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

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

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

In addition, DBRS Morningstar confirmed its ratings on the remaining classes as follows:

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

All trends are Stable.

The upgrades generally reflect the significantly improved credit support for the rated bonds as a result of collateral reduction for the pool overall, as well as DBRS Morningstar’s generally positive outlook for the transaction’s performance over the remaining term.

At issuance, the collateral consisted of 43 floating-rate mortgages secured by 44 transitional properties totaling approximately $320.8 million, excluding approximately $101.3 million of future funding commitments held outside the trust. As of the April 2021 remittance, 25 loans remain in the pool with a trust balance of $255.9 million, representing a collateral reduction of 20.2% since issuance.

There are seven loans, representing 20.6% of the current trust balance, on the servicer’s watchlist as of the April 2021 remittance. The servicer is monitoring these loans for reporting a low debt service coverage ratio (DSCR). Additionally, the pool has three loans, representing 11.4% of the pool, in special servicing: StarCity 229 Ellis (Prospectus ID#11, 5.7% of the pool), Tapestry by Hilton Daytona Beach (Prospectus ID#22, 3.5%), and 2850 Greene Street (Prospectus ID#18, 2.2%).

Tapestry by Hilton Daytona Beach is the only loan in the pool secured by a lodging property and was transferred to special servicing in April 2020. The loan collateral is a 110-key limited-service hotel in Daytona Beach, Florida. The property, which was previously flagged as a Lexington Inn & Suites, is in the midst of a $4.3 million ($39,000 per key) property improvement plan (PIP) to convert the property’s flag to a Tapestry by Hilton. A 20-year franchise agreement with Hilton was executed in June 2017, and renovations were expected to take approximately 18 months from issuance. However, in April 2020, the borrower reached out to the servicer about a forbearance and requested the authorization to pause bookings for all the rooms at the property to speed up the remaining renovations and reduce expenses. At that time, renovations were roughly 42% complete. An updated as-is value of $15.9 million was provided in August 2020, up from the $8.3 million as-is value at issuance. According to the servicer’s April 2021 site inspection, the renovations for the guest rooms appeared largely complete, with only common area improvements outstanding. According to an online search as of May 2021, the property remains closed and is set to open at the end of July 2021. DBRS Morningstar analyzed this loan with an elevated probability of default (PoD) to reflect the ongoing concerns in the delayed stabilization for the collateral property. However, the overall risks for this loan are moderate given the significant investment in the property since issuance and the property’s location in Florida, which should enable it to capture travel demand as the vaccination rate continues to climb and the effects of the Coronavirus Disease (COVID-19) pandemic continue to ease.

DBRS Morningstar is also closely monitoring the 2850 Greene Street loan. The loan is secured by a 61,587-sf Class B industrial flex property in Hollywood, Florida. The loan transferred to special servicing in May 2020 for delinquency, but was later brought current in 2021. The initial delinquency was attributed to struggles of the property’s sole tenant, Silver Airways (48.1% of the net rentable area (NRA) through September 2027), which was reportedly unable to meet rental obligations amid the pandemic. The borrower signed another tenant, United Hardware Supply (45.0% of the NRA through September 2025), in September 2020, successfully leasing up the majority of the building. According to updates provided by the servicer, both tenants were fully operating at the property and paying rent as of October 2020.

As of the April 2021 reporting, the loan is showing as current but remains with the special servicer as a nonperforming matured balloon as the loan did not repay at the initial maturity date of October 2020. An updated as-is value of $8.7 million was provided in November 2020, up 13.0% from the issuance as-is value of $7.7 million. According to servicer commentary, the borrower brought the loan current in order to discuss workout strategies, and, although a maturity extension was fully negotiated, the servicer confirmed that the modification failed to close and foreclosure was filed in March 2021. Given the breakdown in maturity negotiations and the uncertainty surrounding the failure to execute the loan modification, this loan was also analyzed with an elevated PoD to increase the expected loss. However, DBRS Morningstar also notes that the updated value as of November 2020 is well above the loan’s total exposure, suggesting the likelihood of a loss to the subject trust is generally low.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class E and F as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist.

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. 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 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.

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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