DBRS Morningstar Confirms Ratings on All Classes of A10 SACM 2021-LRMR

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-LRMR issued by A10 SACM 2021-LRMR as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All trends are Stable.

The ratings confirmations reflect the overall performance of the loan, which has remained consistent with DBRS Morningstar’s expectations at issuance. The loan is secured by the borrower’s fee-simple and leasehold interests in Larimer Square, a 246,000-square-foot (sf) mixed-use property consisting of retail and office in Denver, Colorado. Larimer Square is a protected historic district and comprises 26 buildings, including a parking garage on 12 separate real estate tax parcels. Two of the buildings are subject to ground leases.

The fully funded loan amount of $88.7 million consists of an initial loan balance of $61.0 million and $27.7 million of future funding. The initial loan proceeds were used to recapitalize the sponsor’s purchase of Larimer Square while the future funding, along with future sponsor equity, will be used to execute the sponsor’s business plan of completing capital improvements and leasing up the property to market occupancy and rental rates. The lender is expected to fund $21.1 million of future funding toward capital improvements and $6.6 million toward leasing costs, with the sponsor expected to contribute $13.3 million of additional equity to help cover capital improvements (a 31.06% share) and leasing costs (a 35.0% share) on a pari passu basis.

The renovations were budgeted at $30.9 million and will be completed in three phases. Phase I consists of repairs to the roof and facades on the majority of the 26 buildings at a cost of $2.3 million. Phase II mainly consists of the redevelopment of the Granite, Buerger-Sussex, and Lincoln Hall buildings to repurpose the space for large office tenant users. In addition, these buildings will receive infrastructure upgrades related to mechanical, electrical, and plumbing with some modifications to ingress/egress points at a total budgeted cost of $16.0 million. Phase III consists of improvements to the streetscape and general improvements to the exterior of the overall property at a cost of $2.0 million. According to the collateral manager, Phase I is under way and $884,405 of future funding has been advanced to date, with a borrower draw request of $1.4 million currently under review and pending release.

The sponsor is working toward turning the subject into a 24-hour destination for the local population while catering to office and retail demands. Restaurants represented approximately 70% of the retail space at closing and the sponsor is working toward reducing this component to approximately 55%, with a goal to retain only restaurant tenants with high sales volume while executing leases with replacement tenants that offer a wider range of goods and services. As leases roll, the sponsor plans to increase rents to market while adding strong and national retailers to its tenant roster. Lastly, the sponsor will be converting office leases to a triple net (NNN) structure upon renewal or new leasing activity.

According to the December 2021 rent roll, the subject was 58.5% occupied, compared with the occupancy rate at issuance of 66.0%. Occupancy is expected to remain depressed as the sponsor works toward its capital improvement program prior to initiating its lease-up strategy. According to Reis, retail properties in the Midtown/Central Business District (CBD) submarket reported a Q1 2022 vacancy rate of 6.2% and asking rental rate of $22.50 per sf (psf), while office properties in the CBD submarket reported a Q1 2022 vacancy rate of 19.6% and asking rental rate of $34.11 psf. DBRS Morningstar analyzed the loan with a stabilized vacancy rate of approximately 10.0% for the entire portfolio, which is in line with the appraiser’s estimate. In regard to rental rates, DBRS Morningstar assumed a rental rate of $50.00 psf NNN for both retail and restaurant space with new and renewal leasing costs of $75.00 psf and $40.00 psf, respectively. DBRS Morningstar analyzed office space with a rental rate of $35.00 psf NNN with new and renewal leasing costs of $35.00 psf and $18.00 psf, respectively.

The DBRS Morningstar stabilized net cash flow (NCF) was $7.2 million, a variance of -21.1% from the sponsor’s projected stabilized NCF of $9.2 million. The loan is structured with a $25.0 million limited guaranty by the sponsor, which may be terminated upon the loan meeting certain performance metrics including an average occupancy rate of 90.0% for a period of six months, a debt yield of 9.0% for a period of three months, and a loan-to-value ratio of 60.0% based on an updated appraisal.

ESG 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/396929.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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.

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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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