Morningstar DBRS Confirms All Credit Ratings on CFK Trust 2019-FAX

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-FAX issued by CFK Trust 2019-FAX as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-A at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the underlying collateral's stable performance, as exhibited by year-over-year increases in rental rates as part of ongoing unit renovations. The transaction's underlying loan is secured by the Fairfax Multifamily Portfolio, which consists of three cross-collateralized and cross-defaulted Class B+ multifamily properties totaling 870 units in Fairfax and Herndon, Virginia. The previous owner invested more than $22.8 million in capital improvements and renovated 248 of the 870 units in the portfolio. In December 2022, The Milestone Group purchased the portfolio and assumed the subject loan. At issuance, it was noted that an additional $11.0 million, or $12,800 per unit, was allocated for future renovations and upgrades, aimed at tapping potential upside in rental revenues. As of the January 2025 reporting, $3.3 million of future funding remained in a reserve account. Morningstar DBRS has reached out to the servicer for an update on the status of the planned renovations and the plan to spend the remainder of the reserve funds; as of the date of this press release, the response is pending.

The $82.0 million trust loan consists of two senior notes ($15.0 million) and two junior notes ($67.0 million). In addition to the trust loan, five senior notes comprise a $70.0 million nontrust pari passu companion loan, a $25.0 million senior mezzanine loan, and a $20.0 million junior mezzanine loan, which are held outside of the trust. The loan is interest only (IO) throughout its 10-year loan term and matures in January 2029.

Based on the financials for the trailing 12-month (T-12) period ended September 30, 2024, the portfolio reported a net cash flow (NCF) of $15.1 million (reflecting a debt service coverage ratio of 1.70 times), which is equivalent to a whole loan debt yield of 9.9%, excluding mezzanine debt. Cash flows have shown an upward trajectory since issuance because of increased rental rates driven by the ongoing unit renovations. The NCF for the T-12 period ended September 30, 2024, was 7.9% above the YE2023 figure and 30.1% above the Morningstar DBRS NCF.

Although units are likely being taken offline for some period of time while renovations are completed, the portfolio-level weighted-average (WA) occupancy has recently remained generally stable. As of the September 2024 rent roll, the WA occupancy rate was 95.2%, a slight decline from 97.0% at YE2023. The September 2024 occupancy rate is in line with the issuance levels. Ongoing renovations have gradually increased the portfolio-level WA rental rate from $1,801 per unit at issuance to $2,165 per unit at September 2023 and, again, up to $2,308 per unit according to the September 2024 rent roll. At issuance, renovated units were fetching average rental premiums of $126 over unrenovated units; however, it is noteworthy that there had only been 248 unit renovations completed at that time.

As part of the analysis for this review, the Morningstar DBRS value was updated. The Morningstar DBRS NCF was based on a haircut to the NCF figure of $15.1 million for the T-12 period ended September 30, 2024. A capitalization rate (cap rate) of 6.75% was applied and a small credit was considered to account for the remaining renovation work to be completed. The resulting Morningstar DBRS value of $222.8 million represents a variance of -11.4% from the appraised value at issuance of $251.5 million. In addition, Morningstar DBRS maintained positive qualitative adjustments totaling 2.5% to reflect the low cash flow volatility and healthy market fundamentals. Given the significant performance improvements, which have contributed to the increase from the Morningstar DBRS value of $183.3 million derived at issuance, a stressed scenario was considered to evaluate the potential for credit rating upgrades. That analysis considered a 20.0% haircut to the NCF for the T-12 period ended September 30, 2024, for all three properties. The same 6.75% cap rate was applied. The results of that analysis did not provide enough cushion to warrant credit rating upgrades with this review.

The Morningstar DBRS credit ratings assigned to Classes B, C, D, and E are lower than the results implied by the loan-to-value sizing benchmarks. These variances are warranted given that renovation work remains to be completed across the portfolio, and the upgrade stress analysis Morningstar DBRS considered did not support credit rating upgrades for the classes in question.

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

Class X-A is an 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617.

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 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 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
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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 Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024), https://dbrs.morningstar.com/research/444612
-- 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 (December 3, 2024), https://dbrs.morningstar.com/research/444064

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.