DBRS Morningstar Finalizes Provisional Ratings on TRTX 2022-FL5 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by TRTX 2022-FL5 Issuer, Ltd. (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 20 floating-rate mortgages secured by 116 mostly transitional properties with a cut-off balance of $1.075 billion, excluding approximately $158.0 million of future funding participations and $916.8 million of funded companion participations. In addition, there is a two-year reinvestment period during which the Issuer may use principal proceeds to acquire additional eligible loans, subject to the eligibility criteria. During the reinvestment period, the Issuer may acquire future funding commitments, funded companion participations, and additional eligible loans subject to the eligibility criteria. The transaction stipulates a no downgrade confirmation from DBRS Morningstar for companion participations exceeding $500,000 if there is already a participation of the underlying loan in the trust.

The loans are mostly secured by currently cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 19 loans, representing 95.7% of the trust balance, have remaining future funding participations totaling $156.7 million, which the Issuer may acquire in the future.

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. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 12 loans, representing 57.9% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCRs for four loans, representing 18.4% of the initial pool balance, are below 1.00x. 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 other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

The transaction will have a sequential-pay structure whereby interest and principal payments will be prioritized in order of seniority. In the event that a note protection test is not satisfied, the payments will be redirected to redeem the Offered Notes until the note protection tests are satisfied. Interest may also be deferred for the Class C Notes (Offered Note), Class D Notes (Offered Note), Class E Notes (Offered Note), Class F Notes (Retained Note), and Class G Notes (Retained Note).

The transaction’s sponsor is TPG RE Finance Trust Holdco, LLC, a wholly owned subsidiary of TPG RE Finance Trust, Inc (TRTX). TRTX 2022-FL5 Issuer, Ltd. and TRTX 2022-FL5 Co-Issuer, LLC are each newly formed special-purchase vehicles (collectively, the Co-Issuers) and indirect wholly owned subsidiaries of the Sponsor. TPG, Inc. (TPG) is a global investment firm with multiple investment platforms focused on a wide range of alternative investment products, including real estate. As of September 30, 2021, TPG had assets under management of approximately $109 billion, including $11.5 billion managed by TPG’s real estate platform, TPG Real Estate (TPGRE). TPGRE includes debt investing under TRTX, which was formed in December 2014 as a private commercial mortgage real estate investment trust and went public in July 2017. As of December 31, 2021, TRTX originated or acquired approximately $14.4 billion of loan commitments. This transaction represents TRTX’s sixth commercial real estate collateralized loan obligation (CRE CLO) and fifth broadly marketed CRE CLO transaction since 2018. The four broadly marketed transactions to date total $4.4 billion of mortgage assets contributed excluding reinvestments.

An affiliate of TRTX, an indirect wholly owned subsidiary of the Sponsor (as the retention holder), will acquire the Class F Notes, the Class G Notes, and the Preferred Shares (Retained Securities), representing the most subordinate 15.625% of the transaction by principal balance.

Five loans, representing 25.1% of the mortgage asset cut-off date balance, had Above Average or Average + property quality scores based on physical attributes and/or a desirable location within their respective markets (The Curtis, One Campus Martius, Westin Charlotte, Residences at Payton Place, and 300 Lafayette). Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance.

The pool contains a relatively high number of properties in primary markets, which have historically demonstrated lower probability of default (POD) and loss severity given default (LGD) characteristics. Nine loans, representing 50.1% of the pool, are in areas identified as DBRS Morningstar Market Ranks of 6, 7, or 8, which are generally characterized as highly dense urbanized areas. These areas benefit from increased liquidity driven by consistently strong investor demand and lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include New York City, Los Angeles, Philadelphia, Honolulu, and Jersey City, New Jersey. Eight loans, representing 40.9% of the pool balance, have collateral in Metropolitan Statistical Area (MSA) Group 3, which is the best-performing group in terms of historical commercial mortgage-backed securities (CMBS) default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 11 percentage points lower than the overall CMBS historical default rate of 28.0%.

Based on the initial pool balances, the overall DBRS Morningstar Weighted Average (WA) As-Is DSCR of 0.96x and DBRS Morningstar WA As-Is Loan-to-Value Ratio (LTV) of 74.7% generally reflect high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR for each loan at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for. When measured against the DBRS Morningstar Stabilized NCF, the DBRS Morningstar WA DSCR is estimated to improve to 1.26x, suggesting that the properties are likely to have improved NCFs once the sponsors’ business plans have been implemented. Furthermore, the DBRS Morningstar Stabilized LTV improves significantly to 60.0%.

The transaction is managed and includes a 24-month reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by eligibility criteria (detailed in the transaction documents) that outline DSCR, LTV, Herfindahl score minimum, property type, and loan size limitations for reinvestment assets. The transaction requires a no downgrade confirmation from DBRS Morningstar for new reinvestment loans and companion participations above $500,000. DBRS Morningstar will analyze these loans for potential impacts on ratings. Deal reporting includes standard monthly Commercial Real Estate Finance Council reporting and quarterly updates. DBRS Morningstar will regularly monitor this transaction.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in many instances, above the in-place cash flow. It is possible that the sponsors will not successfully execute their 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. A sponsor’s failure to execute the business plan 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 78.8% of the of the mortgage asset cut-off date balance. The transaction’s DBRS Morningstar WA Business Plan Score of 2.32 is generally in the range of recent DBRS Morningstar-rated CRE CLO transactions. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside. Future funding companion participations will be held by affiliates of TRTX and have the obligation to make future advances. TRTX agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, TRTX will be required to satisfy and certify to investors certain liquidity requirements on a quarterly basis.

Three loans, The Curtis, One Campus Martius, and Westin Charlotte, have fully extended maturity dates within 12 months or less. Given the pending maturities, the loans may not have adequate time to complete the sponsors’ business plans and fully stabilize. The Curtis has a low As-Is LTV of 57.8%, and DBRS Morningstar incorporated minimum upside in the stabilized NCF. One Campus Martius has a moderately low As-Is LTV of 63.6%, and DBRS Morningstar did not incorporate upside in the stabilized NCF. Westin Charlotte has a low As-Is LTV of 59.8%; however, given the hotel’s weak performance and unlikely recovery before the maturity date, DBRS Morningstar elected to incorporate a POD penalty.

All 20 loans have floating interest rates and have original terms of 49 months to 61 months, which creates interest rate risk. 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 all loans have purchased Libor rate caps with strike prices that range from 0.25% to 4.00% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

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.

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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 the 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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