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 (the Issuer) 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 reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance.

The transaction is collateralized by a portfolio of 16 Class A multifamily assets totaling 5,260 units spread across 11 unique metropolitan statistical areas (MSAs) within six states. The borrower used whole loan proceeds of $796.5 million, alongside $385.0 million of sponsor equity, to facilitate the acquisition of the portfolio for approximately $1.09 billion ($216,300 per unit). The loan benefits from experienced sponsorship by Starwood, which owns nearly 350 multifamily properties totaling approximately 88,000 units in the United States.

The two-year, floating-rate loan, structured with an initial maturity date in July 2023, has three one-year extension options and pays interest only (IO) through the fully extended maturity date. To hedge exposure to Libor, at issuance, the borrower entered into an interest rate cap agreement with a strike price of 1.00% and a five-year term, consistent with the fully extended loan maturity. According to the servicer, the borrower intends to exercise its first one-year loan extension option along with a new rate cap agreement that has a rate conversion from Libor to SOFR. 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 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.

As of the September 2022 rent rolls, the portfolio had a weighted average (WA) occupancy rate of 95.0%, generally in line with the occupancy rate of 95.3% at year-end (YE) 2021 and 96.2% at issuance. The annualized trailing nine-month net cash flow (NCF) of $50.5 million, as of September 2022, reflects an 11.8% increase from the YE2021 NCF of $45.2 million, a 12.6% increase from the Issuer’s NCF of $44.8 million and an increase of 22.4% from the DBRS Morningstar NCF of $41.3 million at issuance. Based on Q3 2022 reporting, the loan had a healthy WA debt service coverage ratio (DSCR) of 2.67 times (x), down from 3.49x at YE2021 and 3.17x at issuance because of an increased interest rate.

DBRS Morningstar anticipates the portfolio will continue to perform in line with issuance expectations and has maintained the issuance estimated value of the portfolio at approximately $660.4 million ($125,556 per unit), implying a DBRS Morningstar LTV of 120.6%. 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%.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022) https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022) https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].