DBRS Morningstar Confirms Ratings on All Classes of Angel Oak SB Commercial Mortgage Trust 2020-SBC1

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Mortgage-Backed Certificates, Series 2020-SBC1 issued by Angel Oak SB Commercial Mortgage Trust 2020-SBC1:

-- Class A1 at AAA (sf)
-- Class A2 at AA (sf)
-- Class A3 at A (sf)
-- Class M1 at BBB (sf)
-- Class B1 at BB (sf)
-- Class B2 at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The subject transaction closed in November 2020 and comprised 236 loans secured by 236 commercial, multifamily, and single-family rental home (SFR) properties with a trust balance of $181.0 million. Nearly all loans have variable interest rates with interest rate floors ranging from 5.125% to 10.125%. At issuance, loan terms ranged from 10 to 30 years and all loans but one amortized on a 360-month basis. Of the 236 loans, DBRS Morningstar identified five loans, representing 1.2% of the trust balance, that are secured by SFR properties. Because the DBRS Morningstar CMBS methodology does not currently contemplate ratings on SFR properties, DBRS Morningstar drastically increased the expected losses on these loans relative to the non-SFR loan expected losses.

Per the September 2021 remittance report, 203 of the original 236 loans remained in the transaction with a trust balance of $154.3 million, representing a 14.8% collateral reduction since issuance. The remaining pool is relatively diverse by property type as the three largest property concentrations are industrial (25.9% of the trust balance), retail (22.3% of the trust balance), and multifamily (17.3% of the trust balance). Overall, there are five distressed loans in the pool, which include two loans (1.7% of the trust balance) that are 60+ days delinquent, two loans (1.0% of the trust balance) with borrowers that have filed for bankruptcy, and one loan (0.8% of the pool) that is in the foreclosure process. As part of this review, DBRS Morningstar increased the probability of default for all distressed loans.

The pool is relatively granular with an average loan size of $764,000 as of the September 2021 remittance report. The higher pool diversity insulates the senior classes from event risk. Additionally, the loans are secured by traditional property types with no exposure to higher-volatility property types, such as hotels. The pool generally represents lower leverage financing as a weighted-average loan-to-value ratio of 61.7% based on the issuance balances and appraised values. All but 20 loans, representing 10.8% of the trust balance, fully amortize over their respective loan terms.

There are 101 loans that were considered below-average quality, representing 46.7% of the trust balance. The probability of default was increased for loans with these property qualities. Limited property-level information was available for DBRS Morningstar at issuance and for the subject review. Property condition reports and Phase I environmental reports were not provided and the loans do not require terrorism insurance or earthquake insurance. Consequently, DBRS Morningstar applied a penalty to the loss severity to mitigate any potential future environmental risk. Although each mortgage loan provides full recourse to the borrower, sponsors of small balance loans are generally less sophisticated operators of commercial real estate with limited real estate portfolios and experience. Therefore, DBRS Morningstar modeled loans with Weak borrower strength, which increases the stress on the default rate.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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