Morningstar DBRS Downgrades Credit Rating on One Class of Ready Capital Mortgage Financing 2022-FL8, LLC

DBRS, Inc. (Morningstar DBRS) downgraded its credit rating on one class of notes issued by Ready Capital Mortgage Financing 2022-FL8, LLC as follows:

-- Class G to CCC (sf) from B (low) (sf)

Morningstar DBRS also confirmed its credit ratings the remaining classes of notes 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)

All trends are Stable with the exception of Class G, which is assigned credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating downgrade on Class G, which is a non-offered class held by the issuer, is the result of ongoing accumulated interest shortfalls, which have persisted since April 2024 and are expected to surpass the Morningstar DBRS tolerance of six months' shortfalls for the BB or B credit rating category. As of the August 2024 reporting, cumulative interest shortfalls on the Class G Notes totaled $0.9 million. Per the terms of the Pooling & Servicing agreement for the transaction, the servicer is not required to advance interest to the non-offered Class F, G and unrated Class H certificates. The August 2024 remittance showed four delinquent loans, with payments between one and three months past due.

The credit rating confirmations reflect the overall composition of the pool as the majority of the collateral, 38 loans, representing 91.1% of the current trust balance, is secured by multifamily properties. Multifamily properties have historically proven to be better able to retain property value and cash flow compared with other property types. 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 as well as business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 67 floating-rate mortgages secured by 89 mostly transitional properties with a cut-off date balance totaling $1.22 billion. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. The transaction was structured with a Replenishment Period that expired with the February 2024 Payment Date.

As of the August 2024 remittance, the pool comprised 47 loans secured by 61 properties with a cumulative trust balance of $650.8 billion, representing collateral reduction of 16.4% since issuance. Since issuance, 21 loans with a prior cumulative trust balance of $536.7 million have been successfully repaid from the pool, including 10 loans totaling $397.2 million that have repaid since the previous Morningstar DBRS rating action in September 2023.

Beyond the multifamily concentration noted above, seven loans, representing 7.2% of the current trust balance, are secured by Industrial properties, and one loan, representing 1.7% of the current trust balance, is secured by student housing property. As of September 2023, multifamily collateral represented 90.3% of the trust balance, industrial collateral represented 8.2%, and student housing collateral represented 1.5%.

The pool is primarily secured by properties in suburban markets, as defined by Morningstar DBRS, with 41 loans, representing 87.8% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional four loans, representing 9.6% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6 or 7, denoting urban markets, while one loan, representing 2.5% of the pool, is secured by a property with a Morningstar DBRS Market Rank of 2, denoting tertiary markets. In comparison, in September 2023, properties in suburban markets represented 88.7% of the collateral, properties in urban markets represented 8.6% of the collateral, and properties in tertiary markets represented 2.7% of the collateral.

Leverage across the pool has remained similar since issuance as the current weighted-average (WA) as-is appraised value loan-to-value ratio LTV is 75.1% with the current WA stabilized LTV of 66.2%. In comparison, these figures were 74.6% and 65.4%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the individual property appraisals were completed in 2021 or 2022 and do not reflect the current higher interest rate or widening capitalization rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 19 loans, representing 67.0% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

As of the August 2024 reporting, seven loans, representing 12.4% of the current trust balance, are in special servicing. In its analysis, Morningstar DBRS liquidated four of the specially serviced loans, with individual loan loss severities ranging from approximately 10.0% to 30.0%. The cumulative loss was contained to Class H, the unrated $109.2 million first-loss piece. The largest loan in special servicing, the MN Brownstone Portfolio loan, is secured by a portfolio of eight multifamily properties totaling 332 units in Minneapolis. The loan transferred to special servicing in December 2023 for imminent payment default. Despite having been modified twice in 2024, the loan remains 60 days delinquent. According to documents provided by the servicer, the property was 84.0% occupied as of September 2023 with an annualized net cash flow (NCF) of $1.2 million for the trailing nine months ended September 30, 2023, equating to a debt service coverage rate (DSCR) of 0.27x and debt yield of 2.5%. While the in-place cash flow remains in line with Morningstar DBRS' As-Is NCF of $1.2 million at closing, cash flow is well below the issuer's and Morningstar DBRS' projected stabilized NCF of $3.2 million and $2.3 million. The property was appraised for $41.1 million at closing, implying an LTV of 93.1% based on the current funded A-note of $38.3 million. Given weaker market fundamentals, in its current analysis, Morningstar DBRS assumed a distressed property value given the status of the loan and liquidated the loan from the trust. The resulting loan loss severity was approximately 20.0%.

Eight loans, representing 10.6% of the current trust balance, are on the servicer's watchlist as of the August 2024 reporting. The loans have generally been flagged for upcoming loan maturity, low occupancy rates, and low DSCRs. Excluding any specially serviced loans, 26 loans, representing 60.9% of the current trust balance, have scheduled maturity dates. All but two loans (combined representing 1.0% of the current trust balance) have outstanding extension options available to the individual borrowers. If property performance does not qualify to exercise the related options, Morningstar DBRS expects the borrowers and lender to negotiate mutually beneficial loan modifications to extend the loans, which would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase a new interest rate cap agreement.

Through August 2023, the lender had advanced cumulative loan future funding of $53.4 million to 40 of the 42 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $4.9 million, has been made to the borrower of the Highland Park and Residences at Turnberry loan. The loan is secured by a portfolio of two multifamily properties, totaling 454 units, in Reynoldsburg, Ohio, and Pickerington, Ohio. The advanced funds have been used to fund the borrower's planned $5.7 million planned capital expenditure (capex) plan across the portfolio. An additional $0.7 million of future funding remains available to the borrower to continue its capex plan.

An additional $42.4 million of loan future funding allocated to 38 of the outstanding individual borrowers remains available. The largest portion is allocated to the borrower of the MN Brownstone Portfolio ($3.6 million) loan. The available funds are for the borrower's capex plan across the portfolio; however, given the status of the loan, it is unclear if additional funds will be advanced to the borrower. Through August 2024, the lender had advanced $4.4 million of loan future funding to the borrower.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective private rating letters at issuance.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

DBRS, Inc.
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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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/428797

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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

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

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 info-DBRS@morningstar.com.