DBRS Morningstar Finalizes Provisional Ratings on Oceanview Mortgage Loan Trust 2020-SBC1

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of secured floating-rate notes issued by Oceanview Mortgage Loan Trust 2020-SBC1 (the Issuer):

-- Class A1-A at AAA (sf)
-- Class A1-B at AAA (sf)
-- Class A1-C at AAA (sf)
-- Class A1-XA at AAA (sf)
-- Class A1-XB at AAA (sf)
-- Class A1-XC at AAA (sf)
-- Class A1-XD at AAA (sf)
-- Class A1-XE at AAA (sf)
-- Class M1-A at AA (sf)
-- Class M1-B at AA (sf)
-- Class M1-C at AA (sf)
-- Class M1-XA at AA (sf)
-- Class M1-XB at AA (sf)
-- Class M1-XC at AA (sf)
-- Class M1-XD at AA (sf)
-- Class M1-XE at AA (sf)
-- Class M2-A at A (sf)
-- Class M2-B at A (sf)
-- Class M2-C at A (sf)
-- Class M2-XA at A (sf)
-- Class M2-XB at A (sf)
-- Class M2-XC at A (sf)
-- Class M2-XD at A (sf)
-- Class M2-XE at A (sf)
-- Class M3-A at BBB (sf)
-- Class M3-B at BBB (sf)
-- Class M3-C at BBB (sf)
-- Class M3-XA at BBB (sf)
-- Class M3-XB at BBB (sf)
-- Class M3-XC at BBB (sf)
-- Class M3-XD at BBB (sf)
-- Class M3-XE at BBB (sf)
-- Class M4-A at BBB (low) (sf)
-- Class M4-B at BBB (low) (sf)
-- Class M4-C at BBB (low) (sf)
-- Class M4-XA at BBB (low) (sf)
-- Class M4-XB at BBB (low) (sf)
-- Class M4-XC at BBB (low) (sf)
-- Class M4-XD at BBB (low) (sf)
-- Class M4-XE at BBB (low) (sf)
-- Class B1-A at BB (high) (sf)
-- Class B1-B at BB (high) (sf)
-- Class B1-XA at BB (high) (sf)
-- Class B1-XB at BB (high) (sf)
-- Class B1-XC at BB (high) (sf)
-- Class B2 at BB (low) (sf)
-- Class B3 at B (low) (sf)

All trends are Stable.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impacts on both the commercial real estate sector and the global fixed income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

A portion of the initial Mortgage Loans is composed of Unresolved COVID Forbearance Loans. Additionally, Mortgage Loans may be modified or become subject to Fresh Start Loss Mitigation or Proprietary COVID Forbearance following the Closing Date. The repayment of forborne debt service payments may be made at one time, over 90 days, capitalized and added to the loan balance, or otherwise as required by law.

Since the presale report and corresponding ratings were published on August 26, 2020, the Issuer elected to exclude 20 loans, comprising $8,898,226 or 3.2% of the previous trust balance, from the transaction.

The collateral consists of 637 individual loans secured by 761 commercial, multifamily, and single-family rental (SFR) properties with an average (unless noted otherwise, average refers to straight average) loan balance of $428,354. The transaction is configured with a sequential-pay pass-through structure. Given the complexity of the structure and granularity of the pool, DBRS Morningstar applied its “North American CMBS Multi-Borrower Rating Methodology” (the CMBS Methodology) and the “RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology” (the RMBS Methodology).

Of the 637 individual loans, 399 loans, representing 60.1% of the pool, have a fixed interest rate with an average of 6.9%. The floating-rate loans have interest rate life floors ranging from 2.00% to 10.3%, with a straight average of 7.00%, and interest rate margin ranging from 0.50% to 5.50%, with a straight average of 2.4%. To determine the probability of default (POD) and loss severity given default (LGD) inputs in the CMBS Insight Model for the floating-rate loans, DBRS Morningstar applied a stress to the various indexes that corresponded with the remaining fully extended term of the loans and added the respective contractual loan spread to determine a stressed interest rate over the loan term. DBRS Morningstar looked to the greater of the interest rate floor or the DBRS Morningstar stressed index rate when calculating stressed debt service. The average modeled coupon rate across all loans was 8.1%. The loans have original terms of 10 years to 30 years and amortize over periods of 15 years to 30 years. When the cut-off loan balances were measured against the DBRS Morningstar stressed net cash flow (NCF) and their respective actual constants or stressed interest rates, there were 387 loans, representing 53.9% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default.

The pool has an average original term length of 355 months, or 29.6 years, with an average remaining term of 343 months, or 28.5 years. Based on the original loan balance and the appraisal at origination, the pool had a weighted-average (WA) loan-to-value ratio (LTV) of 66.9%. DBRS Morningstar applied a pool average LTV of 71.3%, which reflects the adjustments it made to values based on implied cap rates by market rank. Furthermore, all but two of 637 loans fully amortize over their respective remaining loan terms, resulting in 99.9% expected amortization; this does not represent typical commercial mortgage-backed securities (CMBS) conduit pools, which have substantial concentrations of interest-only (IO) and balloon loans. DBRS Morningstar’s research indicates that, for CMBS conduit transactions securitized between 2000 and 2018, the average amortization by year has ranged between 7.5% to 22.0%, with an overall median of 12.5%.

Of the 637 loans, 46 loans, representing 3.1% of the trust balance, are secured by SFR properties. The CMBS Methodology does not currently contemplate ratings on SFR properties. To address this, DBRS Morningstar severely increased the expected loss on these loans by approximately 2.9x over the average non-SFR expected loss.

DBRS Morningstar then applied the fully adjusted default assumption and model generated severity figures from the DBRS Morningstar CMBS Insight Model to the RMBS Cash Flow Model, which is adept at modeling sequential and pro rata structures on loan pools exceeding 500 loans. As part of the RMBS Cash Flow Model, DBRS Morningstar incorporated four constant prepayment rate (CPR) stresses: 5.0%, 10.0%, 15.0%, and 20.0%. Additional assumptions in the RMBS Cash Flow Model include a 22-month recovery lag period, 100% servicer advancing, and four default curves (uniform, front, middle, and back). The shape and duration of the default curves were based on the RMBS loss curves. Lastly, DBRS Morningstar stressed rates, both upward and downward, based on their respective loan indexes.

The pool is relatively diverse based on loan size, with an average balance of $428,354, a concentration profile equivalent to that of a pool with 386 equal-sized loans and a top-10 loan concentration of only 7.1%. Increased pool diversity helps to insulate the higher-rated classes from loan-level event risk. The loans are mostly secured by traditional property types (i.e., retail, multifamily, office, and industrial) with no exposure to higher-volatility property types, such as hotels, and minimal exposure to self-storage facilities or manufactured housing communities, which represent 0.2% of the pool balance combined. All but two loans in the pool fully amortize over their respective loan terms between 120 and 360 months, thus virtually eliminating refinance risk.
 
The pool has high term risk as supported by the low WA DBRS Morningstar DSCR of 1.18x. The DBRS Morningstar DSCR reflects conservatively stressed debt service amounts on floating-rate loans. Furthermore, the pool has a cut-off WA LTV of 66.9% based on appraisal values at loan origination that suggests overall moderate leverage.

The pool is heavily concentrated with multifamily, 39.1% of the pool. Multifamily properties included mixed-use assets that were predominately residential. Based on DBRS Morningstar’s research, multifamily properties securitized in conduit transactions have had lower default rates than most other property types.

Of the 47 loans that DBRS Morningstar sampled (performed an exterior site inspection and/or reviewed third-party photographs), 21 loans, representing 24.1% of the DBRS Morningstar sample, had Average (-) to Poor property quality scores. DBRS Morningstar increased the POD for these loans to account for the elevated risk. Furthermore, DBRS Morningstar modeled any uninspected loans as Average (-), which has a slightly increased POD level.

Limited property-level information was available for DBRS Morningstar to review. It did not receive Asset Summary Reports, Property Condition Reports, Phase I/II Environmental reports, and historical financial cash flows in conjunction with this securitization. DBRS Morningstar received a long- or short-form appraisal for loans in its sample, which DBRS Morningstar used in the NCF analysis process. The Issuer did not provide environmental reports; however, only 11.5% of the pool consists of loans secured by industrial properties, which would typically have an increased risk of environmental concerns originating at the property. Furthermore, as of the Cut-Off Date, approximately 40.7% of the Mortgage Loans will be covered by one or more blanket environmental insurance policies. DBRS Morningstar did not receive property condition reports; however, it used capital expense estimates exceeding its guideline amounts and its assessment of the sampled property quality to stress the NCF analysis. DBRS Morningstar’s NCF analysis resulted in a 23.6% reduction to the Issuer’s NCF, well above the median historical reduction of 8.0% across CMBS conduit transactions, which provides meaningful stress to the default levels. Forty-three loans, representing 7.8% of the trust balance, were listed in the AMC Guideline review with exceptions for missing environmental reports, missing hazard insurance, or insufficient hazard insurance; therefore, DBRS Morningstar increase its LGD assumptions in its model to mitigate this risk.

DBRS Morningstar received limited borrower information, net worth or liquidity information, and credit history. DBRS Morningstar modeled loans with Weak borrower strength, which increases the stress on the default rate. Furthermore, DBRS Morningstar received a 12-month pay history on each loan. Any loan with more than one late payment within this period was modeled with additional stress to the default rate. This applied to 77 loans, representing 14.0% of the pool balance. Additionally, loans originated under the Lite Doc or Bank Statement documentation programs received additional stress to account for risk associated with borrowers that are potentially less sophisticated or have negative credit histories. This applied to 384 loans, representing 52.6% of the pool balance. DBRS Morningstar increased default rates for 13 loans, representing 1.8% of the trust balance, because they were listed in the AMC Guideline review with exceptions for credit eligibility. Finally, 617 of the 637 loans had a borrower FICO score as of July 2020, with an average FICO score of 736. While the CMBS Methodology does not contemplate FICO scores, the RMBS Methodology does and would characterize a FICO score of 736 as near-prime, where prime is greater than 750. A borrower with a FICO score of 736 may have had previous credit events (foreclosure, bankruptcy, etc.), but it is likely that these credit events were cleared about two to five years ago.

DBRS Morningstar received limited information regarding the effects of the impact of the coronavirus pandemic on individual property occupancy or cash flow. Of the 637 loans, 64 loans (11.7% of the trust amount) have been in forbearance for coronavirus pandemic-related reasons, but they have exited forbearance and have brought the loan payments current. DBRS Morningstar modeled these loans with a slightly elevated default rate. An additional 18 loans (3.3% of the trust amount) are actively in or in the process of becoming actively in forbearance. These loans had severely elevated default rate assumptions because it is unknown if the loan will successfully exit forbearance. Finally, six loans (1.6% of the trust amount) are in a post forbearance workout plan. DBRS Morningstar modeled these loans with near 100.0% default rates.

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.

Classes A1-XA, A1-XB, A1-XC, A1-XD, A1-XE, M1-XA, M1-XB, M1-XC, M1-XD, M1-XE, M2-XA, M2-XB, M2-XC, M2-XD, M2-XE, M3-XA, M3-XB, M3-XC, M3-XD, M3-XE, M4-XA, M4-XB, M4-XC, M4-XD, M4-XE, B1-XA, B1-XB, and B1-XC are 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.

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 (August 7, 2020), which can be found on 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 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 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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