DBRS Morningstar Assigns Provisional Ratings to BSPRT 2021-FL6 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by BSPRT 2021-FL6 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 (high) (sf)
-- Class G at BB (sf)
-- Class H at B (low) (sf)

The Issuer elected to make certain changes to the non-offered Class G certificate after DBRS Morningstar assigned a provisional rating of BB (sf). The resulting finalized provisional rating DBRS Morningstar assigned to the non-offered Class G certificate in light of the changes was BB (low) (sf).

The initial collateral includes 21 mortgage loans, consisting of eight whole loans and 13 fully funded senior, senior pari passu, or pari passu participations secured by commercial or multifamily real estate properties with an initial cut-off balance totaling $446.7 million. Twenty of the mortgages have floating rates, while one loan has a fixed rate. The transaction is a managed vehicle, which includes a 180-day ramp-up acquisition period and subsequent 30-month reinvestment period. The ramp-up acquisition period will be used to increase the trust balance by $253.3 million to a total target collateral principal balance of $700.0 million. DBRS Morningstar assessed the $253.3 million ramp component using a conservative pool construct, and, as a result, the ramp loans have expected losses above the pool weighted-average (WA) loan expected loss. During the reinvestment period, so long as the note protection tests are satisfied and no event of default has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interest, including funded companion participations, meeting the eligibility criteria. The eligibility criteria, among other things, has minimum debt service coverage ratio (DSCR), loan-to-value (LTV), 14 Herfindahl score, and loan size limitations. This pertains to all loans in the pool with exception to Palms on Lamar (7.2% of pool), which is only subject to Loan Specific Eligibility Criteria. Lastly, the eligibility criteria stipulates Rating Agency Confirmation on ramp loans, reinvestment loans, and a $1.0 million threshold on pari passu participation acquisitions if a portion of the underlying loan is already included in the pool, thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impacts to the overall ratings.

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), 18 loans, comprising 92.1% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. Additionally, the DBRS Morningstar Stabilized DSCR of 11 loans, comprising 67.7% of the initial pool balance, was 1.00x or below, which is indicative of elevated refinance risk. 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.

The sponsor for the transaction, BSPRT 2021-FL6 Holder, LLC, is an indirect wholly owned subsidiary of Benefit Street Partners Realty Trust, Inc. (BSPRT) and an experienced commercial real estate (CRE) collateralized loan obligation (CLO) issuer and collateral manager. As of September 30, 2020, BSPRT managed a commercial mortgage debt portfolio of approximately $2.6 billion and had issued six CRE CLO transactions. Through December 31, 2020, BSPRT had not realized any losses on any of its CRE bridge loans. Additionally, BSPRT will purchase and retain 100.0% of the Class F Notes, the Class G Notes, the Class H Notes, and the Preferred Shares, which total $115.5 million, or 16.5% of the transaction total.

77.9% of the total pool comprises multifamily (62.5%), self-storage (9.3%), and industrial (6.1%) properties. These property types have historically shown lower defaults and losses. Multifamily properties 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. Furthermore, the pool has limited office and retail exposure, comprising 22.1% of the pool, which have experienced considerable disruption as a result of the Coronavirus Disease (COVID-19) pandemic with mandatory closures, stay-at-home orders, retail bankruptcies, and consumer shifts to online purchasing. Additionally, the pool contains no loans backed by hotel properties.

The business plan score (BPS) for loans DBRS Morningstar analyzed was between 1.37 and 2.42, with an average of 2.03. On a scale of 1 to 5, a higher DBRS Morningstar BPS is indicative of more risk in the sponsor’s business plan. Consideration is given to the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity. Compared with similar transactions, the subject has a relatively low average BPS, which is indicative of lower risk.

The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector, and while DBRS Morningstar expects multifamily (62.5% of the pool) to fare better than most other property types, the long-term effects on the general economy and consumer sentiment are still unclear. DBRS Morningstar received coronavirus and business plan updates for all loans in the pool, confirming that all debt service payments have been received in full through February 2021. Furthermore, no loans are in forbearance or other debt service relief and no loan modifications were requested. All loans in the pool have been originated after March 2020 or the beginning of the pandemic. Loans originated after the pandemic include timely property performance reports and recently completed third-party reports, including appraisals. Given the uncertainty and elevated execution risk stemming from the coronavirus pandemic, 13 loans, totaling 60.7% of the trust balance, are structured with substantial upfront interest reserves.

The transaction is managed and includes a delayed-close loan, a ramp-up component, a reinvestment period, and a replenishment 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 also partially offset by eligibility criteria that outline DSCR, LTV, 14 Herfindahl minimum, property type, and loan size limitations for ramp and reinvestment assets. DBRS Morningstar has the ability to provide a no-downgrade confirmation for new ramp loans, companion participations over $1.0 million, and new reinvestment loans. These loans will be analyzed by DBRS Morningstar before they come into the pool and reviewed for potential ratings impact. DBRS Morningstar accounted for the uncertainty introduced by the 180-day ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria. The ramp component has a higher expected loss than the weighted-average pre-ramp pool.

DBRS Morningstar has analyzed the loans to a 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 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 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 loss given default based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside.

As of the cut-off date, the pool contains 21 loans and is concentrated by CRE CLO standards with a lower Herfindahl score of 14.85. Furthermore, the top 10 loans represent 74.7% of the pool. The 21 loans are secured by 25 properties across 13 states, and the properties are primarily in core markets with the overall pool’s WA DBRS Morningstar Market Rank at 3.7. The cut-off date balance will increase from a delayed-close loan and ramp-up loans, which is projected to occur 180 days after closing. New loans will increase loan count and add broader diversity to the pool, raising the Herfindahl score.

Because of the ongoing coronavirus pandemic, DBRS Morningstar was unable to perform site inspections on any of the properties in the pool. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned for each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos. DBRS Morningstar made relatively conservative property quality adjustments with only one loan, 4 West Las Olas (2.9% of the pool), being modeled with Above Average property quality. Furthermore, no loans received Excellent property quality distinction and three loans, comprising 23.0% of the pool, were modeled with Average + property quality.

Twenty loans, comprising 94.0% of the pool, have floating interest rates and are interest only during the initial loan term, creating interest rate risk should interest rates increase. 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. Additionally, all loans have extension options, and, in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements. All loans are short-term and, even with extension options, have a fully extended loan term of five years maximum. The borrowers for 20 loans, totaling 94.0% of the trust balance, have purchased Libor rate caps that range between 0.50% and 3.00% to protect against rising interest rates over the term of the loan.

The underlying mortgage loans for the transaction will pay the floating rate, which presents potential benchmark transition risk as the deadline approaches for the elimination of Libor. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be either Term Secured Overnight Financing Rate (SOFR) plus the applicable Alternative Rate Spread Adjustment or Compounded SOFR plus the Alternative Rate Spread Adjustment. There is an inherent conflict of interest between the special servicer and the seller as they are related entities. Given that the special servicer is typically responsible for pursuing remedies from the seller for breaches of the representations and warranties, this conflict could be disadvantageous to the noteholders. While the special servicer is classified as the enforcing transaction party, if a loan repurchase request is received, the trustee and seller will be notified and the seller is required to correct the material breach or defect or repurchase the affected loan within a maximum period of 90 days. The repurchase price would amount to the outstanding principal balance and unpaid interest less relevant seller expenses and protective advances made by the servicer. The Issuer retains 16.50% equity in the transaction holding the first-loss piece.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Taylor at Copperfield (12.2% of the pool)
-- Prospectus ID#2 – 1660 Linc (9.8% of the pool)
-- Prospectus ID#3 – Jerome Apartments (9.2% of the pool)
-- Prospectus ID#4 – Greensboro Multifamily Portfolio (8.1% of the pool)
-- Prospectus ID#5 – Palms on Lamar (7.2% of the pool)
-- Prospectus ID#6 – Prime Self Storage Portfolio (6.7% of the pool)
-- Prospectus ID#7 – Cheyenne Industrial (6.1% of the pool)
-- Prospectus ID#8 – Insulet Headquarters (6.0% of the pool)
-- Prospectus ID#9 – HUE at Chroma (4.7% of the pool)
-- Prospectus ID#10 – Kendall Lake Apartments (4.7% of the pool)
-- Prospectus ID#11 – Landmark Building (3.7% of the pool)
-- Prospectus ID#12 – 4 West Las Olas (2.9% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

DBRS Morningstar notes that this press release was amended on March 25, 2021, to include a change made to the Class G certificate after the initial provisional rating was assigned.

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 (August 7, 2020), 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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