Morningstar DBRS Confirms All Credit Ratings on Ready Capital Mortgage Financing 2021-FL6, LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by Ready Capital Mortgage Financing 2021-FL6, LLC (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction as well as the increased credit support to the bonds since issuance as a result of successful loan repayments. Since issuance, there has been collateral reduction of 38.1%, an increase from 9.0% at the previous Morningstar DBRS rating action in June 2023. While the specially serviced loan count for the pool has increased to six loans, representing 36.3% of the current trust balance, the risk is slightly mitigated as the loans are secured by multifamily properties, which are likely more stable from a value standpoint in the current environment as compared with other commercial property types such as office or mixed use. The transaction as a whole is primarily concentrated by multifamily properties as 20 of the outstanding 21 loans, representing 97.3% of the current trust balance, are secured by multifamily collateral. 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 and with 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].

The initial collateral pool consisted of 52 floating-rate mortgage assets with an aggregate cut-off date balance of $652.5 million secured by 55 mortgaged properties. The majority of the assets were in transition with stated business plans to increase property cash flow and value. As of the April 2024 remittance, the pool comprises a cumulative trust balance of $409.8 million. The transaction benefits from overcollateralization as the outstanding cumulative bond balance is $403.9 million. Since the previous Morningstar DBRS rating action in June 2023, seven loans, with a former cumulative trust balance of $142.4 million, have been paid in full.

Beyond the multifamily concentration noted above, there is one remaining loan in the pool (2.7% of the current trust balance), which is secured by a mixed-use property. In comparison, as of the May 2023 reporting, loans secured by multifamily properties represented 93.9% of the trust balance while loans secured by mixed-use properties represented 3.3% of the trust balance. The remaining loans are primarily secured by properties in suburban markets as 16 loans, representing 81.4% of the pool, are secured by properties located in markets with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional five loans, representing 18.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6 or 7, denoting an urban market. In comparison, in May 2023, properties in suburban markets represented 81.1% of the collateral and properties in urban markets represented 13.3% of the collateral.

Leverage across the pool has increased slightly from issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 74.9%, with a current WA stabilized LTV of 67.1%. In comparison, these figures were 73.2% and 65.5%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and may not reflect the current rising interest rate or widening capitalization rate environments. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for 12 loans, representing 80.0% of the current trust balance.

Through March 2024, the lender had advanced cumulative loan future funding of $28.3 million to 19 of the remaining individual borrowers to aid in property stabilization efforts, excluding any funds advanced at loan closing as working capital. The largest advance ($6.6 million) has been made to the borrower of the 79 Metcalf Apartments loan, which is secured by a 300-unit multifamily property in the Kansas City suburb of Overland Park, Kansas. Funds were advanced to the borrower to complete capital improvements across the property as its business plan is to renovate all existing units, convert previous storage space to 20 additional units, and upgrade common areas and property exteriors. The loan is currently on the servicer's watchlist for a low debt service coverage ratio (DSCR), which was 0.26 times (x) at YE2023 as well as the upcoming May 2024 maturity date. According to the servicer, the borrower has requested to exercise the first extension option; however, as the property does not meet the required performance tests, the borrower and lender will need to agree to a loan modification to extend the loan. At YE2023, the property was 81.3% occupied with an average rental rate of $1,129 per unit as 20 units were listed as down and in the process of being fully renovated. Through YE2023, the borrower had fully upgraded 95 units and partially upgraded 81 units, according to the rent roll provided.

An additional $14.9 million of the loan future funding allocated to 18 of the remaining individual borrowers remains available. The largest portion of available funds, $5.2 million, is allocated to the borrower of the Desert Gardens loan, which is secured by a 307-unit multifamily property in Glendale, Arizona. The available funds are for the borrower's $6.6 million capital improvement plan, which includes the renovation of all unit interiors as well as upgrades to property amenities and exteriors. The borrower appears to be behind its stated capital improvement plan as only $1.4 million had been advanced to the borrower. The loan is also on the servicer's watchlist for a low DSCR, which was 0.21x at YE2023 in addition to the upcoming June 2024 maturity date. The borrower has requested to exercise the first extension option, which is currently under review, according to the servicer. As property performance also does not meet the required performance tests, the loan will need to be modified to complete an extension. The sponsor, Tides Equities, has recently experienced stress throughout its commercial real estate portfolio as a result of increased debt service payments and slowing rental rate growth. The firm's liquidity has not been recently disclosed to Morningstar DBRS.

The largest loan in special servicing, Lucern Charlotte Portfolio (Prospectus ID#4, 8.4% of the current trust balance), is secured by a portfolio of two multifamily properties in Charlotte, North Carolina. The loan transferred to special servicing in December 2023 for imminent payment default and remains outstanding for the December 2023 payment. According to servicer reporting, loan modification documents are being drafted; however, a more recent update from the collateral noted the borrower is pursuing a sale of both assets. Morningstar DBRS expects the loan to ultimately be repaid in full.

The third-largest loan in special servicing, 1818 Church Street (Prospectus ID#8, 6.5% of the current trust balance), is secured by a multifamily property in the Midtown submarket of Nashville, Tennessee. The loan transferred to special servicing in October 2023 for imminent payment default and the sponsor, GVA Real Estate Group (GVA), has since requested a forbearance agreement be granted. The January 2024 debt service payment remains pending. According to the servicer, the borrower executed a pre-negotiation letter with discussions ongoing. GVA has also recently encountered stress across its commercial real estate portfolio with concerns about the firm's liquidity. The collateral was re-appraised at $31.0 million, a 12.9% decline from the original As-Is value at loan closing of $35.6 million. The property is well-located, and the business plan only involved completing minor property-wide upgrades and increasing rental rates to market. Performance remains below expectations; however, the YE2023 net cash flow (NCF) was $1.1 million, below the issuer's stabilized figure of $2.0 million. Potentially complicating the resolution process is the upcoming July 2024 maturity date, which will likely be taken into account by the lender and borrower in the current negotiations. In its analysis, Morningstar DBRS recognized the increased credit risk to the loan, applying upward LTV and probability of default adjustments, resulting in a loan expected loss in excess of the pool expected loss.

As of the April 2024 remittance, there are 11 loans are on the servicer's watchlist, representing 42.1% of the current trust balance. The majority of these loans have been flagged for upcoming maturity dates; however, select loans have also been cited for below breakeven DSCRs and declining occupancy rates. While property performance was expected to be sluggish across select assets as borrowers completed the respective business plans to increase rental rates, prolonged dispersion to property cash flow is concerning as loans approach maturity dates. This risk is slightly mitigated as all loans are structured with extension options. While not all borrowers will qualify based on required property performance tests, Morningstar DBRS notes these loans may be modified by the issuer to waive these tests, allowing borrowers to exercise loan extensions. In return, borrowers will likely be required to contribute fresh equity in the form of a principal curtailment, deposit into reserve accounts and/or the purchase of a new interest rate cap agreement.

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 (January 23, 2024); https://dbrs.morningstar.com/research/427030

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 1, 2024; https://dbrs.morningstar.com/research/428798).

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

The credit ratings assigned to Classes B, C, and F 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. The rationale for the material deviations is uncertain loan level event risk as, although the transaction benefits from significant paydown in the last year, there remains a high concentration of loans in special servicing and loans with upcoming loan maturity dates throughout 2024.

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.

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

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 (February 26, 2024), https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

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/410863.

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