DBRS Assigns Provisional Ratings to Greystone Commercial Real Estate Notes 2017-FL1

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of secured Floating-Rate Notes (the Notes), to be issued by Greystone Commercial Real Estate Notes 2017-FL1:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at BBB (low) (sf)

All trends are Stable.

The transaction also features Senior and Junior Preferred Shares that will not be offered as part of this transaction.

With respect to the deferrable notes (Class B and Class C), to the extent that interest proceeds are not sufficient on a given payment date to pay accrued interest, interest will not be due and payable on the payment date and will instead be deferred and capitalized. The ratings assigned by DBRS contemplate the timely payments of distributable interest and, in the case of deferred interest notes, the ultimate recovery of deferred interest (inclusive of interest payable thereon at the applicable rate, to the extent permitted by law).

The collateral consists of 27 floating-rate mortgages secured by 27 transitional multifamily properties totaling $366.6 million. Three of the loans are cross-collateralized and cross-defaulted into one crossed group. The DBRS analysis of this transaction incorporates this crossed group, resulting in a modified loan count of 25 and the loan number references within this report reflect this total. The loans are secured by current cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. The transaction has a reinvestment period expected to expire in September 2019. Reinvestment is subject to Eligibility Criteria that includes rating agency condition by DBRS on loans that are being added to the pool during the Reinvestment Period in order to evaluate any credit drift caused by potential loan concentrations. Following the Reinvestment Period, the transaction will have a sequential-pay structure. One loan, representing 7.8% of the the pool, a pari passu companion participation held by Greystone Bridge Holdings, Inc., a subsidiary of the trust asset seller and sponsor.

The floating-rate mortgages were analyzed to determine the probability of loan default over the term of the loan and its refinance risk at maturity based on a fully extended loan term. As a result of the floating-rate nature of the loans, the index DBRS used (one-month LIBOR) was the lower of a DBRS 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 In-Place NCF and their respective stressed constants, there were 24 loans, representing 95.1% of the pool, with term debt service coverage ratios (DSCRs) below 1.15 times (x), a threshold indicative of a higher likelihood of term default. Additionally, to assess refinance risk, DBRS applied its refinance constants to the balloon amounts, resulting in 23 loans, or 93.8% of the loans, having refinance DSCRs below 1.00x, relative to the DBRS Stabilized NCF. The properties are often transitioning with potential upside in the cash flow; however, DBRS does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place were insufficient to support such treatment. Furthermore, even with structure provided, DBRS generally does not assume the assets to stabilize above market levels.

The loans were all sourced by Greystone, a commercial mortgage originator with strong origination practices. The Senior and Junior Preferred shares will be retained by Greystone Bridge Senior Shareholder LLC and Greystone Bridge Junior Shareholder LLC, respectively, both affiliates of the trust asset seller. The Senior and Junior Preferred Shares represent 19.5% of the transaction balance. The loans are all secured by multifamily properties and only two loans, representing 7.5% of the pool, are secured by student housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Additionally, student housing exposure for the trust is capped at 10.0% during the reinvestment period per the Eligibility Criteria. Twenty loans, totaling 86.4% of the pool balance, represent acquisition financing with borrowers contributing equity to the transaction.

The overall weighted-average (WA) DBRS Term and Refi DSCRs of 0.83x and 0.84x, respectively, and corresponding DBRS Debt and Exit Debt Yields of 5.9% and 7.1%, respectively, are considered high-leverage financing. The DBRS Term and Refinance DSCRs are based on the DBRS In-Place NCF and debt service calculated using a stressed interest rate. The WA stressed rate used is 7.1%, greater than the current WA interest rate of 5.7% (based on WA mortgage spread and an assumed 0.75% one-month LIBOR index). Regarding the significant refinance risk indicated by the DBRS Refi DSCR of 0.84x, the credit enhancement levels are reflective of the increased leverage that is substantially higher than in recent fixed-rate transactions. The assets are generally well positioned to stabilize and any realized cash flow growth would help to offset a rise in interest rates and also improve the overall debt yield of the loans. DBRS associates its probability of default (POD) based on the assets’ in-place cash flow, which does not assume that the stabilization plan and cash flow growth will ever materialize. Eight loans, representing 22.2% of the pool, are secured by properties located in tertiary or rural markets, including two of the top ten loans. Properties located in tertiary and rural markets were analyzed with significantly higher loss severities than those located in urban and suburban markets.

The ratings assigned to the Notes by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.
Notes:
All figures are in U.S. dollars unless otherwise noted.

Greystone Commercial Real Estate Notes 2017-FL1 refers to Greystone Commercial Real Estate Notes 2017-FL1, Ltd. and Greystone Commercial Real Estate Notes 2017-FL1, LLC as entities.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are the North American CMBS Rating Methodology, Unified Interest Rate Model for Rating U.S. Structured Finance Transactions and DBRS Commercial Real Estate Property Analysis Criteria, which can be found on our website under Methodologies.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E), which contains a description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

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