representing 12.7% of the cumulative loan balance, are in urban markets, defined by DBRS Morningstar as markets with a DBRS Morningstar Market Rank of 6, 7, or 8. These markets historically have shown greater liquidity and demand.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 71.6% and a WA stabilized LTV of 65.4%. In comparison, these figures were 68.3% and 66.5%, respectively, at closing. As the majority of individual property appraisals were conducted between 2019 and 2022, it’s possible that select property values may have decreased given the current interest rate and capitalization rate environment. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across eight loans, representing 66.4% of the current trust balance.

Through November 2023, the lender had advanced cumulative loan future funding of $42.4 million to 10 of the outstanding individual borrowers. The largest advance ($13.6 million) was made to the borrower of the Central Park Plaza loan. The loan, which represents the largest loan in the pool (12.7% of the current pool balance), is secured by a six-building office complex totaling 302,471 square feet in San Jose, California. The borrower used advanced loan proceeds to fund various capital expenditures to improve the property’s overall quality as well as to fund leasing costs. Since completing its capital expenditure program, the property has maintained stable performance as the property was 92.5% occupied as of the September 2023 rent roll. The loan matures in August 2024 after the sponsor exercised its fourth extension option. Despite the improvement in recent property performance, DBRS Morningstar remains concerned with the borrower’s ability to effectuate its exit strategy given the lack of available financing options for loans secured by office properties. Given these factors, DBRS Morningstar applied an increased stabilized LTV in its analysis, resulting in an increased loan expected loss greater than the overall pool expected loss.

An additional $27.5 million of unadvanced loan future funding allocated to 12 individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars ($6.2 million) is allocated to the borrower of the 360 Wythe Avenue loan, which is secured by a Class A, mixed-use building in the Williamsburg neighborhood of Brooklyn, New York. The loan is currently on the servicer’s watchlist for the November 2023 maturity; however, according to an update from the collateral manager, the lender and borrower agreed to a loan amendment in Q4 2023, which allowed the borrower to extend the loan’s maturity date to November 2024 in exchange for the borrower depositing fresh equity into the interest reserve and purchasing a new interest rate cap agreement. As of the September 2023 rent roll, the multifamily portion was 96.4% occupied while the commercial space was 32.6% occupied, though recent positive leasing activity is expected to increase the commercial occupancy rate. According to the financials for the trailing 12-month period ended September 30, 2023, the loan reported a debt service coverage ratio (DSCR) of 0.50 times (x) and a debt yield of 4.0%. In its analysis, DBRS Morningstar applied increases to both the as-is LTV and the stabilized LTV; however, the resulting loan expected loss still remained below the overall pool expected loss.

As of November 2023, there were no loans in special servicing; however, there were seven loans on the servicer’s watchlist, representing 49.9% of the pool balance. The largest loan on the servicer’s watchlist is the aforementioned Hilton Inverness loan, which is being monitored for upcoming maturity risk as the loan is scheduled to mature in February 2024; however, the loan is structured with one 12-month extension option subject to a minimum 1.40x net operating income DSCR and the borrower purchasing a new interest rate cap agreement. The borrower is expected to exercise the option as property performance currently meets the performance test. In its analysis, DBRS Morningstar applied an upward LTV adjustment, with the resulting loan expected loss in excess of the overall expected loss for the pool. An additional four loans, representing 27.0% of the pool balance, have been modified. The modified terms for individual loans have generally included changes in the floating interest rate spreads and maturity extensions.

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 credit ratings assigned to the Class B, C, and F Notes materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk because of the high concentration of loans secured by office properties across the transaction.

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.
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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 (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://www.dbrsmorningstar.com/research/422859

-- 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

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