DBRS Morningstar Finalizes Provisional Ratings on PFP 2021-8, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by PFP 2021-8, 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 (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

Coronavirus Overview
With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains 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, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The initial collateral consists of 46 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $1.1 billion secured by 55 properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $125.9 million. The holder of the related future funding companion participations, an affiliate of Prime Group, 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 related fully funded future funding participations subject to stated criteria during the replenishment period, which ends on or about September 2024, and among other criteria, includes a no-downgrade rating agency confirmation (RAC) by DBRS Morningstar for the acquisition of related companion participations exceeding $1.0 million. As of September 30, 2021, four loans (#16, 330 S Wells; #31, Addison Springs; #32, Gateway Marketplace; and #44, Billings Retail), representing 5.7% of the initial pool balance, have not closed. One loan, Rockhill Industrial Portfolio, that was previously identified as a Delayed Close Mortgage Asset, closed on September 23, 2021. Everything in the report that follows was based on all five loans (including Rockhill Industrial Portfolio) being unclosed. 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 EOD. The transaction will have a sequential-pay structure.

Of the 55 properties, 36 are multifamily assets (57.8% of the mortgage asset cutoff date balance) and 11 are office assets (18.6% of the mortgage asset cutoff date balance). No other property type exceeds 10.2% 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. Sixteen loans are whole loans and the other 30 are participations with companion participations that have remaining future funding commitments totaling $125.9 million. The future funding for each loan is generally to be used for capital expenditures to renovate the property or build out space for new tenants. All of the loans in the pool have floating interest rates initially indexed to Libor. Nine loans, representing 19.1% of the mortgage asset cutoff date balance, amortize on a fixed schedule, with an additional 31 mortgage assets, representing 70.4% of the mortgage asset cutoff date balance, that amortize on a fixed schedule during their respective extension periods. 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 terms 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 that the assets will stabilize above market levels.

The transaction is sponsored by Prime Finance Short Duration Holding Company VII, LLC (Prime Holding), which has strong origination practices and substantial experience in originating loans and managing commercial real estate properties. Prime Finance was formed in June 2008 and has more than $6.0 billion of short-duration assets and callable capital as of June 30, 2021.

Five loans, comprising 16.6% of the total pool balance, are secured by properties that DBRS Morningstar deems to be Above Average in quality, with an additional loan, Matter Park, totaling 3.7% of the total pool balance, secured by a property identified as Average + in quality. Equally important, only one loan, representing 1.5% of the total pool balance, is secured by a property that DBRS Morningstar deems to be Below Average and only four loans, comprising 6.5% of the total pool balance, are secured by properties that DBRS Morningstar deems to be Average –.

As no loans in the pool were originated prior to the onset of the coronavirus pandemic, the weighted average remaining fully extended term is 57 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.

Forty-nine loans, representing 95.7% of the pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral and aligning the financial interests of the sponsor and lender.

The DBRS Morningstar Business Plan Scores (BPS) for loans that DBRS Morningstar analyzed range between 1.20 and 3.58, with an average of 2.20. Higher DBRS Morningstar BPS indicate more risk in the sponsor’s business plan. DBRS Morningstar considers the anticipated lift to the properties from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity of the business plan. Compared with similar mixed property type transactions, the subject has a low average BPS, which is indicative of lower risk.

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 72.3% 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 net cash flow (NCF) or value upside.

The deal is concentrated by property type, with 21 loans, representing 57.8% of the mortgage loan cutoff date balance, secured by multifamily properties. Three of these loans, comprising 7.2% of the trust balance, are backed by student housing properties. Additionally, 11 loans, representing 18.6% of the mortgage loan cutoff balance, are secured by office properties. Multifamily properties benefit from staggered lease rollover and generally have 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 average expected loss of the loans secured by multifamily properties is roughly 30% lower than the average expected loss of the overall pool. DBRS Morningstar sampled 72.3% of the pool, representing 58.6% of the total multifamily loan cutoff balance and 51% of the total office loan cutoff balance, thereby providing comfort for the DBRS Morningstar NCF.

All loans have floating interest rates, and 37 loans, representing 80.9% of the initial pool balance, are interest only during the initial loan terms, which range from 24 months to 48 months, creating interest rate risk. The borrowers of all 37 loans have purchased Libor rate caps that have ranges of 0.25% to 3.00% to protect against a rise in interest rates over the terms of the loans. All loans are short term and, even with extension options, have fully extended maximum loan terms of six years. Additionally, all loans have extension options, and, in order to qualify for these options, the loans must meet the minimum debt service coverage ratio (DSCR) and loan-to-value ratio (LTV) requirements. Twenty-six of the loans, representing 89.5% of the total pool, amortize on fixed schedules during all or a portion of their extension periods.

DBRS Morningstar conducted management tours on only seven properties, representing 16.0% 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.

The underlying mortgages for the transaction will pay the floating rate, which presents potential benchmark transition risks as the deadline approaches for the elimination of Libor. The transaction documents provide an alternative benchmark rate for the transition, 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.

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.

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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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

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