Morningstar DBRS Confirms All Credit Ratings of Ready Capital Mortgage Financing 2021-FL7, LLC

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the notes issued by Ready Capital Mortgage Financing 2021-FL7, LLC 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 favorable pool composition as the majority of the 30 underlying loans, representing 89.0% of the current trust balance, are secured by multifamily properties, which have historically fared better during times of distress, in terms of retained property value and cash flow, as compared with other property types. Although the transaction reports a significant percentage of specially serviced loans, with seven loans, representing 25.0% of the pool, Morningstar DBRS' analysis suggests that losses in the potential liquidation scenarios considered as part of this review for two of those loans would be well contained to the $85.8 million unrated Class H Note. In addition, the significant paydown since issuance and resulting increase in credit support to the rated Notes is seen to be a mitigating factor for the increased pool expected loss (EL) that resulted from the stressed scenarios considered for other loans in special servicing to increase the loan-level ELs. In total, there is almost $174.0 million in cushion against loss across the unrated Class H and the below-investment-grade credit rated Class F and Class G Notes, with credit enhancement of nearly 28.0% for the BBB (low) (sf) credit rated Class E Note.

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 76 floating-rate mortgages secured by 89 properties with a cut-off date balance totaling $927.2 million. Most collateral properties 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 November 2023 payment date. As of the September 2024 remittance, the pool comprised 37 loans secured by 43 properties with a cumulative trust balance of $624.3 million, representing collateral reduction of 32.8% since issuance. Since issuance, 39 loans with a prior cumulative trust balance of $384.5 million have been successfully repaid from the pool, including 17 loans totaling $221.2 million that have repaid since the previous Morningstar DBRS rating action in October 2023.

Beyond the multifamily concentration noted above, five loans, representing 6.4% of the pool, are secured by industrial properties and the remaining two loans are secured by a lodging and a self-storage property. The pool is primarily secured by properties in suburban markets, as defined by Morningstar DBRS, with 32 loans, representing 80.9% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional five loans, representing 19.1% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6 or 7, denoting urban markets. These concentrations are generally in line with the pool composition in September 2023.

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 72.5%, with the current WA stabilized LTV of 65.3%. In comparison, these figures were 72.9% and 65.3%, respectively, at issuance. Some of the appraisals are from the early years of the pandemic (completed in 2020 and 2021), suggesting some of the cap rates utilized by the appraisers could be low compared to cap rates utilized later in the cycle, after the interest rate increases that began in 2022. As such, Morningstar DBRS evaluated the implied cap rates for each of those loans and stressed the values where applicable. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments to 17 loans, representing 55.1% of the current trust balance.

As of the September 2024 reporting, seven loans, representing 25.0% of the current trust balance, are in special servicing. In its analysis, Morningstar DBRS liquidated the Asher Apartments (Prospectus ID#6, 4.7% of the pool) and Highland Midtown loans (Prospectus ID#19, 2.7% of the pool), with loss severities exceeding 30.0% and 50.0%, respectively. The cumulative loss was contained to Class H, the unrated $85.8 million first-loss piece. The largest loan in special servicing, Skylar Pointe (Prospectus ID#2, 6.3% of the pool), is secured by a 449-unit multifamily complex in Houston, Texas. The loan transferred to special servicing in November 2023 and is in the process of being modified to facilitate the transfer of interest to the preferred equity investor and also to extend its initial November 2024 maturity date. Following the transfer of ownership, the loan is expected to return to the master servicer. Given the collateral property's underperformance as compared with issuance expectations, Morningstar DBRS analyzed the loan with an elevated as-is LTV and stabilized LTV, along with a probability of default penalty, resulting in an expected loss approximately 70% greater than the pool average.

There are 21 loans, representing 50.9% of the current trust balance, on the servicer's watchlist as of the September 2024 reporting. The loans have generally been flagged for upcoming loan maturity and low debt service coverage ratios. Excluding any specially serviced loans, 26 loans, representing 65.1% of the current trust balance, have scheduled maturity dates in the next 12 months. All but two loans (combined representing 0.9% 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. Based on prior modification terms, Morningstar DBRS expects such agreements would likely include fresh sponsor equity to fund principal curtailments, funding of carry reserves, and/or the purchase of a new interest rate cap agreement.

Through August 2024, the lender had advanced cumulative loan future funding of $59.7 million to 32 borrowers to aid in property stabilization efforts. The largest advance, $7.7 million, has been made to the borrower of the 835-864 West Barry Avenue loan (Prospectus ID#9, 4.7% of the pool). The loan is secured by a 115-unit apartment complex in Chicago. The advanced funds have been used to fund the borrower's $10.3 million planned capital expenditure (capex) across the portfolio. Less than $100,000 of future funding remains available to the borrower to complete its capex plan.

An additional $20.0 million of loan future funding allocated to 27 of the outstanding individual borrowers remains available. The largest portion ($2.8 million) is allocated to the borrower of the specially serviced Asher Apartments loan, for which $2.6 million in future funding has been previously advanced to date. The remaining available funds are for the borrower's capex plan; however, given the specially serviced status of the loan, it is unlikely that additional funds will be advanced 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 press releases 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 at (August 13, 2024) https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings.

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 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 info-DBRS@morningstar.com.

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 Limited
DBRS Tower, 181 University Avenue, Suite 700
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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- 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/417279.

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