Morningstar DBRS Takes Credit Rating Actions on Nine Small-Balance Commercial Real Estate Transactions

DBRS Limited (Morningstar DBRS) conducted its surveillance review of nine small-balance commercial real estate (CRE) transactions, which included 111 classes. Morningstar DBRS confirmed the credit ratings on 75 classes across all of the transactions and upgraded the credit ratings on 36 classes between the Silver Hill Trust 2019-SBC1 (SHT 2019-SBC1), Bayview Financing SBC Trust 2021-5F (BVRT 2021-5F), Sutherland 2029-SBC8 (SCMT 2019-SBC8), Sutherland 2021-SBC10 (SCMT 2021-SBC10), and Oceanview Mortgage Loan Trust 2020-SBC1 (OMLT 2020-SBC1) transactions. The trends on Classes B and C of SCMT 2021-SBC10 were changed to Stable from Positive. All other trends are Stable.

The credit rating confirmations reflect the overall stable to improved performance of the transactions since Morningstar DBRS' prior review, while the credit rating upgrades generally reflect growth in credit support levels whether through principal repayments, increased prepayments, or increased defeasance. Excluding BAMLL 2024-LB1 (a recently closed transaction) and BVRT 2021-5F (a resecuritization of SHT 2019-SBC1), these transactions have experienced collateral reductions ranging between 19.9% and 88.7%, with a weighted-average (WA) figure of approximately 47.0% since issuance, compared with approximately 40.5% at the prior review. The concentration of delinquent loans has increased slightly, as did the WA coupon rate, which increased by just over 20 basis points. Prepayment figures slowed moderately on a trailing 12-month (T-12) basis but saw a significant uptick on a trailing three-month (T-3) basis. The majority of the loans are fully amortizing, with the exception of the SCMT 2021-SBC10 transaction, in which less than half the loans are fully amortizing; however, that transaction has experienced the largest collateral reduction since the prior review, increasing by 9.8%.

The full list of the credit ratings for the classes in these nine transactions can be found at the end of this press release.

According to the February 2025 reporting, 2,757 loans are secured across the transactions (excluding BVRT 2021-5F), with an aggregate outstanding balance of $2.7 billion. Of the 133 delinquent loans (6.9% of the aggregate outstanding balance), 49 loans (3.4% of the aggregate outstanding balance) were 120+ days delinquent, in foreclosure, real estate owned, or with borrowers in bankruptcy. The delinquent loans were analyzed with elevated probability of default (POD) penalties, with incrementally more punitive treatment applied, based on the length of delinquency or workout strategy to appropriately reflect the credit risk profile. Certain POD adjustments were also considered for loans secured by nontraditional property types, as well as amortization and loan prepayment, in addition to certain loss given default (LGD) penalties considered for the lack of environmental reporting, where applicable.

Most of the loans that have repaid since issuance across all transactions were paid in advance of the respective maturity dates, with the most recent repayments including applicable prepayment penalties. Based on the most recent reporting available, these pools had WA life, T-12, and T-3 constant prepayment rates (CPRs) of 10.3%, 10.7%, and 14.5%, respectively. While the WA life and T-12 metrics generally reflected a decline from the previous years, the T-3 figure reflected a significant increase when compared with the February 2024 figure of 4.3%; likely a result of the recent decline in interest rates following the Federal Reserve's third cut in 2024.

The "North American CMBS Insight Model" (CMBS Model) does not contemplate the ability to prepay loans, which is generally considered credit positive because prepaid loans cannot default. As a result, Morningstar DBRS applied the fully adjusted default assumptions and model-generated severity figures from the CMBS Model to the "RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model" (RMBS Model), which considers sequential and pro rata structures, for all transactions with the exception of Angel Oak SB Commercial Mortgage Trust 2020-SBC1 (AOMT 2020-SBC1) and Cherrywood SB Commercial Mortgage Loan Trust 2016-1 (Cherrywood 2016-1). Morningstar DBRS did not run an updated model for BAMLL 2024-LB1 given the transaction's recent close in December 2024. For more information on this transaction, please refer to the press release "Morningstar DBRS Finalizes Provisional Credit Ratings on BAMLL 2024-LB1" at https://dbrs.morningstar.com/research/444421.

As part of the RMBS Model analysis, Morningstar DBRS incorporated four CPR stresses: 5.0%, 10.0%, 15.0%, and 20.0%. In addition, a 22-month recovery lag period (excluding SCMT 2021-SBC10, which assumed a recovery lag of six months given the seasoning of the deal), 100% servicer advancing, and two default curves (front and back) were considered. The shape and duration of the default curves were based on the RMBS loss curves. Lastly, interest rates were stressed upward and downward, based on the respective loan indexes.

Generally, these pools are well-diversified, a factor that combines with the increased credit support to the rated classes from issuance (excluding SCMT 2021-SBC10, which has a pro rata structure) to generally reduce the loan-level event risk of the transaction. There are noteworthy risks for the transactions, however, in that property quality is generally considered to be Average -/Below Average based on those properties' samples and that the loan sponsors are generally less sophisticated operators of CRE with limited real estate portfolios and experience. These risks are partially mitigated by borrower or guarantor recourse, regardless of credit history. Morningstar DBRS notes that ongoing property financials are not provided as part of the surveillance reviews.

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 credit 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
Excluding SCMT 2021-SBC10 and BAMLL 2024-LB1, there were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

SCMT 2021-SBC10
An Environmental factor was applicable to the credit analysis for SCMT 2021-SBC10. At issuance, limited to no property-level information was available for review, including property condition reports and Phase I/II environmental site assessment reports. As a result, Morningstar DBRS applied an LGD penalty that resulted in a significant effect on the credit analysis and the approach was maintained with this review.

BAMLL 2024-LB1
The following Emissions, Effluents, and Waste factor had a significant effect on the credit analysis: Partner Engineering performed a comprehensive desktop/database review of all loans in the pool. Morningstar DBRS made LGD adjustments to eight loans, 1.0% of the pool, to mitigate potential environmental concerns with known on-site or adjacent-site contamination.

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.

Classes that are interest-only (IO) certificates reference a single rated tranche or multiple rated tranches. The IO credit 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 the North American CMBS Surveillance Methodology (December 13, 2024), https://dbrs.morningstar.com/research/444617.

Given the complexity, granularity, and modified pro rata pay pass-through structure of certain transactions, Morningstar DBRS also included elements of the RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (https://dbrs.morningstar.com/research/445477; January 2, 2025) as a related methodology.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to several classes (noted below) materially deviate from the credit ratings 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 ratings 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 ratings.

Below is the list of transactions and their respective classes that reported material deviations from the CMBS Model. The rationale for the material deviation is uncertain loan-level event risk.
-- Cherrywood 2016-1: Class B2
-- AOMT 2020-SBC1: Class B2

Below is the list of transactions and their respective classes that reported material deviations from the RMBS Model. The rationale for the material deviations is that certain risks are not fully reflected in the RMBS model output.
-- OMLT 2020-SBC1: Classes M4A, M4B, M4C, B2, and B3
-- SCMT 2019-SBC8: Classes C and D
-- SCMT 2021-SBC10: Class C
-- BVRT 2021-5F: Class A3

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 these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 (December 13, 2024), https://dbrs.morningstar.com/research/444616.

-- 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..