DBRS Morningstar Finalizes Provisional Ratings on RCMF 2021-FL6

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by Ready Capital Mortgage Financing 2021-FL6, 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 52 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $652.5 million secured by 55 mortgaged properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $87.8 million. The holder of the future funding companion participations, Ready Capital Subsidiary REIT I, LLC, has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is static with no ramp-up period or reinvestment period. However, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations subject to stated criteria during the Permitted Funded Companion Participation Acquisition Period, which ends on or about July 2023 (subject to a 120-day extension for binding commitments entered during the Permitted Funded Companion Participation Acquisition Period). Acquisitions of future funding participations of $1.0 million or greater will require rating agency confirmation. Interest can be deferred for the Class F and Class G notes, and interest deferral will not result in an event of default. The transaction will have a sequential-pay structure.

Of the 55 properties, 49 are multifamily assets (92.5% of the mortgage asset cutoff date balance). Four of the remaining loans (1791 Mt. Zion Road, Trolley Two, Trolley Industrial, and 184 Courtright Street) are secured by industrial properties (5.3% of the mortgage asset cutoff date balance). One of the remaining loans, Rolling Hills, is secured by an anchored retail property (1.5%); the other remaining loan (Station West) is secured by a mixed-use property (0.7%).

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. One loan, 1900 Euclid Lofts, is a whole loan and the other 51 loans (99.2% of the mortgage asset cutoff date balance) are participations with companion participations that have remaining future funding commitments totaling $87.8 million. The future funding for each loan is generally to be used for capital expenditures to renovate the property or build-out space for new tenants. Please see the chart below for loans with future funding companion commitments and their uses. All of the loans in the pool have floating interest rates initial indexed to Libor. Fifty-one loans are IO through their initial terms; one loan, Trolley Two, is IO for the first 35 months of its 48 initial loan term and then amortizes on a 360-month schedule thereafter. As such, 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 REIT, 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 $8.3 billion in capital across all of its commercial real estate lending programs through July 1, 2021 (approximately $2.0 billion in 2021), and generally lends from $2.0 million to $45 million for commercial real estate loans.

The Depositor, Ready Capital Mortgage Depositor VI, LLC., which is a majority-owned affiliate and subsidiary of the sponsor, expects to retain the Class F, G, and H Notes, collectively representing the most subordinate 18.5% of the transaction by principal balance.

The pool is mostly composed of multifamily assets (92.5% 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.

The DBRS Morningstar Business Plan Scores (BPS) for loans analyzed by DBRS Morningstar ranged between 1.53 and 3.08, with an average of 2.08. Higher DBRS Morningstar BPS indicate more risk in the sponsor’s business plan. DBRS Morningstar considers the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity of the business plan. Compared with similar transactions, the subject has a low average business plan score, which is indicative of lower risk.

As no loans in the pool were originated prior to the onset of the Coronavirus Disease (COVID-19) pandemic, the weighted-average (WA) remaining fully extended term is 59 months, which gives the Sponsor enough time to execute its business plans without risk of imminent maturity. In addition, the appraisal and financial data provided are reflective of conditions after the onset of the pandemic.

Acquisition Financing: Forty-nine loans, representing 95.7% of the pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral and aligns the financial interests between the sponsor and lender.

DBRS Morningstar has concluded 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 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 sampled a large portion of the loans, representing 73.9% of the pool cutoff date 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 given default 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 I, LLC and have the obligation to make future advances. Ready Capital Subsidiary REIT I, LLC agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Ready Capital Subsidiary REIT I, LLC will be required to meet certain liquidity requirements on a quarterly basis.

Twenty-two loans, comprising 56.5% of the trust balance, are located within DBRS Morningstar MSA Group 1. Historically, loans located within this MSA Group have demonstrated higher probabilities of default (POD), resulting in higher individual loan level expected losses than the weighted-average (WA) pool expected loss. Loans within MSA Group 1 are in markets with a WA DBRS Morningstar Market Rank of 3.8. More specifically, three of the 12 loans (7.4% of pool) are located within a DBRS Morningstar Market Rank 5 or higher. Overall, 13 loans, representing 19.3% of the trust balance, are located within a DBRS Morningstar Market Rank 5 or higher.

Twenty-one loans, representing 45.8% of the trust balance, have DBRS Morningstar As-Is Loan-to-Value Ratios (LTVs) greater than 85.0%, which represents significantly high leverage. Six of those loans, 27.3% of the trust balance, are among the 10 largest loans in the pool. All 21 loans were originated in 2021 and have sufficient time to reach stabilization. Additionally, all the loans have DBRS Morningstar Stabilized LTVs of less than 72.0%, indicating improvements to value based on the related sponsors’ business plans. The WA DBRS Morningstar Stabilized LTV for the pool is 65.5% and there are no loans with a DBRS Morningstar Stabilized LTV of greater than 76.0%. In addition, 20 of the loans (45.2% of the trust balance) are acquisition financing, with the sponsor contributing a considerable amount of cash equity at closing.

All 52 loans have floating interest rates, and 51 loans are IO during the original term with original terms of 15 months to 60 months, creating interest-rate risk. Forty-six loans (76.9% of mortgage asset cutoff date balance) amortize during extension options. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five years. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest-rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. The borrowers of 42 (96.8% of mortgage asset cutoff date balance) floating-rate loans have purchased Libor rate caps with strike prices that range from 0.25% to 2.50% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercising any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

Lack of Site Inspections: DBRS Morningstar conducted no management tours because of health and safety constraints associated with the ongoing coronavirus pandemic. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned to each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos.

Environmental Concerns: Two loans in the pool, Trolley Two (1.5% of the trust balance) and Trolley Industrial (0.95%) have outstanding environmental issues. In the case of Trolley Two, the Phase I Environmental Site Assessment (ESA) identified an Recognized Environmental Condition (REC) resulting from the property’s historical use as an unregistered nonhazardous solid waste landfill site with identified concentrations of hazardous substances exceeding Generic Residential Cleanup Criteria (GRCC) for unrestricted property use. For Trolley Industrial, Phase I ESA identified several RECs, including two underground storage tanks that were previously removed from the property; the presence of phenanthrene, acetone, arsenic, cadmium, chromium, selenium, silver, and zinc above GRCC; the presence of arsenic, chromium, mercury, and selenium in soil and groundwater above the GRCC at an adjacent property, as well as methane gas in the soil at concentrations representing a potential flammability/explosivity condition; and the presence of a rail spur. The Phase I ESA recommended a limited subsurface investigation to determine whether there was soil, soil vapor, and/or groundwater contamination as a result of the property’s historical use and the former underground storage tanks. The Phase II subsurface investigation determined that off-site soil gas had not migrated onto the property. For both properties, the environmental reports recommended the preparation of a Baseline Environmental Assessments (BEA) and Due Care Plans (DCP). The BEA and the DCP for the Trolley Two property were completed in February 2021 indicating that current on-site human health exposure concerns were identified. For the Trolley Industrial Property, the related sponsor has engaged an environmental engineer to prepare the BEA and DCP and to undertake further evaluation of Volatilization to Indoor Air Pathway screening, both of which remain in process. DBRS Morningstar modeled both these loans with a Property Quality Score of Poor, and consequently a higher POD, and elevated DBRS Morningstar BPS of 3.08, resulting in higher loan level expected losses compared with the WA pool expected loss.

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#01 – Estates at Crossroads (9.3% of the pool)
-- Prospectus ID#02 – Clifton Glen (6.6% of the pool)
-- Prospectus ID#03 – Desert Gardens (5.7% of the pool)
-- Prospectus ID#04 – Lucern Charlotte Portfolio (4.9% of the pool)
-- Prospectus ID#05 – Tides on 25th (4.9% of the pool)
-- Prospectus ID#06 – LaVista Crossing (4.2% of the pool)
-- Prospectus ID#07 – 79 Metcalf Apartments (4.1% of the pool)
-- Prospectus ID#08 – 1818 Church Street (4.0% of the pool)
-- Prospectus ID#09 – Ivilla Garden Apartments (3.9% of the pool)
-- Prospectus ID#10 – Chimney Hill (3.4% of the pool)

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.

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 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.

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 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.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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