Morningstar DBRS Assigns Provisional Credit Ratings to Toorak Mortgage Trust 2024-RRTL1

DBRS, Inc. (Morningstar DBRS) assigned the following provisional credit ratings to the Mortgage-Backed Notes, Series 2024-RRTL1 (the Notes) to be issued by Toorak Mortgage Trust 2024-RRTL1 (TRK 2024-RRTL1 or the Issuer):

-- $162.3 million Class A Notes at BBB (low) (sf)
-- $146.1 million Class A-1 Notes at A (low) (sf)
-- $16.2 million Class A-2 Notes at BBB (low) (sf)
-- $10.6 million Class M-1 Notes at BB (low) (sf)
-- $19.1 million Class B-1 Notes at B (low) (sf)

Class A is an exchangeable note. This class can be exchanged for proportionate shares of the exchange notes (Classes A-1 and A-2) as specified in the offering documents.

The A (low) (sf) credit rating reflects 26.97% of credit enhancement provided by the subordinated notes and overcollateralization. The BBB (low) (sf), BB (low) (sf), and B (low) (sf) credit ratings reflect 18.85%, 13.55%, and 4.00% of credit enhancement, respectively.

Other than the specified classes above, Morningstar DBRS does not rate any other classes in this transaction.

This transaction is a securitization of a two-year revolving portfolio of residential transition loans (RTL) funded by the issuance of the Notes. As of the Statistical Calculation Date, the Notes are backed by (1) 370 mortgage loans with a total principal balance of $158,448,508 and (2) $41,551,492 in the Funding Account. Additional RTL may be added to the revolving portfolio on future additional transfer dates, subject to the transaction’s eligibility criteria.

TRK 2024-RRTL1 represents the ninth RTL securitization issued by the Sponsor, Toorak Capital Partners LLC (Toorak), and the inaugural rated RTL securitization. Formed in 2016 and headquartered in Summit, New Jersey, Toorak is a mortgage loan aggregator that partners with third-party loan originators to acquire business purpose residential, multifamily, and mixed-use bridge and term loans. Toorak is the named Servicer for the transaction, and the loans will be subserviced by Merchants Mortgage Trust & Corporation, LLC (Merchants), Servis One, Inc. doing business as BSI Financial Services, FCI Lender Services, Inc., and RCN Capital, LLC. Merchants is the largest originator in the revolving portfolio and will subservice the Merchants-originated loans.

The revolving portfolio consists of first-lien, fixed-rate, interest only (IO) balloon RTL with original terms to maturity of five to 37 months. The loans also include extension options, which may lengthen maturities beyond the original terms. The characteristics of the revolving pool will be subject to eligibility criteria specified in the transaction documents and include:
-- A minimum non-zero weighted-average (NZ WA) FICO score of 715.
-- A maximum NZ WA As-Is Loan-to-Value ratio of 85.0%.
-- A maximum NZ WA Loan-to-Cost ratio of 85.0%.
-- A maximum NZ WA As Repaired Loan-to-Value ratio of 70.0%.

RTL Features
RTL are short-term bridge loans designed to help real estate investors purchase and renovate residential or small balance commercial properties (the latter is limited to 5.0% of the revolving portfolio), generally within 12 to 36 months. RTL are similar to traditional mortgages in many aspects but may differ significantly in terms of initial property condition, construction draws, and the timing and incentives by which borrowers repay principal. For traditional residential mortgages, borrowers are generally incentivized to pay principal monthly, so they can occupy the properties while building equity in their homes. In the RTL space, borrowers repay their entire loan amount when they (1) sell the property with the goal to generate a profit or (2) refinance to a term loan and rent out the property to earn income.

In general, RTL are short-term IO balloon loans with the full amount of principal due at maturity. Borrowers generally rely on the sale or refinancing of the related mortgaged properties to repay the balloon payment due at maturity. The repayment of an RTL is mainly based on the ability to sell the related mortgaged property or to convert it into a rental property. In addition, many RTL lenders offer extension options, which provide additional time for borrowers to repay their mortgage beyond the original maturity date. For the loans in this transaction, such extensions may be granted, subject to certain conditions, at the direction of the Servicer.

In the TRK 2024-RRTL1 revolving portfolio, RTL may be:
(1) Fully funded:
-- With no obligation of further advances to the borrower,
-- With a portion of the loan proceeds allocated to a rehabilitation escrow account for future disbursement to fund construction draw requests upon the satisfaction of certain conditions, or
-- With a portion of the loan proceeds allocated to an interest reserve escrow account for future disbursement to fund interest draw requests upon the satisfaction of certain conditions.
(2) Partially funded:
-- With a commitment to fund construction draw requests upon the satisfaction of certain conditions.

After completing certain construction/repairs using their own funds, the borrower usually seeks reimbursement by making draw requests. Generally, construction draws are disbursed only upon the completion of approved construction/repairs and after a satisfactory construction progress inspection. Based on the TRK 2024-RRTL1 eligibility criteria, unfunded commitments are limited to 35.0% of the portfolio by unpaid principal balance (UPB).

Cash Flow Structure and Draw Funding
The transaction employs a sequential-pay cash flow structure. During the revolving period, the Notes will generally be IO. After the revolving period, or on the Redemption Date, principal will be applied to pay down the Notes, sequentially. If the Issuer does not redeem the Notes by the payment date in August 2026, the Class A-1 and Class A-2 fixed rates will step up by 1.000% (step-up event).

There will be no advancing of delinquent (DQ) interest on any mortgage by the Servicer, the Subservicers, or any other party to the transaction. However, the Servicer is obligated to fund Servicing Advances, which include:
-- Customary amounts: taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing properties.
-- Construction advances: borrower-requested draws for approved construction, repairs, restoration, and protection of the property.
-- Interest draw advances: for loans with interest reserve escrow accounts, borrower-requested draws to cover interest payments for the related mortgage loan, subject to certain conditions.
-- Purchase advances: amounts used to acquire additional mortgage loans up to 1.5% of the aggregate Class A-1 and Class A-2 Note amounts.

The Servicer will be entitled to reimburse itself for Servicing Advances from available funds prior to any payments on the Notes. Interest draw advances are related to certain loans that have mortgagor interest reserve escrow amounts that borrowers may draw upon and are unrelated to DQ interest payments.

Historically, Toorak’s RTL acquisition portfolio has generated robust prepayments, which have been able to cover unfunded commitments. Nonetheless, the transaction incorporates a Funding Account during the revolving period, which is used to fund draws and purchase additional loans. A Reserve Account, which is used to fund purchases of additional loans solely from Merchants, is also available for the transaction.

During the revolving period, the Funding Account is replenished from the transaction cash flow waterfall, after payment of interest to the Notes, to maintain a minimum required funding balance. The Reserve Account is replenished from the Funding Account from time to time at the direction of the Depositor. Amounts held in the Funding Account and Reserve Account, along with the mortgage collateral, must be sufficient to maintain a maximum effective advance rate of 96.0%, which ensures a minimum level of overcollateralization for the bonds until the amortization period begins. During and after the revolving period, an Expense Reserve Account will be available to cover fees and expenses. The Expense Reserve Account is replenished from the transaction cash flow waterfall, before payment of interest to the Notes, to maintain a minimum reserve balance.

In the RTL space, because of the lack of amortization and the short-term nature of the loans, voluntary prepayments (paydowns and payoffs) tend to occur closer to or at the related maturity dates when compared with traditional residential mortgages. In its analysis of historical RTL data, Morningstar DBRS considers both unscheduled and scheduled voluntary principal balance reductions in the construction of its cash flow stresses. In its cash flow analysis, Morningstar DBRS evaluates Toorak’s historical paydowns relative to draw commitments and incorporates several stress scenarios where prepayments may or may not sufficiently cover draw commitments. Please see the Cash Flow Analysis section of the related report for more details.

Other Transaction Features
The Issuer may be permitted to sell one or more mortgage loans in a discretionary sale, subject to certain conditions, for a price equal to the greater of (1) the UPB and (2) the fair market value of the mortgage loan.

Prior to the two-year anniversary of the Closing Date, the Issuer will not be permitted to sell all the loans in aggregate in one or more discretionary sales. On or after the two-year anniversary of the Closing Date, the Issuer, at the direction of 100% of the Class P Certificateholders, may sell all the loans in aggregate in a discretionary sale at the Redemption Price (Optional Redemption). The Redemption Price is equal to par plus interest and fees. The Redemption Date is the date on which the aggregate Notes are redeemed in full.

Similar to certain other issuers, each Seller will have the option to repurchase any related mortgage loan that becomes 60+ days DQ at a price equal to the UPB of the loan, as long as the UPB of the aggregate repurchased DQ mortgages does not exceed 10.0% of the cumulative principal balance of the mortgage loans. During the revolving period, if a Seller repurchases DQ loans, this could potentially delay the natural occurrence of an early amortization event based on the DQ trigger. Morningstar DBRS’ revolving structure analysis assumes the repayment of Notes is reliant on the amortization of an adverse pool regardless of whether it occurs early or not.

As the Sponsor, Toorak, or one or more majority-owned affiliates, will retain a 5% eligible horizontal residual interest in the securities to satisfy the credit risk retention requirements.

The credit ratings reflect transactional strengths that include the following:
-- Robust pool composition defined by eligibility criteria.
-- Historical prepayments versus draw rates.
-- Solid historical performance with favorable resolutions.
-- Satisfactory third-party due-diligence review framework.
-- Structural enhancements.

The transaction also includes the following challenges:
-- Funding of future construction draws.
-- RTL loan characteristics.
-- Representations and warranties framework.
-- No advances of DQ interest.

The full description of the strengths, challenges, and mitigating factors is detailed in the related presale report.

Morningstar DBRS’ credit ratings on the Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated Notes are the related Note Interest Payment Amount, the Interest Carryover Amount, and the Note Amount.

Morningstar DBRS’ credit ratings on the Class A-1 and Class A-2 Notes also address the credit risk associated with the increased rate of interest applicable to the Class A-1 and Class A-2 Notes if the Class A-1 and Class A-2 Notes remain outstanding on the step-up date (August 2026) in accordance with the applicable transaction document(s).

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, in this transaction, Morningstar DBRS' credit ratings do not address the payment of any Cap Carryover Amounts.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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).

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

The principal methodology applicable to the credit ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023), https://dbrs.morningstar.com/research/420108.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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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Tel. +1 212 806-3277

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

-- Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023), https://dbrs.morningstar.com/research/413297
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687
-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 8, 2023), https://dbrs.morningstar.com/research/420333
-- Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023), https://dbrs.morningstar.com/research/414076
-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081
-- Operational Risk Assessment for U.S. RMBS Originators (August 31, 2023), https://dbrs.morningstar.com/research/420106
-- Operational Risk Assessment for U.S. RMBS Servicers (August 31, 2023), https://dbrs.morningstar.com/research/420107

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.