DBRS Morningstar Upgrades Three Classes of Ready Capital Mortgage Financing 2019-FL3

DBRS Limited (DBRS Morningstar) upgraded the ratings on three classes of Commercial Mortgage-Backed Notes, Series 2019-FL3 issued by Ready Capital Mortgage Financing 2019-FL3 as follows:

-- Class B to AAA (sf) from AA (sf)
-- Class C to AA (high) (sf) from A (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed the ratings on the following classes:

-- Class A-S at AAA (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating upgrades reflect the overall strong credit support to the bonds as a result of successful loan repayment as there has been collateral reduction of 60.9% since issuance. Additionally, select loans remaining in the transaction exhibit favorable credit and DBRS Morningstar expects the borrowers to successfully execute their respective exit strategies in the near to medium term, which would increase the credit support to the outstanding bonds further. DBRS Morningstar does note concerns surrounding the ultimate resolution of the 158 Lafayette loan (Prospectus ID#4, 22.4% of the current pool balance), which is currently in special servicing. DBRS Morningstar anticipates the trust to realize a loss with the ultimate disposition of the loan; however, the loss is expected to be contained to the unrated Class G. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

The transaction closed in April 2019 with an initial collateral pool of 43 floating-rate mortgage loans secured by 44 transitional real estate properties, totaling approximately $320.8 million, excluding approximately $101.3 million of future funding commitments. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is static and did not include a ramp-up acquisition period or Reinvestment Period.

As of the April 2022 remittance, the pool comprises eight loans secured by eight properties with a cumulative trust balance of $128.6 million. Since issuance, 35 loans with a former cumulative trust balance of $239.3 million have been successfully repaid from the pool. In general, the borrowers for the remaining loans in the pool have experienced delays in execution of the stated business plans at issuance with the most common issues related to construction and leasing delays caused by the coronavirus pandemic. Some borrowers, however, continue to make progress and have taken advantage of loan extensions and modifications in an effort to ultimately succeed. Through March 2022, the collateral manager had advanced $47.3 million in loan future funding to the eight individual borrowers to aid in property stabilization efforts with an additional $3.6 million of unadvanced loan future funding allocated to three individual borrowers outstanding.

The transaction is concentrated by property type as two loans are secured by mixed-use properties, totalling 48.0% of the current trust balance; two loans are secured by office properties, totalling 26.5% of the current trust balance; and two loans are secured by multifamily properties, totaling 15.5% of the current trust balance. In comparison with transaction closing at April 2019, loans secured by mixed-use properties have grown from 25.9% of the trust balance at issuance, while loans secured by multifamily properties have decreased by 39.9% of the trust balance. The transaction is also concentrated by loan size, as the largest three loans represent 65.2% of the pool.

As of the April 2022 remittance, there are four loans on the servicer’s watchlist, representing 23.5% of the pool balance, and there are two loans in special servicing, representing 33.7% of the pool balance. The largest specially serviced loan, 158 Lafayette, is secured by a mixed-use building in the SoHo neighborhood of Lower Manhattan. The loan transferred to special servicing in May 2021 due to delinquent payments; however, the borrower had a history of late payment issues with an initial forbearance executed in July 2020 and an additional six-month forbearance executed in October 2020. The borrower defaulted on the second agreement in March 2021 with the loan currently paid through October 2020. The loan matured in August 2021 and the borrower’s one-year extension request was rejected. According to the servicer, a workout strategy is being dual-tracked with the borrower along with foreclosure. To date, the borrower has not been cooperative and a hearing has been scheduled for May 20, 2022, for the appointment of a receiver, though foreclosure is not expected to be finalized until potentially Q1 2023. The property is not cash flowing and an updated December 2020 appraisal reported a property value of $19.0 million, reflective of a 25.5% decline from the as-is value at issuance of $25.5 million. DBRS Morningstar has requested an updated property valuation; however, given the outstanding loan balance of $28.8 million combined with a partially finished renovation plan, which will require additional equity to complete, DBRS Morningstar anticipates the trust to realize a loss at loan disposition.

In addition, the StarCity 229 Ellis loan (Prospectus ID#11, 11.3% of the current pool), which is secured by a multifamily property in the Civic Center/Downtown submarket of San Francisco, recently transferred to special servicing, which will be reflected in the May 2022 reporting. The loan transferred to the special servicer due to imminent monetary default. The servicer has reported that the borrower was not able to repay the loan at the Aprill 2022 maturity and has requested an additional extension. It is expected that the lender will dual track resolution with the borrower and pursue foreclosure. DBRS Morningstar has not received updated financials for the property since 2021, and at that point, the property was not cash flowing. While the property will likely not achieve the DBRS Morningstar stabilized net cash flow of $1.1 million or the appraiser’s originally projected stabilized value of $27.9 million, an appraisal dated June 2021 valued the property at $23.9 million, implying a loan-to-value ratio of 60.7% as the current loan balance is $14.5 million. Given there appears to be significant implied market equity remaining in the deal, DBRS Morningstar does not expect the resolution of the loan to result in a realized loss to the trust upon disposition.

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.

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 issuer and servicer 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 methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

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.

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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