Morningstar DBRS Finalizes Provisional Credit Ratings on BANK5 2024-5YR10

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates Series, 2024-5YR10 (the Certificates) issued by BANK5 2024-5YR10 (the Trust):

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C 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, D, E, F, G, and H-RR will be privately placed.

The collateral for the BANK5 2024-5YR10 transaction consists of 42 fixed-rate loans secured by 83 commercial and multifamily properties with an aggregate cut-off date balance of $837.84 million. Two loans (The Galt House and ExchangeRight 68), representing 15.4% 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. When the cut-off balances were measured against the Morningstar DBRS Net Cash Flow (NCF) and their respective constants, the initial Morningstar DBRS Weighted-Average (WA) Debt Service Coverage Ratio (DSCR) of the pool was 1.55 times (x). The WA Morningstar DBRS Issuance Loan-to-Value Ratio (LTV) of the pool was 57.1% and the loan is scheduled to amortize to a WA Morningstar DBRS Balloon LTV of 56.7% at maturity. These credit metrics are based on the A note balances. Excluding the shadow-rated loans, the deal still exhibits a reasonable WA Morningstar DBRS Issuance LTV of 61.0% and a WA Morningstar DBRS Balloon LTV of 60.8%. However, 10 loans, representing 13.7% of the allocated pool balance, exhibit a Morningstar DBRS Issuance LTV in excess of 67.1%, a threshold generally indicative of above-average default frequency, Additionally, 16 loans, representing 22.3% of the allocated pool balance, exhibit a Morningstar DBRS DSCR below 1.25x, a threshold indicative of a higher likelihood of midterm default. The transaction has a sequential-pay pass-through structure.

The Galt House and ExchangeRight 68, together representing 15.4% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. The credit characteristics of The Galt House were consistent with a AA shadow rating and those of ExchangeRight 68 were consistent with a BBB (high) shadow rating.

Three loans, representing 14.8% of the pool, are located in areas with Morningstar DBRS Market Ranks of 7 or 8, which are indicative of dense urban areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Additionally, 12 loans, representing 50.1% of the allocated pool balance, are located in areas with Morningstar DBRS Market Ranks of 5 or 6. Markets with these rankings benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. New York and Los Angeles are the predominant urban markets represented in the deal. Another 12 loans, representing 35.3% of the pool, are located in Metropolitan Statistical Area (MSA) Group 3, which represents the best-performing group among the top 25 MSAs in historical commercial mortgage-backed securities (CMBS) default rates.

Fourteen loans, representing 37.6% of the pool, have Morningstar DBRS Issuance LTVs below 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 15.4% of the pool, the transaction exhibits a WA Morningstar DBRS Issuance LTV of 61.0%. There are only three loans in the pool (Kimpton Journeyman Hotel, River Apartments, and The Reserve at Homosassa Springs) with Morningstar DBRS LTVs equal to or above 70.0%.

Five loans, representing 16.1% of the pool, received a property quality assessment of Average +, with no loans in the pool receiving a property quality assessment of Below Average. Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance.

The pool contains 42 loans and is concentrated with a lower Herfindahl score of 19.5, with the top 10 loans representing 60.8% of the pool. These metrics are lower than the Morningstar DBRS-rated BANK5 2024-5YR7 transaction, which had a Herfindahl score of 21.2, while the BANK5 2024-5YR8 deal had a Herfindahl score of 16.7. The pool's low diversity is accounted for in the Morningstar DBRS model, raising the transaction's credit enhancement levels to account for the more concentrated pool.

The pool has a relatively high concentration of loans secured by office and retail properties at 16 loans, representing 45.1% of the pool balance. These property types were among the most affected by the COVID-19 pandemic. Future demand for office space is uncertain because of the post-pandemic growth of work from home or hybrid work, resulting in less use and, in some cases, companies downsizing their office footprints. Retail will continue to be affected by decreasing consumer sentiment and spending, with many retail companies closing stores as a result of decreased sales. Two of the office loans and two of the retail loans, representing 24.7% of the total pool balance, are located in areas with Morningstar DBRS Market Ranks of 6, 7, and 8, which exhibit the lowest historical CMBS probabilities of default (PODs) and loss severity given default. Furthermore, three of the office loans and three of the retail loans, representing 28.3% of the total pool balance, are in MSA Group 3, which is the best-performing group among the top 25 MSAs in historical CMBS default rates. All office loans in the pool were sampled as were six of the 11 retail properties, representing 90.9% of the property type's trust balance. Three of the five office properties sampled were assessed as having Average + property quality. Two of the six retail properties sampled were deemed to have Strong sponsorship strength.

In today's challenging interest rate environment, debt service payments have nearly doubled since mid-2022. Elevated interest rates have severely constrained DSCRs, and the subject transaction has a WA Morningstar DBRS DSCR of 1.55x, or 1.40x when excluding the 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 DSCRs receive a POD penalty in the Morningstar DBRS model.

Thirty-eight, or 85.1%, of the 42 loans in the pool are structured with interest-only (IO) payment structures and do not benefit from any amortization. The four remaining loans amortize over their full loan terms with no periods of IO payments. One of the IO loans, ExchangeRight 68, which represents 5.5% of the pool, is shadow-rated investment grade by Morningstar DBRS. The IO loans have a WA Morningstar DBRS LTV of 60.3%, indicative of moderately low leverage. Of the 38 loans with full-term IO periods, six loans, representing 30.5% of the pool, are located in areas with Morningstar DBRS Market Ranks of 6 or higher, while 14.8% of the pool is in areas with Morningstar DBRS Market Ranks of 7 or 8. These urban markets benefit from increased liquidity even during times of economic stress.

Thirty-four loans, representing 86.3% of the total pool balance, are refinancing or recapitalizing existing debt. Morningstar DBRS views loans that refinance existing debt as more credit negative compared with loans that finance an acquisition. Acquisition financing typically includes a meaningful cash investment from the sponsor, which aligns its interests more closely with those of the lender, whereas refinance transactions may be cash-neutral or cash-out transactions, the latter of which may reduce the borrower's commitment to a property. The loans that are refinancing existing debt exhibit relatively low leverage. Specifically, the Morningstar DBRS WA Issuance and Balloon LTVs of those loans debts are 57.4% and 57.0%, respectively.

Thirty of the 42 loans in the pool exhibit negative leverage, defined as the Issuer's implied capitalization rate (cap rate) (Issuer's NCF divided by the appraised value), less the current interest rate. On average, the transaction exhibits -0.79% of negative leverage. 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. In the longer term, should interest rates hold steady, the loans in this transaction could be subject to negative value adjustments that may affect their borrowers' ability to refinance their loans.

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/or Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit rating does not address non-payment 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 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

Classes X-A, X-B, X-D, X-F, and X-G are interest-only (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.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)
https://dbrs.morningstar.com/research/428797.

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.

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024)
https://dbrs.morningstar.com/research/439702

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

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

North American Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024)
https://dbrs.morningstar.com/research/439699

Rating North American CMBS Interest-Only Certificates (June 28, 2024)
https://dbrs.morningstar.com/research/435294

North American CMBS Insight Model v 1.2.0.0 (March 01, 2024)
https://dbrs.morningstar.com/research/428797

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