Morningstar DBRS Changes Trends on Five Classes of SBALR Commercial Mortgage 2020-RR1 Trust to Stable From Negative, Confirms All Credit Ratings

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-RR1 issued by SBALR Commercial Mortgage 2020-RR1 Trust as follows:

-- Class A-3 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AA (high) (sf)
-- Class B at B (high) (sf)
-- Class C at CCC (sf)
-- Class D at C (sf)
-- Class E at C (sf)
-- Class F at C (sf)

In addition, Morningstar DBRS changed the trends on Classes A-3, A-AB, X-A, A-S, and B to Stable from Negative. Classes C, D, E, and F are assigned credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating confirmations reflect Morningstar DBRS' current outlook and loss expectations for the transaction. During the prior review, Morningstar DBRS downgraded its credit ratings on six classes and changed the trends on Classes A-3, A-AB, X-A, A-S, and B to Negative from Stable, primarily because of concerns related to the transaction's largest loan group, Emerald Bronx Multifamily Portfolio (the Emerald portfolio; Prospectus ID#s 2, 3, 4, 5, 6, 10, 11, and 13; 31.1% of the pool). Since that time, updated appraisals have been made available for the properties backing the eight defaulted loans. Those appraisals indicate the as-is values for the underlying collateral have not deteriorated further over the last year, supporting the change in trends to Stable from Negative. Additional details are outlined below.

As of the October 2024 reporting, 50 of the original 59 loans remain in the pool with an aggregate principal balance of $353.5 million, representing collateral reduction of 11.6% since issuance. To date, the trust has incurred a total loss of approximately $1.0 million, which has been contained to the nonrated Class G certificate. There are 13 loans, representing 19.2% of the pool, on the servicer's watchlist, and 10 loans, representing 36.4% of the pool, in special servicing. In addition, the largest loan in the pool, Winner's Circle at Saratoga Apartments (Prospectus ID#1; 5.8% of the pool), has fully defeased.

The transaction is highly exposed to rent-stabilized, workforce housing, located in New York City (NYC), which represents 37.9% of the current pool balance, as both the Emerald portfolio and another group of loans, Gutman and Hoffman Multifamily Portfolio (Gutman portfolio; Prospectus ID#s 9 and 12; 6.8% of the pool), are collateralized by that property type. In the analysis for this review, Morningstar DBRS assumed liquidation scenarios for all 10 loans in special servicing (based on haircuts to the most recent appraised values), including the Emerald portfolio loans, Clarion Suites Anchorage loan (Prospectus ID#7; 3.7% of the pool) and Executive Center V loan (Prospectus ID#29; 1.6% of the pool), which transferred to the special servicer in May 2024. Although both loans within the Gutman portfolio are current and the reported cash flows are relatively in line with the issuance figures, Morningstar DBRS considered a stressed scenario for those two loans based on an as-is value decline for the underlying properties. This approach was considered appropriate given the increased challenges for rent-stabilized assets located in NYC. The scenarios analyzed for this review resulted in an aggregate forecast loss projection totalling approximately $50.0 million, which would fully erode Classes E, F, and G and reduce the Class D balance by more than 70.0%.

The Emerald portfolio is composed of eight loans secured by smaller portfolios of multifamily properties, typically classified as workforce housing. In total, the portfolio consists of 28 properties and 747 units in multiple neighborhoods in the Bronx. The loans transferred to the special servicer between May 2023 and November 2023 for imminent monetary default with the sponsor, Emerald Equity Group, citing nonpaying tenants and inflated expenses as the source of the payment issues. According to the most recent servicer reporting, foreclosure litigation remains active and in progress. Morningstar DBRS notes that the sponsor is having difficulty outside of the subject portfolios, with other defaults reported since 2020. In addition, the subject financing represented an $8.7 million cash out, with equity of just more than $500,000 remaining. The appraisals for the properties backing the defaulted loans reported weighted-average (WA) value declines of approximately 45.0% when compared with the issuance appraised values. When considering the updated values in a hypothetical liquidation scenario, including a haircut to the most recent appraised values, the resulting liquidated loss amounts suggest a WA loss severity in excess of 35.0% could be realized upon disposition.

The Clarion Suites Anchorage loan is secured by a 112-room limited-service hotel in Anchorage, Alaska. The loan transferred to the special servicer in October 2020 and the asset became real estate owned in December 2021. According to the most recent servicer commentary, an unsolicited purchase offer for the property was received, the terms of which are currently being reviewed. The most recent appraisal, dated March 2022, valued the property at $16.0 million, considerably lower than the issuance appraisal value of $22.0 million. Morningstar DBRS' analysis included a liquidation scenario based on a haircut to the most recent appraised value, resulting in a projected loss severity approaching 20.0%.

The Executive Center V loan is secured by a 57,180-square-foot (sf) multitenant office property in Brookfield, Wisconsin. The loan transferred to the special servicer in May 2024 after the borrower stated that the property was not generating sufficient cash flow to cover debt service obligations. Prior to its transfer to the special servicer, the borrower executed three new leases increasing occupancy to approximately 83.0% from 19.0%. However, the borrower failed to reimburse the contractor for the renovations performed on the two of three spaces, prompting the special servicer to move forward with foreclosure proceedings. A July 2024 appraisal valued the property at $4.8 million, 40.0% below the issuance appraised value of $8.0 million. Morningstar DBRS' analysis included a liquidation scenario based on a haircut to the most recent appraised value, resulting in a projected loss severity of approximately 40.0%.

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 https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Class X-A is an interest-only (IO) certificate that references 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 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 credit rating assigned to the Class B certificate materially deviates from the credit rating implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is Uncertain loan-level event risk. As outlined above, there is a high concentration of loans in special servicing, including the largest loan group in the pool, Emerald Bronx Multifamily Portfolio. Because the junior classes do not provide a significant amount of cushion to insulate against potential losses, should those loans, or any other loans experience further value and/or performance declines, this deviation was deemed warranted.

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. 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 credit 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.

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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/North American CMBS Insight Model v 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797

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

-- 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 (October 28, 2024); https://dbrs.morningstar.com/research/441840

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 (July 17, 2023).

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