DBRS Morningstar Assigns Provisional Ratings to Ready Capital Mortgage Trust 2019-6

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Mortgage Pass-Through Certificates (the Certificates) to be issued by Ready Capital Mortgage Trust 2019-6 (the Issuer):

-- Class A Certificates at AAA (sf)
-- Class IO-A Certificates at AAA (sf)
-- Class B Certificates at AAA (sf)
-- Class IO-B/C Certificates at AA (sf)
-- Class C Certificates at AA (low) (sf)
-- Class D Certificates at A (low) (sf)
-- Class E Certificates at BBB (low) (sf)
-- Class F Certificates at BB (low) (sf)
-- Class G Certificates at B (low) (sf)

All trends are Stable.

The initial collateral consists of 89 fixed- and floating-rate mortgages secured by 110 stabilized and transitional properties with a cut-off balance totaling $430.7 million, excluding approximately $5.6 million of future funding commitments attributed to five loans. The pool contains a mix of stabilized properties seeking short-term bridge financing, loans backing properties that are in a period of transition with plans to stabilize and improve the asset value, and long term stabilized loans.

Although the majority of the loans are fixed rate, the loans backing transitional properties have a hybrid interest rate structure wherein the loan amount within the trust is fixed rate while the future funding component outside the trust is floating rate. For these, DBRS Morningstar applied the floating rate across the loans by using the one-month LIBOR index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded with the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 12 loans, comprising 28.5% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR for seven loans, comprising 15.0% of the initial pool balance, is below 1.00x, which is indicative of elevated refinance risk. Some of the properties are transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels. The loans backing transitional properties are structured with future funding, which will be conditionally released to the sponsor but will not be brought into the trust.

The transaction will have a sequential-pay structure.

The loans are generally secured by traditional property types (i.e., retail, multifamily, office and industrial); however, one loan (Springhill Suites at The Rim; representing 3.5% of the pool) is secured by a hotel property. Additionally, two of the multifamily loans (The Stilts on Springfield, representing 1.3% of the pool balance, and Lincoln Park Townhomes, representing 1.2% of the pool balance) in the pool are currently secured by a student-housing property, which often exhibit higher cash flow volatility than traditional multifamily properties.

Twenty-six loans, representing 45.1% of initial pool balance, are represented by properties primarily located in core markets with a DBRS Morningstar Market Rank of 5 to 8. These higher DBRS Morningstar Market Ranks correspond with zip codes that are more urbanized or densely suburban in nature. Additionally, 30 loans, representing 26.1% of the initial pool balance, are secured by properties located in MSA Group 3. This group of MSAs has relatively low historic commercial mortgage-backed security (CMBS) default rates.

Three loans in the pool, totaling 13.4% of the DBRS Morningstar sample by cut-off date pool balance, are backed by a property with a quality deemed to be Average (+) by DBRS Morningstar.

Forty loans, representing 50.0% of the pool, represent acquisition financing wherein sponsors contributed material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a moderately high sponsor cost basis in the underlying collateral.

Of the 28 loans DBRS Morningstar sampled, nine loans, representing 20.7% of the pool (34.9% of the DBRS Morningstar sample), were modeled with Average (-) or Below Average property quality. Lower-quality properties are less likely to retain existing tenants, resulting in less stable performance. DBRS Morningstar increased the probability of default (POD) for these loans to account for the elevated risk.

DBRS Morningstar analyzed the loans to achieve a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss given default (LGD) based on the DBRS Morningstar As-Is Loan to Value, assuming the loan is fully funded.

The deal is concentrated by property type with 31 loans, representing 41.7% of the mortgage loan cut-off date balance, secured by multifamily properties. Two of these loans, comprising 2.6% of the trust balance, are backed by student-housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Two loans, totaling 1.3% of the total multifamily cut-off balance, are secured by properties located in a DBRS Morningstar Market Rank of 7. An additional two loans, representing 11.1% of the multifamily concentration, are located in a DBRS Morningstar Market Rank of 6. More importantly, DBRS Morningstar sampled 69.5% of the pool, representing 80.2% coverage of the total multifamily loan cut-off balance, thereby providing comfort for the DBRS Morningstar NCF. Student-housing properties are modeled with an elevated POD compared with traditional multifamily. No loans are secured by military housing properties, which also often exhibit higher cash flow volatility than traditional multifamily properties.

The pool is generally concentrated by geography with 21 properties, representing 32.7% of the pool, located in Texas. Seven of these properties are located in MSA Group 3, which has relatively low historic CMBS default rates. Five of these are located in Market Ranks that range between 5 and 7.

DBRS Morningstar materially deviated from its “North American CMBS Multi-borrower Rating Methodology” when determining the rating assigned to Class G, which deviated from the higher ratings implied by the quantitative results. DBRS Morningstar considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the ratings. The material deviations are warranted given the expected dispersion of loan-level cash flows post-issuance and uncertain loan-level event risk.

Classes IO-A and IO-B/C 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- #1 - Houston Portfolio (6.2% of pool)
-- #2 - 1001 Ross (5.8% of pool)
-- #3 - Highland Square (5.1% of pool)
-- #4 - Place at Greenway (4.9% of pool)
-- #5 - 777 E 12th St (4.5% of pool)
-- #6 - Back Bay Center (3.9% of pool)
-- #7 - Springhill Suites at The Rim (3.5% of pool)
-- #8 - 970 New Brunswick Ave (3.3% of pool)
-- #9 - Westover Parc (3.1% of pool)
-- #10 - The Mark on Solon (2.8% of pool)
-- #11 - The Lex Dallas (2.7% of pool)
-- #12 - Waypoint – Main Street Crossroads (2.7% of pool)
-- #13 - 2202 Wilshire (2.3% of pool)
-- #14 - Aspen Village (2.0% of pool)
-- #15 - Ebb and Flow (1.6% of pool)
-- #16 - 8701 and 8717 4th Avenue (1.5% of pool)
-- #17 - The Stilts on Springfield (1.3% of pool)
-- #18 - Waynesboro Industrial (1.3% of pool)
-- #19 - Broad Street Crossing (1.3% of pool)
-- #20 - Hermosa Hotel and Apartments (1.2% of pool)
-- #21 - Lincoln Park Townhomes (1.2% of pool)
-- #24 - Buckingham Court (1.1% of pool)
-- #27 - The Creek at Stone Oak (1.0% of pool)
-- #28 - 509 Myrtle Avenue (1.0% of pool)
-- #48 - Snapwoods Apartments (0.6% of pool)
-- #60 - Kensington Office Park (0.5% of pool)
-- #73 - 3000-3002 N Sheffield Ave (0.3% of pool)
-- #85 - 1135 SW 6th St (0.2% of pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding commercial mortgage-backed security transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

DBRS Morningstar notes that the above press release was amended on January 23, 2020, to add a section about the material deviation on Class G.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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

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