DBRS Morningstar Upgrades Four, Confirms Three Classes of Exantas Capital Corp. 2020-RSO9, Ltd.

DBRS Limited (DBRS Morningstar) upgraded its ratings on four classes of notes issued by Exantas Capital Corp. 2020-RSO9, Ltd. 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)
-- Class E to BB (sf) from BB (low) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes as follows:

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

All trends are Stable.

The rating upgrades reflect the strengthened credit profile of the transaction, largely the result of the significant paydown in the principal balance of the deal since issuance. The Stable trends reflect DBRS Morningstar’s general view on the performance outlook for the remaining collateral. At issuance, the transaction, which has a static composition structure, consisted of 32 loans secured by 34 commercial properties, with a cut-off balance of $297.0 million and aggregate future funding commitments of $21.6 million held in a reserve account. As of the August 2021 remittance, 14 loans remain in the pool with an aggregate loan balance of $171.2 million, with $8.1 million held in reserve, representing a collateral reduction of 39.6% since issuance. The remaining loans are concentrated in multifamily, office, and retail property types, representing 48.1%, 20.4%, and 14.6% of the pool, respectively.

As noted at issuance, the transaction has a sequential-pay structure, and interest can be deferred for the Class C, D, E, and F notes. Such interest deferral will not result in an event of default. The paydown since issuance has significantly reduced the risks of this structure for the more senior notes, but it is still a noteworthy factor for the lowest rated note in Class F. Given this factor and the note’s position in the transaction’s waterfall, DBRS Morningstar elected to confirm the B (low) (sf) rating for that class despite the sizable increase in credit support since issuance.

There are no delinquent loans and no loans in special servicing; however, there are three loans, representing 9.9% of the current pool balance, on the servicer’s watchlist. All three on the watchlist are because of upcoming loan maturities. Two of the smaller loans are likely to finalize loan extension requests in the near to moderate term.

The largest loan on the servicer’s watchlist, Village at Sandhill Town Center Phase I, representing 5.7% of the current pool balance, was added to the watchlist in June 2021 ahead of the scheduled August 2021 loan maturity. The loan is currently cash managed, with the borrower and servicer working on a short-term maturity extension. As of the collateral manager’s June 2021 update, the borrower was in the process of finalizing a replacement loan, but that ultimately fell through and the loan remains past due for the August 2021 maturity date. The loan collateral is a 189,485-square-foot (sf) anchored retail lifestyle center in Columbia, South Carolina. The property consists of 13 buildings, built between 2005 and 2007, and is part of a larger master-planned mixed-use development called Village at Sandhill, which has a multifamily component, open air retail, dining, and entertainment. There are two, noncollateral tenants at the subject, JCPenney and Regal Sandhill movie theatre, both of which are open for business as of September 2021.

The borrower’s business plan focused on a plan to lease the property up to stabilized levels; however, the May 2021 rent roll provided to DBRS Morningstar showed an occupancy rate of 62.3%, down from the issuance occupancy rate of 71.2%. The largest tenants include Books-A-Million, representing 9.5% of the net rentable area (NRA), lease expiry in November 2021; Aetius Restaurant, 3.2% of the NRA, lease expiry in December 2022; and LOFT, 2.9% of the NRA, lease expiry in January 2022. As of the August 2021 reserve report, the loan still has $1.05 million in the leasing reserve. The borrower has reported declining sales amid the Coronavirus Disease (COVID-19) pandemic, which is likely a contributing factor to the lack of leasing traction since issuance. At issuance, DBRS Morningstar applied a loan-to-value ratio adjustment to increase the expected loss; with this review, it maintained that approach.

Another larger loan in the pool is 12000 Biscayne Boulevard, representing 10.2% of the current pool balance , which is also scheduled to mature within the near term. The borrower has also had difficulty executing the business plan, which could delay plans to refinance the loan by the February 2022 maturity date. The loan is not on the servicer’s watchlist as of the August 2021 remittance date, but it will likely be added in the near term. The $17.5 million loan includes $250,000 in future funding to effectuate a lease-up. The loan collateral is a 152,719-sf mixed-use, office and retail, center located in North Miami, Florida. The borrower planned on stabilizing the office portion of the collateral as the retail component had been expanded and leased up following the borrower’s initial acquisition in 2015.

At issuance, the collateral was 73.4% occupied, but as of the May 2021 rent roll, the occupancy rate had fallen to 69.0%, with the retail portion 100.0% occupied and the office component 66.9% occupied. DBRS Morningstar believes the pandemic likely contributed to the lack of leasing traction for the office portion of the property. The largest office tenants include Jewish Community Services of South Florida, 14.7% of the NRA, lease expiry in January 2026; Software Development Inc., 7.1% of the NRA, lease expiry in September 2022; and State of Florida – Department of Education, 4.9% of the NRA, lease expiry October 2025. As of the June 2021 collateral report, the borrower is in the process of completing a full exterior painting of the building to improve curb appeal. The borrower noted leasing prospects, but nothing has been signed to date. Given the delays in executing the business plan and the near-term maturity, DBRS Morningstar analyzed this loan with a stressed probability of default (POD) to increase the expected loss.

Also, there are increased risks for the 1680 Meridian loan, representing 10.2% of the current pool balance. This loan, also not on the servicer’s watchlist, is secured by a 54,471-sf mixed-use office and ground floor retail building in the heart of Miami Beach, on Meridian Avenue, near the primary thoroughfare in Lincoln Road. The collateral manager’s most recent update noted that a loan modification was recently processed that allowed for a one-year maturity extension to May 2022, in exchange for a 2.0% increase to the interest rate spread. At issuance, the collateral was 88.3% occupied; however, as of the June 2021 rent roll, the occupancy rate has declined to 79.0%. The largest tenants include Douglas Gardens Community Health, 27.6% of the NRA, lease expiry in December 2030; Miami Beach Realty, 13.4% of the NRA, lease expiry in May 2024; and Verifract, 10.7% of the NRA, lease expiry April 2022. The June 2021 collateral report also noted that Harry’s Pizza moved into its space August 1, 2021, while Miami Beach Comprehensive Wellness Center is expected to move into its space in late September 2021. The size of these tenants’ spaces was not provided in the report, but the collateral manager noted that the borrower expects net operating income to increase by 20.0% once those two tenants are in place and paying rent. Given the recent extension of the loan maturity and delays in executing the business plan, DBRS Morningstar analyzed this loan with a stressed POD to increase the 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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class F as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan-level event risk, particularly for the three loans highlighted above.

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.

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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.

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.

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