Press Release

Morningstar DBRS Assigns Provisional Credit Ratings to Toorak Mortgage Trust 2024-RRTL2

RMBS
September 09, 2024

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the Mortgage-Backed Notes, Series 2024-RRTL2 (the Notes) to be issued by Toorak Mortgage Trust 2024-RRTL2 (TRK 2024-RRTL2 or the Issuer) as follows:

-- $205.8 million Class A at BBB (low) (sf)
-- $189.9 million Class A-1 at A (low) (sf)
-- $15.9 million Class A-2 at BBB (low) (sf)
-- $17.1 million Class M-1 at BB (low) (sf)
-- $16.9 million Class B at B (low) (sf)
-- $11.3 million Class B-1 at B (sf)
-- $5.6 million Class B-2 at B (low) (sf)

Class A and B are exchangeable notes. These classes can be exchanged for proportionate shares of the exchange notes as specified in the offering documents.

The A (low) (sf) credit rating reflects 24.05% of credit enhancement provided by the subordinated notes and overcollateralization. The BBB (low) (sf), BB (low) (sf), B (sf), and B (low) (sf) credit ratings reflect 17.70%, 10.85%, 6.35%, and 4.10% 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) 521 mortgage loans with a total principal balance of $179,061,281, (2) Approximately $70,938,719 in the Funding Account, and (3) Approximately $1,600,000 in the Interest Reserve Account. Additional RTL may be added to the revolving portfolio on future additional transfer dates, subject to the transaction’s eligibility criteria.

Additional RTL may be added to the revolving portfolio on future additional transfer dates, subject to the transaction’s eligibility criteria.

TRK 2024-RRTL2 represents the tenth RTL securitization issued by the Sponsor, Toorak Capital Partners LLC, and their second rated RTL securitization. Formed in 2016 and headquartered in Tampa, Florida, 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, BSI, FCI, and RCN. 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 725.
-- A maximum NZ WA As-Is Loan-to-Value (AIV LTV) ratio of 85.0%.
-- A maximum NZ WA Loan-to-Cost (LTC) ratio of 85.0%.
-- A maximum NZ WA As Repaired LTV (ARV LTV) ratio of 70.0%.

RTL Features
RTL, also known as fix-and-flip mortgage loans, 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 (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-RRTL2 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 (rehab) 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 borrower-requested draw requests for approved rehab, construction, or repairs of the property 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-RRTL2 eligibility criteria, unfunded commitments are limited to 35.0% of the portfolio by unpaid principal balance (UPB) and (2) amounts in the Funding Account and the Reserve Account.

Cash Flow Structure and Draw Funding
The transaction employs a sequential-pay cash flow structure. During the revolving period, the Notes will 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 March 2027, the Class A-1 and A-2 fixed rates will step up by 1.000% the following month (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 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.

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 limit the effective advance rate to no higher than 95.9%, which maintains a minimum level of credit enhancement (CE) to the most subordinate rated class. Toorak 2024-RRLT2 incorporates the maximum effective advance rate as a Trigger Event. During the revolving period (and prior to April 2027), if CE is not maintained for all tranches, on the third consecutive such month, a Trigger Event will occur, leading to an Amortization event.

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.

An Interest Reserve Account is in place to help cover the initial three interest payments to the Notes. Such account is funded upfront in an amount equal to $1,600,000. On the payment dates occurring in October and November 2024, the Paying Agent will withdraw a specified amount to be included in available funds, and on the payment date in December 2024, any unused related amounts will otherwise be allocated in the payment waterfall.

Historically, RTL originations reviewed by Morningstar DBRS have generated robust mortgage repayments, which have been able to cover unfunded commitments in securitizations. In the RTL space, because of the lack of amortization and the short term nature of the loans, mortgage repayments (paydowns and payoffs) tend to occur closer to or at the related maturity dates when compared with traditional residential mortgages. Morningstar DBRS considers paydowns to be unscheduled voluntary balance reductions (generally repayments in full) that occur prior to the maturity date of the loans, while payoffs are scheduled balance reductions that occur on the maturity or extended maturity date of the loans. In its cash flow analysis, Morningstar DBRS evaluated mortgage repayments relative to draw commitments for Toorak's historical acquisitions and incorporated several stress scenarios where paydowns may or may not sufficiently cover draw commitments. Please see the Cash Flow Analysis section of the presale 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.

On, or 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. 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 do 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 paydowns and payoffs
-- Solid historical performance
-- 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 (March 2027) 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 factor(s) 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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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 (June 28, 2024) https://dbrs.morningstar.com/research/435279.

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

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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.
140 Broadway, 43rd Floor
New York, NY 10005 USA
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 (June 28, 2024), https://dbrs.morningstar.com/research/435258

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (June 28, 2024), https://dbrs.morningstar.com/research/435282

-- Representations and Warranties Criteria for U.S. RMBS Transactions (June 28, 2024), https://dbrs.morningstar.com/research/435273

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

-- Operational Risk Assessment for U.S. RMBS Originators (June 28, 2024), https://dbrs.morningstar.com/research/435259

-- Operational Risk Assessment for U.S. RMBS Servicers (June 28, 2024), https://dbrs.morningstar.com/research/435261

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

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.