DBRS Morningstar Finalizes Provisional Ratings on LoanCore 2022-CRE7 Issuer Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by LoanCore 2022-CRE7 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 29 floating-rate mortgages secured by 29 mostly transitional properties with a cut-off balance of $1.25 billion, excluding approximately $65.4 million of future funding participations and $194.7 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 all companion participations if there is already a participation of the underlying loan in the trust.

The loans are 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, 18 loans, representing 58.9% of the trust balance, have remaining future funding participations totaling $65.4 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), 22 loans, representing 81.1% 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. Additionally, the DBRS Morningstar Stabilized DSCRs for 20 loans, representing 71.1% 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 has a sequential-pay structure.

The transaction’s sponsor is LCC REIT, which is managed by LoanCore Capital Credit Advisor LLC, a wholly owned subsidiary of LoanCore Capital (LoanCore). LoanCore 2022-CRE7 Issuer Ltd. and LoanCore 2022-CRE7 Co-Issuer LLC are each newly formed special-purchase vehicles (collectively, the Co-Issuers) and indirect wholly owned subsidiaries of the Sponsor. LoanCore is a commercial real estate investor and lender with a credit-focused alternative asset management platform that manages LLC REIT and LoanCore Capital Markets (LCM). As of December 31, 2021, LoanCore had $15.6 billion in assets under management between LCC REIT and LCM. This transaction represents LoanCore’s eighth commercial real estate collateralized loan obligation (CRE CLO) since 2013, and there have been no realized losses to date in any of its issued CRE CLOs on approximately $8.1 billion of mortgage assets contributed including reinvestments. An affiliate of LCC REIT, an indirect wholly owned subsidiary of the Sponsor (as the retention holder), has acquired the Class F Notes, the Class G Notes, and the Preferred Shares (Retained Securities), representing the most subordinate 17.2% of the transaction by principal balance.

Twenty-seven of the 29 loans, representing 94.1% of the mortgage asset cut-off date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. Cash equity infusions from a sponsor typically result in the lender and borrower having a greater alignment of interests, especially compared with a refinancing scenario where the sponsor may be withdrawing equity from the transaction.

The transaction’s initial collateral composition consists mostly of multifamily properties, which benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. The subject pool includes garden-style communities and mid-rise buildings. After closing, as part of the ramp-up and reinvestment period, the collateral manager may only acquire loans secured by multifamily properties. The prior LNCR 2021-CRE5 and LNCR 2021-CRE6 transactions allowed the collateral manager to acquire office, industrial, retail, hotel, mixed-use, self-storage, manufactured housing, and student housing property types.

Based on the initial pool balances, the overall DBRS Morningstar weighted-average (WA) as-is DSCR of 0.85x and WA as-is loan-to-value (LTV) of 76.2% 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 loans’ overall debt yield. DBRS Morningstar associates its loss severity given default (LGD) based on the assets’ DBRS Morningstar 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 is 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. The DBRS Morningstar As-Is LTV of 76.2% is lower than previous LNCR transactions, and less than 10.0% of the pool has DBRS Morningstar As-Is LTVs greater than 85.0%, a lower share than in prior LNCR transactions.

There are no loans in the current pool secured by properties in areas with a DBRS Morningstar Market Rank of 7 or 8, which are more densely populated and urban in nature. Loans secured by properties in such areas have historically benefited from increased liquidity and consistently strong investor demand, even during times of economic distress. Consequently, loans in these dense, urban locations often exhibit lower expected losses, and the lack of collateral in these areas can be a negative credit characteristic. Conversely, 24 loans, representing 80.9% of the current portfolio balance, are secured by properties in markets with a DBRS Morningstar Market Rank of 3 or 4, which are more suburban in nature. Loans secured by properties in such areas have historically exhibited elevated probabilities of default (PODs) and often have higher expected losses in the DBRS Morningstar approach. The DBRS Morningstar WA Market Rank of 3.5 for this pool is generally indicative of a higher concentration of properties in less densely populated suburban areas. This WA market rank is lower than all three LoanCore deals DBRS Morningstar rated in 2021. DBRS Morningstar concluded higher PODs and LGDs in this transaction than in similar pools with more exposure to urban markets.

The transaction is managed and includes a 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. DBRS Morningstar has rating agency confirmation for all new reinvestment loans and companion participations. DBRS Morningstar may 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 monitor this transaction on a regular basis.

DBRS Morningstar has analyzed the loans to reflect an as-stabilized cash flow that is, in some 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. The DBRS Morningstar analysis does not express a view on whether the loan sponsor will extend or modify loans that do not meet extension tests or successfully refinance. DBRS Morningstar sampled a large portion of the loans, representing 71.6% of the mortgage asset cut-off date balance. The transaction’s DBRS Morningstar WA Business Plan Score of 1.83 is generally in the range of recent CRE CLO transactions rated by DBRS Morningstar. 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. Affiliates of LLC REIT will hold future funding companion participations and have the obligation to make future advances. LLC REIT agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, LLC REIT will be required to meet certain liquidity requirements on a quarterly basis.

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.

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/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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