Morningstar DBRS Takes Rating Actions on Eight Small-Balance Commercial Real Estate Transactions

DBRS Limited (Morningstar DBRS) conducted its surveillance review of eight small-balance commercial real estate (CRE) transactions, which included 107 classes. Morningstar DBRS confirmed the credit ratings on 105 classes across all of the transactions and upgraded the credit ratings on two classes of Bayview Financing SBC Trust 2021-5F (BVRT 2021-5F), which is a re-securitization of Silver Hill Trust 2019-SBC1 (SHT 2019-SBC1). The trends are all Stable, except for those on Classes B and C of the Sutherland 2021-SBC10 (SCMT 2021-SBC10) transaction, which were changed to Positive from Stable.

The credit rating confirmations reflect the overall stable performance of the transactions, which have generally remained in line with Morningstar DBRS’ expectations. Overall, these transactions experienced collateral reductions ranging between 12.0% and 90.0%, with a weighted average (WA) of approximately 41.0% since issuance, compared with the prior review when the WA was approximately 34.0%. The concentration of delinquent loans increased slightly while the net WA coupon increased by just over 50 basis points on average. The majority of the loans are fully amortizing, with the exception of SCMT 2021-SBC10 in which less than half of the loans are fully amortizing. However, SCMT 2021-SBC10 exhibited the most collateral reduction change since last review, increasing by 13.6% since last review, therefore supporting the positive trends on Classes B and C.

The full list of the credit ratings on the classes in these eight transactions can be found at the end of this press release.

The assets backing the BVRT 2021-5F transaction consist of interest-only (IO) notes, principal and interest (P&I) notes, Class P notes, and Class X subordinated notes issued by SHT 2019-SBC1. As of the February 2024 reporting, the subject transaction was overcollateralized by approximately $35.0 million as a result of payments from the underlying SHT 2019-SBC1 transaction; including P&I payments on principal and interest notes, interest payment on IO notes, and prepayment premiums. This overcollateralization is subordinate to the rated notes of the transaction, resulting in the increased credit enhancement since issuance. Since Morningstar DBRS’ prior review, credit-enhancement levels for the rated notes have increased considerably, ranging from approximately 20.0% on the most senior A-1 note to almost 50% on the most junior A-3 note, further supporting the credit rating upgrades.

According to the February 2024 reporting, 2219 loans are secured across the transactions (excluding BVRT 2021-5F), with an aggregate outstanding balance of $935.8 million. Of the 123 delinquent loans (5.8% of the aggregate outstanding balance), 44 loans (2.6% of aggregate outstanding balance) were 120+ days delinquent, in foreclosure, real estate owned, or with borrowers in bankruptcy. The delinquent loans were analyzed with elevated probability of default (POD) penalties, with incrementally more punitive treatment applied based on the length of delinquency or workout strategy to appropriately reflect the credit risk profile. Certain POD adjustments were also considered for loans secured by non-traditional property types, as well as amortization and loan prepayment, in addition to certain loss given default (LGD) penalties considered for the lack of environmental reporting.

Most of the loans that have repaid since issuance across all transactions were paid in advance of the respective maturity dates, with the most recent repayments including applicable prepayment penalties. Based on the most recent reporting available, these pools had WA life, trailing 12-month, and trailing three-month constant prepayment rates (CPRs) of 11.1%, 11.1%, and 4.3%, respectively. These rates have generally decreased since the last review, which was expected considering the rising interest rate environment and related property trade disruption in the CRE market.

The “North American CMBS Insight Model” (CMBS Model) does not contemplate the ability to prepay loans, which is generally considered credit positive because prepaid loans cannot default. As a result, Morningstar DBRS applied the fully adjusted default assumptions and model-generated severity figures from the CMBS Model to the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model” (RMBS Model), which considers sequential and pro rata structures, for all transactions with the exception of Angel Oak SB Commercial Mortgage Trust 2020-SBC1 and Cherrywood SB Commercial Mortgage Loan Trust 2016-1 (Cherrywood 2016-1)).

As part of the RMBS Model analysis, Morningstar DBRS incorporated four CPR stresses: 5.0%, 10.0%, 15.0%, and 20.0%. In addition, a 22-month recovery lag period (excluding SCMT 2021-SBC10, which assumed a recovery lag of six months given the seasoning of the deal), 100% servicer advancing, and three default curves (uniform, front, and back). The shape and duration of the default curves were based on the RMBS loss curves. Lastly, rates were stressed upward and downward, based on the respective loan indices.

Generally, these pools are well-diversified, a factor that combines with the increased credit support to the rated classes from issuance (excluding Sutherland Mortgage Trust 2019-SBC8 (SCMT 2019-SBC8) and SCMT 2021-SBC10 deals, which have pro rata structures) to generally reduce the loan-level event risk of the transaction. There are noteworthy risks for the transactions, however, in that property quality is generally considered to be Average-/Below Average based on those properties samples and that the loan sponsors are generally less sophisticated operators of CRE with limited real estate portfolios and experience. These risks are partially mitigated by borrower or guarantor recourse, regardless of credit history. Morningstar DBRS notes that ongoing property financials are not provided as part of the surveillance reviews.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Excluding SCMT 2021-SBC10, there were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

An environmental factor was applicable to the credit analysis for SCMT 2021-SBC10. At issuance, limited to no property-level information was available for review, including property condition reports and Phase I/II environmental site assessment reports. As a result, Morningstar DBRS applied an LGD penalty that resulted in a significant effect on the credit analysis and the approach was maintained with this review. There were no social or 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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Classes that are IO certificates 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 the North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Given the complexity, granularity, and modified pro rata pay pass-through structure of certain transactions, Morningstar DBRS also included elements of the RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023) as a related methodology.

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

The credit ratings assigned to several classes (noted below) materially deviate from the credit ratings 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 ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings.

Class B2 of the Cherrywood 2016-1 deal reported a material deviation from the CMBS Model. The rationale for the material deviation is uncertain loan-level event risk.

Below is the list of transactions and their respective classes that reported material deviations from the RMBS Model. The rationale for the material deviations is that certain risks are not fully reflected in the RMBS model output.

-- Oceanview Mortgage Loan Trust 2020-SBC1: Classes M3A, M4A, B2, B3, M3B, MC3, M4B, and M4C.
-- SCMT 2019-SBC8: Class C.
-- SCMT 2021-SBC10: Classes B and C.
-- BVRT 2021-5F: Class A2

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 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.

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.

DBRS Limited
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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 (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 31, 2023), https://dbrs.morningstar.com/research

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 (February 26, 2024) https://dbrs.morningstar.com/research/428623

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

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].