DBRS Morningstar Requests Comments on North American Single-Asset/Single-Borrower Ratings Methodology

DBRS, Inc. (DBRS Morningstar) is requesting comments on the proposed “North American Single-Asset/Single-Borrower Ratings Methodology” (the SASB Methodology). This methodology presents the criteria for which single-asset/single-borrower transactions, large concentrated pools, rake certificates, ground lease transactions, credit tenant lease transactions and first dollar loss ratings will be assigned and/or monitored.

The proposed SASB Methodology combines elements from Morningstar Credit Rating, LLC’s (MCR) “U.S. CMBS Single-Asset/Single-Borrower Ratings Methodology” and DBRS Morningstar’s “North American Single-Asset/Single-Borrower Methodology.” A joint analysis conducted concluded that both agencies employed similar rating approaches, including loan-to-value (LTV) Sizing Benchmarks and capitalization rates (Cap Rate Ranges) for multi-family, commercial and lodging property types. A full back-testing of updated LTV Sizing Benchmarks and Cap Rate Ranges was undertaken in the development of the combined proposed SASB Methodology.

Material changes are proposed, including updates to the LTV Sizing Benchmarks for multi-family, commercial and lodging property types and Cap Rate Ranges that are utilized to determine a stressed DBRS Morningstar value for input into the LTV Sizing Benchmarks. DBRS Morningstar also provides clarification regarding adjustments that may be made to the LTV Sizing Benchmarks as a result of qualitative or quantitative factors, such as the presence of additional debt, portfolio diversification and amortization.

LTV SIZING BENCHMARKS
The updated LTV Sizing Benchmarks are a function of a quantitative and qualitative analysis of SASB sector performance. DBRS Morningstar notes that defaults and losses in the SASB sector have been very limited and thus LTV Sizing Benchmarks could not be directly derived through statistical analysis of the performance of the SASB sector. The LTV Sizing Benchmarks were subsequently back-tested using a larger universe of fully cycled (matured or defaulted) conduit loans originated from 1997 to 2014, with performance updated through September 2019.

DBRS Morningstar expects the LTV Sizing Benchmarks to provide adequate cushion for value declines that occur in a severe downturn, similar to what was experienced during the 2007–2009 Great Recession. For example, at 61% LTV, DBRS Morningstar commercial tranching implies the ability of a transaction to withstand a 39% market value decline against the DBRS Morningstar Value. In comparison, Green Street Advisors’ Commercial Property Price Index registered a 38.8% peak-to-trough property price decline during this period.

CAP RATE RANGES
The updated DBRS Morningstar Cap Rate Ranges generally reflect averages by property type from 2000 through the second quarter of 2019. DBRS Morningstar Cap Rates are generally 1.5% to 3% higher than prevailing market cap rates, given the location and property type. DBRS Morningstar Cap Rates are applied to the DBRS Morningstar Stabilized Net Cash Flow (NCF) to determine the DBRS Morningstar Value for commercial real estate (CRE) asset(s). For the DBRS Morningstar approach to estimating the DBRS Morningstar Stabilized NCF for a commercial property, please see the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.”

As noted above, the changes in the SASB Methodology are material, as they include updated DBRS Morningstar LTV Sizing Benchmarks and expanded DBRS Morningstar Cap Rate Ranges for various CRE property types. Accordingly, all U.S. and Canadian SASB commercial mortgage-backed securities currently outstanding at MCR and DBRS Morningstar will be affected by the application of this methodology. All MCR outstanding SASB transactions have been placed Under Review – Analytical Integration Review and all DBRS Morningstar outstanding SASB transactions have been placed Under Review with Developing Implications.

A preliminary impact analysis that considers the proposed new SASB Methodology on the applicable certificates rated by DBRS Morningstar, in combination with various changes in assumptions that DBRS Morningstar may make, including those made to better align these assumptions with recent market experience. A statistical review of LTV Benchmark updates indicates that the majority of outstanding DBRS Morningstar ratings are expected to be confirmed (67.1%) with the remaining rating actions expected to be upgrades (7.8%) and downgrades (25.1%), while adding in a statistical review of potential cap rate adjustments based on property type, the majority of DBRS Morningstar ratings actions would continue to result in confirmations (72%) with a higher number of upgrades (25%) and a lower number of downgrades (3%).

All DBRS Morningstar ratings will be reviewed at the transaction level to check that appropriate qualitative adjustments to the LTV Sizing Benchmarks and the new Cap Rate Ranges are applied.

Comments should be received on or before December 16, 2019. Please submit your comments to the following email address:

Structured.Finance.Comments@dbrs.com

DBRS Morningstar publishes on its website all comments received, except in cases where confidentiality is requested by the respondent.

DBRS Morningstar notes that the above press release was amended on November 19, 2019, to remove STWD 2019-FL1, Ltd. from Under Review with Developments Implications, as it was mistakenly included in the list of affected transactions, and include the following transactions as now Under Review with Developing Implications, as these were omitted in the original release:
-- 9279-5129 Quebec Inc. (L'Hexagone)
-- LaSalle Canada Core Real Property, L.P., Minto (Kent St) Inc. and I.G. Investment Management Ltd (Minto Place IV)
-- South Block (Concert) Ltd. and Jawl Precinct Lands Corporation - 525 Superior Street
-- Albert & Lyon Equities Inc., Albert & Lyon Properties LP and Canderel CSQ Ottawa LP - Constitution Square
-- 110 Bloor Street West Inc.
-- Paramount Apartments Limited

DBRS Morningstar notes that the above press release was amended on November 22, 2019, to include statistical reviews of both LTV Benchmarks updates and potential cap rate adjustments as well as their impact on outstanding DBRS Morningstar ratings. As a result of these updates, DBRS Morningstar extended the RFC period on the SASB Methodology to December 23, 2019.

DBRS Morningstar notes that the above press release was amended on January 23, 2020, to include the associated rake bond classes of CSAIL 2017-C8 Commercial Mortgage Trust comprising Classes 85BD-A, 85BD-B, 85BD-C, V1-85A, V1-85B, V1-85C, and V2-85 as these classes were omitted in the original release. These classes have been placed Under Review with Developing Implications.

DBRS Morningstar notes that the above press release was amended on May 6, 2020, to include the 3.59% Mortgage Loan Due October 1, 2027, and 4.82% Mortgage Loan Due October 1, 2027, made to Ellivkroy Realty Corp. as these classes were omitted from the original release. These classes have been placed Under Review with Developing Implications.

Notes:
DBRS Morningstar methodologies are publicly available on its website www.dbrs.com under Methodologies & Criteria.

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