DBRS Morningstar Finalizes Provisional Ratings on BDS 2021-FL8 Ltd.

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by BDS 2021-FL8 Ltd. (the Issuer):

-- Class A 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 23 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $576.4 million secured by 23 properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $47.2 million. The holder of the future funding companion participations, affiliates of Bridge III REIT, Inc. (Bridge REIT), has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is static with no ramp-up period or reinvestment period; however, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations subject to stated criteria during the replenishment period, which ends on or about August 2023 (subject to a 60-day extension for binding commitments entered during the replenishment period). Interest can be deferred for Class C, Class D, Class E, Class F, and Class G Notes, and interest deferral will not result in an event of default. The transaction will have a sequential-pay structure.

Of the 23 properties, 21 are multifamily assets (86.7% of the mortgage asset cutoff date balance). The remaining two loans, Eleven One Eleven and 606-654 Venice Boulevard, are secured by office properties (13.3% of the mortgage asset cutoff date balance). The loans are mostly secured by cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Five loans are whole loans and the other 18 are participations with companion participations that have remaining future funding commitments totaling $47.2 million. The future funding for each loan is generally to be used for capital expenditure to renovate the property or build out space for new tenants. All of the loans in the pool have floating interest rates initial indexed to Libor and are interest only (IO) through their initial terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. 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 the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The transaction is sponsored by Bridge REIT, a wholly owned subsidiary of Bridge Debt Strategies Fund III GP LLC and an affiliate of Bridge Investment Group LLC (Bridge Investment Group). The Sponsor has strong origination practices and substantial experience in originating loans and managing commercial real estate (CRE) properties. Bridge Investment Group is a leading privately held real estate investment and property management firm that manages in excess of $26 billion in assets as of March 2021. Bridge is an active CRE collateralized loan obligation (CLO) issuer, having completed three static CRE CLO transactions and four managed CRE CLO transactions as of the date of this report.

An affiliate of Bridge Investment Group, an indirect wholly owned subsidiary of the Sponsor (as retention holder), will acquire the Class F Notes, the Class G Notes, and the Preferred Shares, representing the most subordinate 18.25% of the transaction by principal balance.

The pool is composed mostly of multifamily assets (86.7% of the mortgage asset cutoff date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall commercial mortgage-backed securities universe.

As no loans in the pool were originated prior to the onset of the Coronavirus Disease (COVID-19) pandemic, the weighted-average (WA) remaining fully extended term is 45 months, which gives the Sponsor enough time to execute its business plans without risk of imminent maturity. In addition, the appraisal and financial data provided are reflective of conditions after the onset of the pandemic.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is debt service coverage ratio (DSCR) is 1.14 times (x) and the WA DBRS Morningstar Stabilized DSCR is estimated to improve to 1.27x. DBRS Morningstar’s estimated lift from As-Is to Stabilized is not significant, suggesting that the properties are well positioned to attain their improved net cash flows (NCFs) once the Sponsor’s business plans have been implemented.

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 Sponsor will not successfully execute its 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. The Sponsor’s failure to execute the business plans could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar sampled a large portion of the loans, representing 83.4% of the pool cutoff date balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans 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. Future funding companion participations will be held by affiliates of Bridge REIT and have the obligation to make future advances. Bridge 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, Bridge REIT will be required to meet certain liquidity requirements on a quarterly basis. Two loans, representing 6.2% of the pool balance, are structured with a debt service reserve to cover any interest shortfalls.

A majority of the collateral is concentrated in Texas and Arizona, with seven properties comprising 37.0% of the initial pool in the Dallas metropolitan statistical area (MSA) and six properties comprising 21.7% of the initial pool in the Phoenix MSA. Furthermore, the top 10 loans represent 60.5% of the pool. Only two loans, 606-654 Venice Boulevard and 1024 Clinton (comprising 8.5% of the pool), are in a DBRS Morningstar Market Rank 6 or 7 and no loans are in a DBRS Morningstar Market Rank 8. These markets are considered more urban in nature and benefit from increased liquidity with consistently strong investor demand even during times of economic stress. Texas and Arizona are growing states, with positive migration and an increasing population. Both states are also projected to have job growth in excess of the national average for the foreseeable future. By CRE CLO standards, the pool has a high Herfindahl score of 19.1. Additionally, the properties are primarily in core markets with the overall pool’s WA DBRS Morningstar Market Rank at 4.1.

Twelve loans, comprising 55.9% of the initial pool balance, are in DBRS Morningstar MSA Group 1. Historically, loans in this MSA Group have demonstrated higher probability of defaults resulting in the individual loan level expected losses to be greater than the WA pool expected loss. These loans are located across three states within primarily core markets and a WA DBRS Morningstar Market Rank of 4.3. More specifically, four of the 12 loans (23.9% of pool) are in a DBRS Morningstar Market Rank 5.

All 23 loans have floating interest rates, are IO during the original term and through all extension options, and have original terms of 36 months to 48 months, creating interest rate risk. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five years. 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. The borrowers of all 23 floating-rate loans have purchased Libor rate caps with strike prices that range from 0.50% to 3.50% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

DBRS Morningstar conducted only one management tour, which was for 1024 Clinton, representing 2.6% of the initial pool, because of health and safety constraints associated with the ongoing coronavirus 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. Recent third-party reports were provided for all loans and contained property quality commentary and photos.

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#01 – Tinsley on the Park (10.4% of the pool)
-- Prospectus ID#02 – The Laurel Preston Hollow (7.4% of the pool)
-- Prospectus ID#03 – Eleven One Eleven (7.4% of the pool)
-- Prospectus ID#04 – 606-654 Venice Boulevard (5.9% of the pool)
-- Prospectus ID#05 – Summerhill Place (5.1% of the pool)
-- Prospectus ID#06 – Villas at Chase Oaks (5.1% of the pool)
-- Prospectus ID#07 – Spalding Bridge (5.0% of the pool)
-- Prospectus ID#08 – Harvest Glen Apartments (4.9% of the pool)
-- Prospectus ID#09 – The Cove (4.7% of the pool)
-- Prospectus ID#10 – Portola West Valley (4.5% of the pool)
-- Prospectus ID#20 – 1024 Clinton (2.6% 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 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.

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.

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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