DBRS Morningstar Confirms All Ratings on STWD 2019-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by STWD 2019-FL1, Ltd. (STWD 2019-FL1):

-- 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 BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 18.4% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as five loans are secured by office properties (28.8% of the current trust balance). Because of complications initially arising from the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. While all loans remain current, given the declining demand for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. 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].

As of the April 2023 remittance, the trust reported an outstanding balance of $897.8 million with 16 loans remaining in the trust. The transaction had an initial 24-month reinvestment period that ended with the August 2021 payment date; however, the collateral manager was granted a 90-day extension to contribute additional collateral as allowed per the transaction documents. Since the previous DBRS Morningstar rating action in November 2022, the loan count remains the same; however, the pool has been paid down by $21.3 million as a result of collateral releases on the Woodbury Portfolio and principal payments on the Park Fifth loan in conjunction with a maturity extension. The remaining loans in the transaction beyond the office concentration noted above include seven loans secured by multifamily properties (39.4% of the current trust balance) and two loans secured by hotel properties (15.1% of the current trust balance). The transaction’s property type concentration has remained relatively stable since April 2022, when 37.2% of the trust balance was secured by multifamily, 27.8% of the trust balance was secured by office collateral, and 13.5% of the trust balance was secured by hospitality properties.

The remaining loans are primarily secured by properties in urban and suburban markets. Seven loans, representing 76.2% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6 or 7. Six loans representing 23.8% of the pool are secured by properties with a DBRS Morningstar Market Rank of 4 or 5, which denotes a suburban market. In comparison with the pool composition in April 2022, properties in urban markets represented 69.1% of the collateral, and properties in suburban markets was similar at 29.9% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

In total, the lender has advanced $78 million in loan future funding to nine of the remaining individual borrowers to aid in property stabilization efforts. The largest loan advances include $25 million to the borrower of the Hyatt Regency Houston loan, which went to fund renovations of guest rooms, meeting rooms, and public spaces across the property. The loan, which is now fully funded, is on the servicer’s watchlist for upcoming maturity risk as the loan matures in July 2023; however, the loan includes three 12-month extension options through 2026, with two remaining. DBRS Morningstar analyzed this loan with an elevated POD resulting in an expected loss (EL) more than 150.0% higher than the pool’s WA EL.

In addition, loan advances totaling $14.7 million have been made to the borrower of the 700 Louisiana and 600 Prairie Street loan. The loan, which is secured by a 1.3 million-square-foot, Class A office building and parking garage in downtown Houston, represents the largest loan in the pool at 10.7% of the current trust balance. While the sponsors are progressing with planned capital expenditures as the loan is nearly fully funded, the loan continues to underperform in terms of occupancy and cash flow as occupancy remains little changed year over year at 69% (versus 68% the year prior), while the loan reported a net operating income debt service coverage ratio (DSCR) of 0.86 times (x) as of YE2022. According to the collateral manager, the loan is in the process of being extended by three months ahead of the June 2023 maturity as the sponsor markets the property for sale. DBRS Morningstar analyzed this loan with an elevated POD resulting in an EL more than 150.0% higher than the pool’s WA EL.

An additional $50.2 million of unadvanced loan future funding allocated to seven individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $15.0 million, is for the borrower of the Hope & Flower loan, which is secured by a multifamily property in downtown Los Angeles. Loan future funding is tied to a property’s performance based earn-out, and according to an update from the collateral manager, it does not expect the property to achieve the performance thresholds.

While there are no loans are in special servicing, eight loans, representing 62.3% of the current trust balance, are on the servicer’s watchlist for upcoming maturity or performance issues. The largest loan on the servicer’s watchlist, Minkin Multifamily LLC (Prospectus ID#3; 10.6% of the current pool balance), is secured by an eight-property, mid-rise multifamily portfolio totaling 805 units in Queens, New York, and New Rochelle, New York. The loan is on the servicer’s watchlist for the upcoming final loan maturity date in July 2023. As of YE2022, the portfolio was 93.0% occupied and reported a DSCR of 1.07x, a slight decline from the in-place DSCR of 1.14x at loan closing. According to the collateral manager, the borrower is actively securing agency takeout financing for the subject loan as well as for the Minkin Multifamily S-Corp loan, which is also backed by the sponsor and securitized in the STWD 2019-FL1 transaction. DBRS Morningstar expects both refinance loans to close prior to the respective loan maturity dates.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (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.
22 West Washington Street
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 CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0,
https://www.dbrsmorningstar.com/research/410913

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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