DBRS Morningstar Confirms Ratings on SREIT Trust 2021-FLWR

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-FLWR issued by SREIT Trust 2021-FLWR 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 (low) (sf)

All trends are Stable. The rating confirmations and Stable trends reflect a deal that is early in its lifecycle with limited reporting and no changes to the performance of the underlying portfolio from issuance.

The trust consists of a single mortgage loan, secured by the borrower’s fee-simple interests in a portfolio of 16 Class A multifamily properties totaling 5,260 units across 11 unique metropolitan statistical areas (MSAs) in six states in the southeastern United States. The transaction closed in July 2021 and there has been minimal updated financial reporting. Rent rolls, dated as of December 31, 2021, for each of the properties reported a weighted average (WA) occupancy rate of 95.3%, which is generally in line with the portfolio’s issuance occupancy rate of 96.2%. The servicer reported a YE2021 net cash flow (NCF) of $45.2 million, compared with the issuer’s $44.8 million and DBRS Morningstar’s issuance NCF of $41.3 million. The YE2021 WA debt service coverage ratio (DSCR) was 3.49 times (x) compared with 3.17x at issuance, with the increase primarily attributed to the floating interest rate, which resulted in an 8.4% decline in the debt service amount from the issuer’s figure.

The loan has a two-year term with the initial maturity date in July 2023, but is also subject to three one-year extension options. The interest-only (IO) loan has a floating interest rate based on Libor plus 1.60%. To hedge exposure to Libor, the borrower entered into an interest rate cap agreement that has a strike price of 1.00% and a five-year term, consistent with the fully extended loan maturity. The loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns across the capital structure for the first 20% of the unpaid principal balance. The borrower can release individual properties subject to customary debt yield and loan-to-value ratio (LTV) tests. The prepayment premium for the release of individual assets is 105.0% of the allocated loan amount (ALA) on the first 15.0% of the original principal balance, and 110.0% of the ALA for the release of individual assets thereafter, which DBRS Morningstar considers to be weaker than a generally credit-neutral standard of 115.0%.

The transaction benefits from experienced sponsorship in Starwood Real Estate Income Trust (Starwood), a private investment company with significant ownership and management experience in commercial real estate across the world. The borrower, a Starwood affiliate, used loan proceeds of $796.5 million, along with borrower equity of $387.5 million, to acquire the portfolio for approximately $1.09 billion ($216,300 per unit). At issuance, DBRS Morningstar estimated the value of the portfolio at approximately $660.4 million ($125,556 per unit), implying a DBRS Morningstar LTV of 120.6%, which is substantial. To account for the high leverage, DBRS Morningstar reduced its LTV benchmark targets by 2.5% across the capital structure. The high leverage point and the lack of scheduled amortization pose potentially elevated refinance risk at loan maturity, however, the DBRS Morningstar LTV on the last dollar of rated debt is much lower at 98.5%.

The underlying properties were constructed between 2006 and 2017, and generally exhibit high-quality finishes and comprehensive amenities. The properties are located in generally strong, high-growth markets, with geographic concentrations in Texas and Florida representing 78.2% of the total units and 76.8% of the total purchase price combined. From a loan balance perspective, the portfolio’s ALA is not heavily concentrated on one particular asset. The average allocated purchase price is 6.3% across the portfolio, with only one property accounting for more than 10% of the total purchase price. Furthermore, only the Travesia asset (9.5% of ALA) accounted for more than 10% of the total portfolio’s YE2021 NCF at 10.2%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
No Environmental, Social, or Governance factor(s) had a significant or relevant effect on the credit analysis.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the 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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did not have 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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