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Ready Capital readies $263M of small-balance commercial mortgage bonds

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Ready Capital Corp. (NYSE: RC) is securitizing hundreds of smaller commercial mortgages that carry “significantly higher” loss severity risk due to their diminutive scale and poorer quality, according to a presale report from DBRS.

Ready Capital, the real estate investment trust formerly known as Sutherland Asset Management, is pooling a $263.5 million portfolio of 452 loans that have an average balance of $583,029 – far below the average $18.6 million of a commercial mortgage found in conduit CMBS this year, according to DBRS. The top 15 loans range in size between $2.1 million and $7.4 million, but 79.7% of the loans are under $2 million.

The transaction is dubbed Sutherland Commercial Mortgage Trust 2018-SBC7.

The small-balance loans, combined with the high percentage of single-tenant and owner-occupied commercial properties, represent a higher-risk pool that limited the senior-note rating to a single A (low) grade for the $217.74 million Class A tranche, according to DBRS

“Historically, loans with smaller balances have experienced significantly higher loss severities in the event of default than larger loans,” stated the report, in which DBRS detailed that over 93% of the loans in the pool were under $5 million – a level at which the loans “are treated more punitively” under DBRS’ CMBS ratings methodology.

About 47% of the pool, or 199 loans, are single-tenant and 29.1% (155 loans) are owner-occupied. The properties – primarily a mix of retail, office and multifamily properties – also have debt-service coverage ratios below 1.15x – a “threshold indicative of a higher likelihood of default,” DBRS’ report stated. Approximately 34.6% have DSCR’s under 1x.

Unlike prior Sutherland transactions that securitized transitional properties lacking cash flow and were structured as collateralized loan obligations, this deal is backed by commercial and multifamily properties that are generating revenue.

In addition, loans in the pool expected to amortize by 70% over their average remaining terms of 94 months – reducing refinance risk. By comparison, the loans securitized in CRE CLOs typically amortize very little.

Moreover, the pool of collateral for the new deal has limited exposure to higher-volatility property types such as hotels, self-storage and manufacturing housing communities, DBRS stated.

But over 32% of the loans are in higher-risk tertiary and rural markets. And of 62 loans for which DBRS inspected, 29 were modeled with average-to-poor properties, which have more trouble retaining existing tenants, the report stated.

DBRS reported having “limited” property-level information to review for the transaction, including the lack of property condition reports, environmental reports and updated appraisals, resulting in a haircut of 14.3% to the issuer’s average net cash flow assumption per property.

The largest loan in the property is a $7.39 million mortgage for a 22-year-old, semi-developed industrial park in Mansfield, Ohio (with a population of less than 50,000).

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