DBRS Morningstar Assigns Provisional Ratings to BSPRT 2021-FL7 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by BSPRT 2021-FL7 Issuer, Ltd.:

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (high) (sf)
-- Class G Notes at BB (low) (sf)
-- Class H Notes at B (low) (sf)

All trends are Stable.

The initial collateral consists of 26 floating-rate mortgage loans secured by 29 mostly transitional real estate properties with a cut-off balance totaling $840.7 million excluding $50.3 million in remaining future funding commitments. The transaction is a managed vehicle, which includes a 24-month reinvestment period. As part of the reinvestment period, the transaction includes a six-month ramp-up acquisition period that will be used to increase the trust balance by $59.3 million to a total target collateral principal balance of $900.0 million. DBRS Morningstar assessed the $59.3 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) ratio, 14.0 Herfindahl score, and loan size limitations. Lastly, the eligibility criteria stipulates Rating Agency Confirmation on ramp loans, reinvestment loans, and 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.

The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 18 loans, representing 60.2% of the pool, have remaining future funding participations totaling $50.3 million, which the Issuer may acquire in the future.

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, representing 71.0% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.0 times (x) or below, a threshold indicative of default risk. By contrast, none of the loans had a DBRS Morningstar Stabilized DSCR below 1.0x. 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 sponsor for the transaction is Benefit Street Realty Operating Partnership, L.P., a wholly owned subsidiary of Franklin BSP Realty Trust, Inc. (FBRT), formerly known as Benefit Street Partners Realty Trust, Inc., and an experienced commercial real estate (CRE) collateralized loan obligation (CLO) issuer and collateral manager. As of September 30, 2021, FBRT managed a commercial mortgage debt portfolio of approximately $3.3 billion and had issued eight CRE CLO transactions. Through September 30, 2021, FBRT had not realized any losses on any of its CRE bridge loans. Additionally, FBRT 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 $177.75 million, or 19.8% of the transaction total.

The majority of the pool comprises primarily multifamily (92.3%) and self-storage (1.8%) properties. These properties 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.

Twenty-four of the 26 loans, representing 94.3% of the mortgage asset cut-off date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. Triton Court Apartments and Prime South Carolina Portfolio are the sole refinance loans representing 5.7% of the pool. Triton Court Apartments, representing 3.9% of the current trust balance, is of recent construction and the sponsor will have $6.6 million of equity remaining in the deal despite a small return of equity as part of the refinance. The sponsor for Prime South Carolina Portfolio, representing 1.8% of the current trust balance, contributed material equity in conjunction with the mortgage loan, and the portfolio is cash flowing.

The transaction is managed and includes a ramp-up component and reinvestment 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 partially offset by eligibility criteria that outline minimum DSCR, LTV, 14.0 Herfindahl score, property type, and loan size limitations, among other things, for reinvestment assets. No Downgrade Confirmation is required from DBRS Morningstar for all reinvestment loans and ramp-up loans. Additionally, DBRS Morningstar accounted for the uncertainty introduced by the six-month ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria.

Based on the initial pool balances, the overall DBRS Morningstar WA As-Is DSCR of 0.92x and WA As-Is LTV of 76.6% 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 severity given default 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 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 does not account for. When measured against the DBRS Morningstar Stabilized NCF, the DBRS Morningstar WA DSCR is estimated to improve to 1.21x, suggesting that the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented.

All 26 loans have floating interest rates and are interest only during the initial loan term, creating interest rate risk should interest rates increase. 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, 24 loans with extension options, representing 91.0% of the initial pool balance, 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 all loans, except one (Vaughan Place Apartments) have purchased Libor caps that range between 1.0% and 3.0% and protect against rising interest rates over the term of the loan. The borrower for Vaughan Place Apartments, representing 10.5% of the trust balance, is not required to purchase a rate cap at closing; however, once Libor reaches 1.00%, the borrower will be required to obtain an interest rate cap for the term of the loan.

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.

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.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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