DBRS Morningstar Confirms All Ratings on HGI CRE CLO 2021-FL2, Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by HGI CRE CLO 2021-FL2, 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 rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at [email protected].

The transaction closed in September 2021, with a cut-off pool balance totalling $514.5 million. At issuance, the pool consisted of 20 floating-rate mortgage loans secured by 22 mostly transitional real estate properties. The majority of the collateral was in a period of transition, with plans to stabilize and improve asset value. The transaction was structured with an initial Ramp-Up Acquisition Period and a subsequent 24-month Reinvestment Period. The Ramp-Up Acquisition Period concluded with the March 2022 payment date when the cumulative trust loan balance totalled $579.5 million. The Reinvestment Period runs through the September 2023 Payment Date, whereby the Issuer may acquire Funded Companion Participations and new loan collateral into the trust subject to Eligibility Criteria as defined at issuance. According to the Eligibility Criteria, all collateral will be secured by multifamily assets.

As of June 2022, the pool comprises 24 loans secured by 26 properties with a cumulative trust balance of $554.5 million with $25.0 million of available cash in the Reinvestment Account. Since issuance, one loan with a former cumulative trust balance of $25.0 million has successfully repaid from the pool, and five loans with a current cumulative trust balance of $62.5 million have been contributed to the trust. In general, borrowers are progressing toward completion of their stated business plans with many plans still in the early stages. Through June 2022, the collateral manager had advanced $5.9 million in loan future funding to 10 individual borrowers to aid in property stabilization efforts. The largest loan advance of $3.8 million has been made to the borrower of the Marbella Apartments loan, which is using the funds to renovate and upgrade 783 unit interiors as well as select exterior items at a multifamily property in Corpus Christi, Texas. An additional $33.7 million of unadvanced loan future funding allocated to 18 individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $6.8 million, is to the borrower of the Marbella Apartments loan.

The pool is concentrated by property type as all 24 loans, representing 100.0% of the current trust balance, are secured by traditional multifamily assets. The pool continues to be predominantly composed of properties located in suburban markets, i.e., those identified with a DBRS Morningstar Market Rank of 3, 4, and 5. As of the June 2022 reporting, this includes 18 loans, representing 70.4% of the current trust balance. In addition, four loans representing 19.0% of the current pool balance are located in tertiary markets, i.e., those identified with a DBRS Morningstar Market Rank of 2. In comparison, at issuance, 15 loans, representing 69.8% of the trust balance, were secured by properties located in suburban markets and four loans, representing 20.5% of the trust balance, were secured by properties located in tertiary markets. The transaction is also concentrated by loan size, as the 10 largest loans represent 63.3% of the pool. Overall pool leverage has remained relatively consistent from issuance. According to the June 2022 reporting, the weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 74.5% and the WA stabilized appraised LTV is 64.2%. In comparison, these figures were 74.2% and 67.0%, respectively, at closing.

As of the April 2022 remittance, two loans, representing 10.0% of the pool, are on the servicer’s watchlist. The first loan, Upland Townhomes, is being monitored for a deferred maintenance and potential life safety issue related to a damaged drainage grate, which DBRS Morningstar deems a non-material issue from a credit perspective. The second loan, Marbella Apartments, is being monitored for a low debt service coverage ratio, which has declined from issuance. The property was affected by a fire in November 2021 when a considerable number of units were damaged and in need of repair. The borrower subsequently estimated the damages at approximately $1.9 million and noted its intention to fully restore the existing building. Given that the borrower already planned to implement a large $10.6 million value-add strategy to modernize the property and increase occupancy, it is unlikely that the damage caused by the fire will present major near-term disruptions to the business plan as the borrower works though the remediation and insurance process. The collateral manager reported that 150 units had already been renovated by mid-April 2022 and 30 more unit renovations were currently in progress. In addition, the borrower has received the necessary permits to conduct repairs on the patios of 75 units, which need to be fixed before they can be leased. DBRS Morningstar does not view either loan as having increased credit risk from issuance.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that 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 loan 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 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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