Morningstar DBRS Finalizes Provisional Credit Ratings on BANK5 2024-5YR7

DBRS, Inc. (Morningstar DBRS) finalized provisional credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates Series, 2024-5YR7 (the Certificates) issued by BANK5 2024-5YR7 (the Trust):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-2-1 at AAA (sf)
-- Class A-2-2 at AAA (sf)
-- Class A-2-X1 at AAA (sf)
-- Class A-2-X2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3-1 at AAA (sf)
-- Class A-3-2 at AAA (sf)
-- Class A-3-X1 at AAA (sf)
-- Class A-3-X2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class A-S at AAA (sf)
-- Class A-S-1 at AAA (sf)
-- Class A-S-2 at AAA (sf)
-- Class A-S-X1 at AAA (sf)
-- Class A-S-X2 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class B-1 at AA (high) (sf)
-- Class B-2 at AA (high) (sf)
-- Class B-X1 at AA (high) (sf)
-- Class B-X2 at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class C-1 at A (high) (sf)
-- Class C-2 at A (high) (sf)
-- Class C-X1 at A (high) (sf)
-- Class C-X2 at A (high) (sf)
-- Class X-D at A (low) (sf)
-- Class X-F at BBB (sf)
-- Class X-G at BBB (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (high) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (high) (sf)

All trends are Stable.

Classes X-D, X-F, X-G, X-J D, E, F, G and J will be privately placed. The RR Interest Certificates will not be offered.

Classes A-2-1, A-2-2, A-2-X1, A-2-X2, A-3-1, A-3-2, A-3-X1, A-3-X2, A-S-1, A-S-2, A-S-X1, A-S-X2, B-1, B-2, B-X1, B-X2, C-1, C-2, C-X1,C-X2 are also offered certificates. Such classes of certificates, together with the Class A-2, A-3, A-S, B and C constitute the Exchangeable Certificates. The Class A-1, D, E, F, G, and J, certificates, together with the Exchangeable Certificates with a certificate balance are referred to as the principal balance certificates.

The collateral consists of 37 fixed-rate loans secured by 41 commercial and multifamily properties with an aggregate cut-off date balance of $1.146 billion. Five loans¿Cira Square, Saks Beverly Hills, Kenwood Towne Centre, Anaheim Desert Inn & Suites, and Columbus Business Park, representing 20.6% of the pool¿are shadow-rated investment grade by Morningstar DBRS. The conduit pool was analyzed to determine the provisional credit ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. The transaction has a sequential-pay pass-through structure.

Cira Square, Saks Beverly Hills, Kenwood Towne Centre, Anaheim Desert Inn & Suites, and Columbus Business Park exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 20.6% of the pool. Cira Square has credit characteristics consistent with an AA (high) shadow rating, Saks Beverly Hills has credit characteristics consistent with an A (low) shadow rating, Kenwood Towne Centre has credit characteristics consistent with an A (high) shadow rating, Anaheim Desert Inn & Suites Square has credit characteristics consistent with a BBB (high) shadow rating, and Columbus Business Park Square has credit characteristics consistent with an A (high) shadow rating.

Seventeen loans, representing a combined 44.5% of the pool by allocated loan amount (ALA), exhibit Morningstar DBRS Issuance loan-to-value ratios (LTVs) of less than 59.3%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency. Even with the exclusion of the shadow-rated loans, which represent 20.6% of the pool, the transaction exhibits a favorable WA Morningstar DBRS issuance LTV of 60.2%.

There are seven loans, representing 24.5% of the pool, in areas identified as Morningstar DBRS Market Ranks of 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Markets with these rankings benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include Washington, D.C.; New York; and Los Angeles. In addition, 17 loans, representing 52.5% of the pool balance, have collateral in MSA Group 3, which represents the best-performing group in terms of historical CMBS default rates among the top 25 metropolitan statistical areas (MSAs).
Six loans, representing 25.3% of the pool balance, received a property quality assessment of Average + or better, including two loans, representing 13.6% of the pool, deemed to be of Above Average quality.

Three loans, representing 15.5% of the pool, were classified as having Strong sponsorship strength. Furthermore, Morningstar DBRS identified only two loans with sponsorship strength deemed Weak, accounting for 7.2% of the pool.

The pool has a relatively high concentration of loans secured by office properties at eight loans, representing 33.2% of the pool balance, with three in the top 10 loans of the pool. Office properties are facing increased pressure from changing user demands, after the pandemic, with the implementation of hybrid remote-working strategies. However, three of the office loans, representing 21.4% of the total pool balance, are located in Morningstar DBRS Market Ranks 6, 7, and 8, which exhibit the lowest historical CMBS PODs and LGDs. Furthermore, three of the office loans, representing 16.0% of the total pool balance, are in MSA Group 3, which is the best-performing group among the top 25 MSAs in terms of historical CMBS default rates. Cira Square, representing 7.9% of the total pool balance, is shadow-rated investment grade by Morningstar DBRS. Two of the office properties were assigned a property quality of Average+ and Above Average.

In today's challenging interest rate environment, rates have increased significantly from before the Fed's interest rate hike regime that began in mid-2022. The rise in interest rates over the past several quarters has severely constrained debt service coverage ratios (DSCRs) and in the case of the subject transaction, has a weighted-average (WA) DSCR of 1.49 times (x) and 1.29x excluding shadow-rated loans. While adequate to service debt, the ratio is considerably lower than historical conduit transactions and provides for a smaller cushion should cash flows be disrupted. Loans with lower DSCR ratios receive a POD penalty in the Morningstar DBRS model.

On average, the transaction exhibits -0.70% of negative leverage (as defined as the issuer's implied cap rate (issuer's NCF divided by the appraised value), less the current interest rate). While cap rates have been increasing over the last few years, they have not surpassed the current interest rates. In the short-term, this suggests borrowers are willing to have their equity returns reduced in order to secure financing. Longer-term, should interest rates hold steady, the loans in this transaction could be subject to negative value adjustments that may impact the borrower's ability to refinance their loans.
There are 35 loans, representing 98.4% of the pool balance, structured with full-term interest-only (IO) periods. Loans that are full-term IO do not benefit from amortization. Of the 35 loans with full-term IO periods, nine loans representing 34.5% of the pool are located in areas with Morningstar DBRS Market Ranks of 6 or higher, with 24.5% of the pool in Morningstar DBRS Market ranks of 7 or 8. These urban markets benefit from increased liquidity even during times of economic stress. Five of the loans, representing 20.6% of the pool balance, are shadow-rated investment grade by Morningstar DBRS. The full-term IO loans still benefit from a low leverage point as evidenced by the low Morningstar DBRS WA Issuance LTV of 56.8%, or 60.2% when excluding the shadow-rated and co-operative loans. Thirty-two loans, representing 91.4% of the total pool balance, are refinancing or recapitalizing existing debt. Morningstar DBRS views loans that refinance existing debt as more credit negative than loans that finance an acquisition. The loans that are refinancing existing debt exhibit relatively low leverage. Specifically, the Morningstar DBRS average Issuance and Balloon LTVs for the loans refinancing debt are 56.3% and 56.2%, respectively. The loans that are refinancing existing debt are generally in stronger Morningstar DBRS Markets Ranks and MSA groups than the broader pool of assets in the transaction.

Morningstar DBRS' credit rating on the Certificates addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, Yield Maintenance Charges, and Prepayment Premiums.

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 (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

Classes X-A, X-B, X-D, X-F, X-G, and X-J are 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.

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 Multi-Borrower Rating (March 1, 2024) https://dbrs.morningstar.com/research/428797/north-american-cmbs-multi-borrower-rating-methodology).

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

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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 Commercial Mortgage Servicer Rankings (August 23, 2023)
https://dbrs.morningstar.com/research/419592/north-american-commercial-mortgage-servicer-rankings

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023)
https://dbrs.morningstar.com/research/420982/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

Rating North American CMBS Interest-Only Certificates (December 13, 2023)
https://dbrs.morningstar.com/research/425261/rating-north-american-cmbs-interest-only-certificates

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

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024)
https://dbrs.morningstar.com/research/428799/north-american-single-assetsingle-borrower-ratings-methodology

North American Insight Model v 1.2.0.00
https://dbrs.morningstar.com/research/428797/north-american-cmbs-multi-borrower-rating-methodology

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