Morningstar DBRS Confirms Credit Ratings on All Classes of Ready Capital Mortgage Trust 2019-6

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by Ready Capital Mortgage Trust 2019-6:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class IO-A at AAA (sf)
-- Class IO-B/C at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (sf)
-- Class F at BB (sf)
-- Class G at B (high) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction since the previous Morningstar DBRS credit rating action in March 2023. As of the January 2024 remittance, 52 of the original 89 loans remain in the pool with a current trust balance of $248.6 million, reflecting a collateral reduction of 42.3% since issuance as a result of loan amortization, loan repayment, and one loan liquidation resulting in a loss of $1.3 million. The collateral reduction continues to provide credit support to the bonds even though two loans, representing 7.9% of the current pool balance, are in special servicing. Since the previous credit rating action, three loans have been repaid. Loans secured by mixed-use properties represent the greatest property type concentration, accounting for 36.0% of the current pool balance, followed by multifamily properties at 23.6%. The largest geographic concentration is Texas, accounting for 39.3% of the current pool balance, followed by California at 29.3%.

The largest loan in special servicing, 777 E 12th St (Prospectus ID#5; 7.5% of the pool balance), is secured by a mixed-use property in the Fashion District of downtown Los Angeles. The loan transferred to special servicing in October 2023 after the borrower informed the servicer it would no longer be able to fund operating shortfalls to keep the loan current. The loan is paid through October 2023 and is now 90 days delinquent. Property performance has struggled in recent years as year-over-year net cash flow (NCF) has declined since loan closing to $1.0 million at YE2022 from $1.7 million. The most recently reported Q3 2023 annualized NCF provided by the servicer remained depressed at $1.0 million, equating to a debt service coverage ratio (DSCR) of 0.84 times (x), despite an occupancy rate of 91.6%. The largest tenant, Pacific City Bank (18.8% of the net rentable area), recently executed a five-year lease extension through August 2028; however, tenancy at the property is primarily concentrated by wholesale retailers in the fashion industry, which have historically utilized individual spaces for display, office, and storage uses. The individual spaces generally range in size from 700 square feet (sf) to 2,300 sf with tenant leases often not longer than one to two years, elevating rollover risk and cash flow volatility.

Morningstar DBRS has yet to receive an updated appraised value from the servicer; however, at issuance, the property’s value was $31.6 million. Given the prolonged decline in operating cash flow, Morningstar DBRS believes the property’s current market value has significantly declined. In its analysis, Morningstar DBRS calculated an updated property value utilizing the Q3 2023 annualized NCF and a market capitalization rate. The implied property value indicates a value decline of more than 50.0% from the original appraised value. Morningstar DBRS assumed a hypothetical liquidation scenario in its analysis of the loan, resulting in a loss severity above 35.0%.

The other loan in special servicing, Lakeland Medical Office Building (Prospectus ID#81; 0.4% of the pool balance), is secured by an office property in Niles, Michigan. The loan has been in special servicing since September 2020 and became real estate owned in July 2022. The servicer has deemed the loan nonrecoverable with the current outstanding loan exposure, including all outstanding advances as of January 2024, totaling $1.7 million, above the updated August 2023 appraised value of $1.5 million. Morningstar DBRS also assumed a hypothetical liquidation scenario in its analysis of this loan, resulting in a loss severity above 40.0%. The cumulative hypothetical losses from both specially serviced loans are likely to be contained to the unrated bond, Class H.

There are also 21 loans on the servicer’s watchlist, representing 46.3% of the current pool balance. The loans remain current and have generally been flagged for performance-related reasons, including low DSCRs, low occupancy rates, upcoming major tenant rollover risk, and deferred maintenance concerns. The largest loan on the servicer’s watchlist, 1001 Ross (Prospectus ID#2; 9.8% of the pool), is secured by a 204-unit multifamily property with a 30,164-sf retail component in downtown Dallas. The loan has been flagged for a low DSCR, reported at 0.73x for the trailing 12 months (T-12) ended September 30, 2023, according to the servicer. At loan closing in 2019, the borrower had a value-accretive business plan centered around renovating the multifamily units and backfilling the anchor retail suite, which was occupied by CVS and was expected to vacate in 2020. The borrower was expected to spend $3.5 million across the property with $2.4 million ($16,597 per unit) allocated for multifamily unit upgrades. The borrower projected an average stabilized rental rate of $1,625 per unit, which implied a premium of $165 per unit at closing.

According to the September 2023 rent roll, the multifamily component was 91.7% occupied with an average rental rate of $1,577 per unit; however, the total rental rate increases to approximately the borrower’s targeted rate of $1,625 per unit when including miscellaneous fees such as trash pickup, package room, and others. Despite the increase, the rental rate continues to trail the Central Dallas submarket’s average effective rental rate of $2,822 per unit as reported by Reis as of Q3 2023. The provided rent roll did not include the retail component, which was last reported as 44.3% occupied following the departure of CVS. Cash flow has not materially changed since loan closing as the T-12 ended September 2023 figure of $1.1 million remains unchanged from closing. In its original analysis, Morningstar DBRS assumed a stabilized NCF of $2.3 million, below the issuer’s assumption of $2.7 million. The credit risk of the loan has not only increased since closing because of the stalled business plan, but also from the loan’s September 2024 maturity date. The loan does not contain any extension options and given the low cash flow current financing market, the borrower will likely need to inject additional cash equity into the transaction to successfully exit the loan. While the loan remains current, in its current analysis, Morningstar DBRS applied increased loan-to-value ratio and probability of default adjustments to reflect the current credit risk of the loan. The adjustments resulted in a loan expected loss approximately 2x greater than the expected loss for the pool.

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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

Classes IO-A and IO-B/C are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 assigned to Class D materially deviates from the credit rating implied by the predictive model. Morningstar DBRS 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 given the concentration of loans in special servicing and on the servicer’s watchlist.

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.

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://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

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

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