Morningstar DBRS Confirms Credit Ratings on Nine Multi-Borrower Single-Family Rental Transactions

DBRS Limited (Morningstar DBRS) conducted a surveillance review of nine multiborrower single-family rental (MB SFR) transactions. Most of the rating actions were credit rating confirmations, with a few credit ratings being upgraded. One transaction had three classes for which trends were changed from Stable to Negative. All other trends are Stable. The full list of affected transactions, classes, and credit ratings can be found at the end of this press release. A summary of the performance metrics for each rated MB SFR transactions can be found by clicking the following link.
https://dbrs.morningstar.com/research/427289

The rating confirmations reflect the overall stable performance of the transactions with the reported cash flows and other performance metrics for most loans generally in line Morningstar DBRS’ expectations. The credit rating upgrades generally reflect the significantly increased credit support, whether through principal repayments or increased loan payoffs coupled with a lack of a significant concentration of loans showing performance declines since issuance. Performance data for each transaction was analyzed, including loan repayments, cash flow and/or occupancy changes for the collateral properties, special servicing transfers, and watchlist additions. In the case of larger loans in special servicing that were exhibiting performance declines from issuance and/or were reporting payment or maturity defaults, Morningstar DBRS considered liquidation scenarios based on a value stress that was determined based on the severity of the performance decline. For some loans exhibiting increased risks that were not liquidated in the analysis, a higher probability of default was analyzed to increase the expected loss.

The January 2024 remittance reports showed servicer’s watchlist concentrations between 7.6% and 51.7%, with concentrations of delinquent loans between 0% and 11.1% across the nine transactions. Realized losses to date have been generally minimal. Historically, liquidations across these pools have shown somewhat binary outcomes, with many loans reporting no or very small losses at disposition, while other loans report high loss severities that can sometimes even exceed 100%. Weighted-average loss severities ranged between 0% and 43.6%. The CAF 2019-1 transaction had the highest watchlist concentration, with most of the loans on that its watchlist being monitored for an upcoming maturity in February 2024.

The CAFL 2019-3 transaction reported the second-highest delinquency rate across the nine transactions; this was a contributing factor for the credit rating actions for that transaction, which included a change of the trends on Classes E, F, and G to Negative from Stable. The increased delinquency rate since the last review could translate to increased losses over the near to moderate term, providing support for the Negative trend. The delinquency rate of 8.1% is up from 7.6% in January 2023 and is fully contained to five loans, all of which are with the special server and are in various stages of workout. Two of the loans, representing 6.0% of the pool balance, have near-term maturities in H2 2024; in both cases, the special servicer has noted there are cash flow and possible liquidity issues that could impair the ability to refinance or cure the outstanding defaults. Based on the increased risks for those loans, both were liquidated in Morningstar DBRS’ analysis, with implied losses of $5.5 million.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (July 4, 2023) at https://dbrs.morningstar.com/research/416784.

Morningstar DBRS also applied its criteria for rating CMBS interest-only (IO) certificates, as referenced in the Rating North American CMBS Interest-Only Certificates methodology. As such, rating changes on the applicable reference obligations may have triggered an action on the CMBS IO certificate as well.

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 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 ratings assigned to the following classes materially deviate from the credit ratings implied by the predictive model: Class G in B2R 2015-1, Class E in B2R 2015-2, and Class G in CAF 2017-1. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for these material deviations is uncertain loan-level event risk associated with a variety of factors including watchlist and delinquency concentrations, near term maturities for underperforming loans, and increased concentration risks.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

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://dbrs.morningstar.com/about/methodologies.

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

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

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

-- 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

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

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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