DBRS Morningstar Finalizes Provisional Ratings on Ready Capital Mortgage Financing 2022-FL9, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Ready Capital Mortgage Financing 2022-FL9, LLC (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The initial collateral consists of 25 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $754.2 million secured by 75 mortgaged properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $82.3 million. The holder of the future funding companion participations, Ready Capital Subsidiary REIT II, LLC, has full responsibility to fund the pari passu future funding participations. The collateral pool for the transaction is static with no ramp-up period or reinvestment period. However, all or a portion of the pari passu future funding participations are eligible to be acquired and held by the issuer to become a part of the collateral, with the exception of the $10.5 million future funding participation associated with the Chronos Portfolio loan. The Issuer has a limited right to use principal proceeds to acquire pari passu future funding participations subject to stated criteria during the Permitted Funded Companion Participation Acquisition Period, which begins on the closing date and ends on the payment date June 2024. Acquisitions of future funding participations of $500,000 or greater will require rating agency confirmation (RAC). Interest can be deferred for the Class F, Class G, and Class H notes, and interest deferral will not result in an event of default unless it occurs on the Final Rated Maturity date. The priority of payments are paid sequentially, starting with the highest-rated note.

As aforementioned, the aggregate remaining unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $82.3 million. However, the $10.5 million unfunded future funding tied to the Chronos Portfolio loan is not eligible to become a part of this collateral as a related funded companion participation as the participation control is under the RCMF 2022-FL8 securitization and pursuant to the terms of that certain indenture dated May 8, 2022. As such, the unfunded future funding commitment as of the cutoff date for this transaction totals $71.8 million.

Of the 75 properties, 71 are multifamily assets (95.7% of the mortgage asset cutoff date balance), inclusive of one student housing property—The Orchard (2.8% of the mortgage asset cutoff date balance). The remaining properties are secured by one industrial property (1.3%), and three self-storage properties (3.0%). The property types reflect the current, and in some cases, converted use as implanted by the owner’s business plan being executed.

The loans are mostly secured by cash-flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Three loans, representing 12.9% of the total pool balance, are whole loans, and the other 22 loans (87.1% of the mortgage asset cutoff date balance) are participations with companion participations that have remaining future funding and/or pari passu commitments totaling $223.5 million. The future funding for each loan is generally to be used for capital expenditure to renovate the property or build out space for new tenants. All of the loans in the pool are interest only (IO) during their entire initial terms and have floating interest rates initial indexed to Libor or average Secured Overnight Financing Rate. There are seven loans (41.3% of the pool) that are full-term IO through the fully extended loan term. The remaining 18 loans are all IO through the initial loan term and then amortize during all of the related extension period(s). To determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The transaction is sponsored by Ready Capital Corporation, a publicly traded mortgage real estate investment trust, externally managed by Waterfall Asset Management, LLC, a New York-based SEC-registered investment advisor. The sponsor has strong origination practices and substantial experience in originating loans and managing commercial real estate properties, with an emphasis on small business lending. The sponsor has provided more than $13.7 billion in capital across all of its commercial real estate lending programs through April 29, 2022 (approximately $2.4 billion year-to-date), and generally lends from $2.0 million to $45.0 million for commercial real estate loans.

The Depositor, Ready Capital Mortgage Depositor VII, LLC, which is a majority-owned affiliate and subsidiary of the sponsor, expects to retain the Class F, Class G, and Class H Notes, collectively representing the most subordinate 18.75% of the transaction by principal balance.

The pool is mostly composed of multifamily assets (95.7% of the mortgage asset cutoff date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall CMBS universe.
DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that a related loan sponsor will not successfully execute its business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing Coronavirus Disease (COVID-19) pandemic and its impact on the overall economy. The loan sponsor’s failure to execute the business plans could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to substantially implement such plans. In addition, DBRS Morningstar analyzes loss severity given default (LGD) based on the as-is credit metrics, assuming the loan is fully funded with no net cash flow or value upside. Future funding companion participations will be held by affiliates of Ready Capital Subsidiary REIT II, LLC and have the obligation to make future advances. Sutherland Partners, L.P. agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Sutherland Partners, L.P. will be required to meet certain liquidity requirements on a quarterly basis.

Six loans, comprising 31.3% of the trust balance, are in DBRS Morningstar MSA Group 1. Historically, loans in this MSA Group have demonstrated higher probability of defaults (PODs) and LGDs, resulting in higher individual loan-level expected losses than the weighted average (WA) pool expected loss. Two of these loans (8.4% of the pool) are in DBRS Morningstar Market Rank 6 or higher. Additionally, the 31.3% concentration in MSA Group 1 is less than the 49.9% average in the past three DBRS Morningstar-rated RCMF securitizations (FL8, FL7, and FL6).

Six loans, representing 23.7% of the trust balance, have DBRS Morningstar As-Is LTVs (fully funded loan amount) greater than 85.0%, which represents significantly high leverage. Three of those loans, 20.1% of the trust balance, are among the 10 largest loans in the pool. All loans were originated in 2021 or 2022 and have sufficient time to reach stabilization. Additionally, all the loans have DBRS Morningstar Stabilized LTVs of 65.6% or less, indicating improvements to value based on the related sponsors’ business plans. The WA DBRS Morningstar Stabilized LTV for the pool is 67.8%, and no loans have a DBRS Morningstar Stabilized LTV greater than 83.7%.

There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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 (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.

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.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429