DBRS Morningstar Assigns Ratings to CFK Trust 2019-FAX

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-FAX issued by CFK Trust 2019-FAX (the Issuer) 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.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about July 16, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The loan is secured by the Fairfax Multifamily Portfolio, which consists of three multifamily properties totalling 870 units in Fairfax and Herndon, Virginia. The sponsor used loan proceeds as well as its ownership equity of $2.1 million and preferred equity of $36.0 million to acquire the Ellipse at Fairfax Corner asset for $98.0 million ($112,644 per unit), to refinance the short-term bridge loan on the Windsor at Fair Lakes and Townes at Herndon Center properties for $86.1 million, and to fund an upfront replacement reserve of $11.1 million. The whole loan is composed of an $82 million trust loan (two senior notes and two junior notes) and a $70 million nontrust pari passu companion loan (five senior notes) for a total first mortgage of $152 million. In addition to the senior debt, the transaction was structured with a $25 million senior mezzanine loan and a $20 million junior mezzanine loan, which are held outside the trust. The 10-year loan is interest only (IO) for the entire period.

All three properties are well situated in close proximity to I-66 and I-495, providing direct access to Arlington, Washington, D.C., and other major cities in Virginia. The properties are close to good school districts, grocery stores, hospitals, and shopping centres. Fairfax Multifamily Portfolio is located in a strong multifamily submarket with rental rates increasing year over year. The submarket, which is popular among young to middle-aged individuals, has had a vacancy rate of less than 5% over the past five years. The portfolio has an average occupancy of 94.6% with the individual properties ranging from 94.0% to 95.6%. The previous owner invested over $22.8 million in capital improvements and renovated 248 of the 870 units in the portfolio. The sponsor budgeted an additional $11.0 million, or $12,800 per unit, for future renovations and upgrades, which will increase in-place rents and keep the property competitive. At issuance, there were concerns about new supply in the West Fairfax County submarket, but the portfolio’s location, its proximity to employment centres and transportation nodes, and the stability in the immediate area mitigate these concerns.

The loan sponsor is Tomas Rosenthal, the Chief Executive Officer of Hampshire Properties Ltd., which is a New York-based privately held real estate investment firm specializing in value-add opportunities. Rosenthal founded the company in 1988 and its current portfolio consists of office buildings, industrial properties, and multifamily complexes across the United States and Canada, valued at approximately $1 billion.

The DBRS Morningstar NCF derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $11.4 million, and a cap rate of 6.75% as well as a value adjustment for reserved renovation funds were applied, resulting in a DBRS Morningstar Value of $180.4 million, a variance of -28.3% from the appraised value at issuance of $251.5 million. The DBRS Morningstar Value implies an LTV of 84.2% compared with the LTV of 60.4% on the appraised value of at issuance, excluding the mezzanine funding. The NCF figure applied as part of the analysis represents a -5.8% variance from the Issuer’s NCF, primarily driven by management fee and payroll expenses.

The cap rate DBRS Morningstar applied is at the lower to middle end of the DBRS Morningstar Cap Rate Ranges for multifamily properties, reflecting the properties’ ages and the submarket. In addition, the 6.75% cap rate DBRS Morningstar applied is above the implied cap rate of 4.9% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 2.5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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@dbrsmorningstar.com.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

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

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