DBRS Morningstar Confirms Ratings on Shelter Growth CRE 2021-FL3 Issuer Ltd

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by Shelter Growth CRE 2021-FL3 Issuer Ltd (the Issuer):

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. 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. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 20 floating-rate mortgages secured by 26 transitional properties with a cut-off date balance totaling approximately $453.9 million, excluding approximately $32.3 million of future funding commitments. Most of the loans are in a period of transition with plans to stabilize performance and improve the asset value. 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 fully funded future funding participations, subject to stated criteria, during the Permitted Funded Companion Participation Acquisition period, which ends on the payment date in September 2023. As of the November 2022 reporting, the Permitted Funded Companion Participation Acquisition Account had a balance of $46,351. Acquisitions of loan future funding participations of $1.0 million or greater require rating agency confirmation.

As of the November 2022 remittance, the pool comprised 17 loans secured by 23 properties with a cumulative trust balance of $360.9 million. Since issuance, three loans with a former cumulative trust balance of $92.9 million have been successfully repaid from the pool resulting in a collateral reduction of 20.5%. In general, borrowers are progressing toward completion of the stated business plans.

The transaction is concentrated by multifamily properties as 13 loans, representing 83.0% of the current pool balance, are secured by multifamily properties. The remaining four loans are secured by a healthcare, industrial, office and student-housing property. Through October 2022, the collateral manager advanced $11.0 million in loan future funding to 10 individual borrowers to aid in property stabilization efforts. The largest advance, $2.3 million, was made to the borrower of the Bay One Apartments loans, which is secured by a multifamily property in Bayonne, New Jersey. The borrower used future funding dollars to build out the improvements for the ground floor restaurant tenant as well as add improvements to the adjacent park. An additional $19.4 million of unadvanced loan future funding allocated to 11 individual borrowers remains outstanding. The largest portion of unadvanced future funding dollars is allocated to the borrower of the Vesta OKC Portfolio loan, which is secured by a portfolio of four multifamily properties in Oklahoma City, Oklahoma. The borrower’s business plan is to institute a capital renovation program across the property to increase rental rates.

Beyond a property type concentration, the transaction is also concentrated by properties located in Suburban markets, which DBRS Morningstar defines as markets with a DBRS Morningstar Market Rank of 3, 4, or 5. As of November 2022, there were 10 loans, representing 57.6% of the cumulative loan balance, secured by properties in suburban markets. An additional five loans, 30.4% of the cumulative loan balance are secured by properties in urban markets, which historically have shown greater liquidity and demand. In comparison with the pool composition at closing, there were 13 loans, representing 62.7% of the cumulative loan balance, in suburban markets and five loans, representing 27.7% of the cumulative loan balance, in urban markets.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 72.3% and WA stabilized LTV of 66.4%. In comparison, these figures were 72.2% and 66.3%, respectively, at closing. As these appraisals were conducted prior to transaction issuance in 2021, there is the possibility that select property values may have decreased given the current interest rate and cap rate environment.

As of November 2022, the Fulton & Ralph loan (Prospectus ID#2; 14.7% of the pool balance) represents the only loan on the servicer’s watchlist. The loan was flagged for maturity risk as the loan matured in October 2022; however, the collateral manager confirmed the borrower exercised its 12-month extension option extending the loan through October 2023. As property operations did not yield the required 7.0% debt yield to qualify for the extension option, the lender and borrower agreed to mutually beneficial terms including the borrower depositing of $1.8 million into an operating and debt service reserve and the purchase of an interest rate cap, among other terms. The loan is backed by two Class A multifamily properties totaling 152 units in Brooklyn, New York. The borrower’s business plan is to complete the initial lease-up of the property to market levels and obtain the 421a property tax abatement. According to the collateral manager, leasing activity remained behind schedule as the Fulton Street property was only 55% leased as of the April 2022 rent roll, while leasing activity at the Ralph Avenue property had not yet commenced. The borrower attributed the slow leasing progress to delays with the New York City Department of Housing Preservation and Development (HPD). According to the borrower, the HPD approval of the plans was received in April 2022 and anticipates that the 421a will be finalized by year-end 2022. As property cash flow currently does not cover debt service, DBRS Morningstar expects the loan to remain on the servicer’s watchlist.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

DBRS Morningstar materially deviated from its CMBS Insight Model when determining the ratings assigned to Class G, as the quantitative results suggested higher ratings. These material deviations are warranted as sustainability of the loan performance trends has not been demonstrated as there are loans remaining that are secured by transitional properties with business plan interruptions, which are delaying stabilization.

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2022-update.

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].