Morningstar DBRS Downgrades the Credit Rating on One Class of TRTX 2019-FL3 Issuer, Ltd.; Confirms All Others

DBRS, Inc. (Morningstar DBRS) downgraded its credit rating on the following class of notes issued by TRTX 2019-FL3 Issuer, Ltd. as follows:

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

Morningstar DBRS also confirmed its credit ratings on the following classes of notes:

-- Class C at AA (sf)
-- Class D at A (high) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)

The trends on all classes are Stable with the exception of Class G, which has a credit rating that does not carry a trend.

The credit rating downgrade on Class G reflects the increased credit risk to the largest loan in the pool, City Plaza (Prospectus ID #32, 21.4% of the pool), which is secured by an 18-story, office property in Orange, California. The loan is now 90 days delinquent after transferring to special servicing in November 2023 for maturity default. According to the collateral manager, the loan is now categorized as real estate owned and the property is negatively cash flowing, with occupancy most recently reported at 14.2% as of the October 2023 rent roll. An updated appraisal is currently pending; however, at loan closing, the property was valued on an as-is basis at $90.3 million. In its analysis, Morningstar DBRS assumed a stressed value and liquidated the loan from the trust, resulting in a hypothetical loss severity on the loan in excess of 45.0%. The loss is projected to be contained to the unrated equity bond. Morningstar DBRS also notes the outstanding accumulated interest shortfalls to Class G totaling $0.4 million as of January 2024 reporting. Interest shortfalls first occurred with November 2023 reporting and are a direct result of the City Plaza loan delinquency. Given the current status and outlook on the resolution process of the loan, Morningstar DBRS expects accumulated interest shortfalls to Class G to continue to increase.

The credit rating confirmations on the remaining classes reflect the increased credit support to the bonds as there has been collateral reduction of 76.1% since issuance as a result of successful loan repayment, principal proceeds recovered on liquidated loans, and realized losses from the resolution of liquidated loans. The collateral reduction serves as a mitigant to the increased concentration of loans secured by office properties across the transaction, as the select borrowers of these loans are behind in the respective business plans, and all borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at respective loan maturity. As of January 2023 reporting, there are five loans secured by office properties in the transaction, representing 83.4% of the current trust balance. In conjunction with this press release, Morningstar DBRS 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].

As of the January 2024 remittance, the trust reported an outstanding balance of $293.9 million with six loans remaining in the trust. The transaction had a 24-month reinvestment period that ended in October 2021. Two of the remaining six loans, representing 26.1% of the current trust balance, were in the transaction at closing. Since the previous Morningstar DBRS credit rating action in April 2023, there has been a collateral reduction of $190.8 million, including the full repayment of the 1825 Park Avenue loan. In addition, two loans, 300 Lafayette Street and 1525 Wilson, were liquidated resulting in a combined loss of $50.6 million to the trust. The remaining loan in the transaction beyond the office concentration noted above is secured by a multifamily property (16.6% of the current trust balance). The transaction’s property type concentration has remained relatively stable since March 2023 when 64.4% of the trust balance was secured by office collateral, 13.4% of the trust balance was secured by multifamily collateral, and 22.6% of the trust balance was secured by mixed-use collateral.

The remaining loans are primarily secured by properties in urban and suburban markets. Four loans, representing 76.6% of the pool, are secured by properties in urban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 6, 7, or 8, and two loans representing 23.4% of the pool are secured by properties with a Morningstar DBRS Market Rank of 4 or 5, which denotes a suburban market. In comparison with the pool composition in March 2022, properties in urban markets represented 81.9% of the collateral, and properties in suburban markets represented 18.1% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

The collateral pool exhibits elevated leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 72.4% and a WA stabilized LTV of 63.9%. In comparison, these figures were 77.4% and 64.4%, respectively, at closing. As the majority of individual property appraisals were conducted between 2019 and 2022, and the pool composition has changed significantly from closing with only two of the original loans remaining, it is possible select individual property values may have decreased given the current interest rate and capitalization rate environment. In the analysis for this review, Morningstar DBRS applied a recoverability analysis using in place property level financial reporting with stressed market and property type specific capitalization rates to determine if individual property valuations can support the respective outstanding debt load. Morningstar DBRS determined in its current analysis that any potential cumulative exposure to loans with loan to value ratios of more than 100.0% would be contained to the unrated equity bond, which has a current balance of $44.8 million.

Through December 2023, the lender had advanced cumulative loan future funding of $153.3 million to all six of the outstanding individual borrowers. The largest advance ($45.8 million) has been made to the borrower of the Lenox Park Portfolio loan (Prospectus ID #2, 5.8% of the pool), which is secured by four office properties in Brookhaven, Georgia. The portfolio originally consisted of five properties; however, one of the larger assets was sold in Q2 2022, and the A note was paid down by $72.0 million with an additional $65.3 million swept into a leasing reserve. In March 2023, the A note was paid down by an additional $75.6 million from existing reserves, resulting in a currently funded A note of $35.1 million. The property’s largest tenant, AT&T, vacated its leased space at the 1057 Lenox and 2180 Lake buildings upon the May 2023 lease expiration decreasing portfolio occupancy from 81.8% to 19.2% as of June 2023. AT&T most recently executed a new lease totaling 120,500 square feet at the 1277 Lenox building, increasing the portfolio’s overall occupancy to 35.1% as of the September 2023 rent roll. The two-year lease expires in July 2025 and includes a starting rental rate of $32.00 per square foot. According to the collateral manager, the portfolio is expected to generate net cash flow (NCF) of $5.5 million of NCF and a debt service coverage ratio of 2.21 times inclusive of the new lease. The loan is being monitored on the servicer’s watchlist for maturity risk as the loan matured in December 2023; however, the loan includes one final extension option through August 2024. The four remaining properties had a combined property value of $174.5 million at loan closing in 2018 implying an LTV of 20.1% based on the current whole loan exposure. Given the low in-place leverage, Morningstar DBRS is not forecasting a value deficiency.

An additional $13.2 million of unadvanced loan future funding allocated to two individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars ($9.4 million) is allocated to the borrower of the aforementioned Lenox Park Portfolio loan for leasing costs. The remaining loan with available future funding ($3.7 million), Del Amo Crossing loan, secured by an eight-building office and retail property totaling 418,555 square feet in Torrance, California. Since issuance, occupancy has decreased to 67.3% from 72.8% as of the September 2023 rent roll. In March 2023, the borrower acquired land adjoining the property that was added to the collateral. The land, which was valued at $7.0 million, was sold in Q2 2023 resulting in a principal curtailment of $6.8 million with an additional $1.6 million deposited into the debt service reserve account. Additionally, the restaurant building was sold in November 2023 for $25.2 million resulting in a curtailment of $22.1 million with $2.5 million deposited into the debt service reserve account. The loan has a final maturity date of January 2025.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.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 Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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.

Morningstar DBRS notes that a sensitivity analysis was not performed for this review as the transaction is in wind-down, with only six remaining loans. In these cases, Morningstar DBRS credit ratings are typically based on a recoverability analysis for the remaining loans. Please also note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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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Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/422859

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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