DBRS Morningstar Finalizes Provisional Ratings on VMC Finance 2021-FL4 LLC

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by VMC Finance 2021-FL4 LLC:

-- 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 collateral consists of 23 floating-rate mortgage loans secured by 29 mostly transitional real estate properties with a cut-off date pool balance of approximately $927.9 million, excluding nearly $92.3 million of future funding commitments that remained outstanding as of the mortgage loan cut-off date. Most loans are in a period of transition with plans to stabilize and improve asset value. During the Permitted Funded Companion Participation Acquisition Period, the Issuer may acquire Related Funded Companion Participations subject to, among other criteria, receipt of a no-downgrade confirmation from DBRS Morningstar (commonly referred to as a rating agency confirmation), except that such confirmation will not be required with respect to the acquisition of a participation if the principal balance of the participation being acquired is less than $1.0 million. The transaction does not permit the ability to reinvest or add unidentified assets to the pool postclosing, except that principal proceeds can be used to acquire the aforementioned Related Funded Companion Participations.

The loans are generally secured by traditional property types (i.e., retail, multifamily, and office) with only three loans, representing 11.1% of the cut-off date pool balance, secured by nontraditional property types such as hospitality and self-storage. Additionally, no loans are secured by student-housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. Five loans, representing 27.6% of the cut-off date pool balance, exhibited either Average + or Above Average property quality. Additionally, no loans exhibited Average – or Below Average property quality.

Based on the initial pool balances, the overall weighted-average (WA) DBRS Morningstar As-Is debt service coverage ratio (DSCR) of 0.74x and WA DBRS Morningstar As-Is loan-to-value ratio (LTV) of 80.1% 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 loss given default (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 at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is net cash flow (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 WA DBRS Morningstar DSCR is estimated to improve to 1.05x, suggesting that the properties are likely to have improved NCFs once the sponsors’ business plans have been implemented.

Eleven loans, totaling 54.5% of the cut-off date pool balance, represent refinancings. The refinancings within this securitization generally do not require the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a lower sponsor equity basis in the underlying collateral. Generally speaking, the refinance loans are performing at a higher level and have less stabilization to do. Of the 11 refinance loans, five loans, representing 42.2% of the refinancings, reported occupancy rates higher than 80.0%. Additionally, the 11 refinance loans exhibited a WA growth between as-is and stabilized appraised value estimates of 11.6% compared with the overall WA appraised value growth of 17.2% of the pool and the WA appraised value growth of 23.9% exhibited by the pool’s acquisition loans.

Twenty-three loans, totaling 100.0% of the cut-off date pool balance, have floating interest rates. All of the aforementioned loans are interest only (IO) through the full duration of the initial loan term (and eight loans representing 33.4% of the cut-off date pool balance are IO through the fully extended loan period) with original terms ranging from 24 to 48 months, creating interest rate risk. All identified floating-rate loans are short-term loans with maximum fully extended loan terms of 60 months or less. Additionally, for all 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 with 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.

DBRS Morningstar did not conduct interior or exterior tours of the properties because of health and safety constraints associated with the ongoing Coronavirus Disease (COVID-19) pandemic. 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 to each loan. DBRS Morningstar received recent third-party reports containing property quality commentary and photos for all loans.

With regard to the pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, affected more immediately. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

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 – Brookwood Portfolio (9.3% of the pool)
-- Prospectus ID#2 – Twin Creeks Apartments (6.7% of the pool)
-- Prospectus ID#3 – Columbus Center (6.3% of the pool)
-- Prospectus ID#4 – One Financial Center (6.3% of the pool)
-- Prospectus ID#5 – Stewart Creek Apartments (6.0% of the pool)
-- Prospectus ID#6 – Rockbrook Village Apartments (5.9% of the pool)
-- Prospectus ID#7 – Dolce Living at Royal Palm Apartments (5.6% of the pool)
-- Prospectus ID#8 – BMO Plaza (5.5% of the pool)
-- Prospectus ID#9 – River Forum (4.9% of the pool)
-- Prospectus ID#10 – MCSS Portfolio (4.8% of the pool)
-- Prospectus ID#11 – Shafer Court (1.9% 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.

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 www.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 www.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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact 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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