DBRS Morningstar Confirms All Ratings on HGI CRE CLO 2021-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of commercial mortgage-backed notes issued by HGI CRE CLO 2021-FL1, Ltd. (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class A-S 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. For access to this report, please click on the link under Related Documents below or contact [email protected].

The initial collateral included 23 mortgage loans or senior notes secured by multifamily properties with an initial cut-off date balance totaling $498.2 million. The trust reached a maximum funded balance of $549.9 million in December 2021. Most of the loans contributed were secured by cash-flowing assets, with stated business plans and loan structures to stabilize the collateral and improve asset value. The 18-month reinvestment period, which originally was expected to expire in November 2022, was extended by 60 days to allow the inclusion of additional collateral identified and disclosed prior to the November 2022 Payment Date. The transaction now pays sequentially with loan repayment proceeds used to pay down the notes.

As of the May 2023 remittance, the pool comprises 34 loans secured by 39 properties with a cumulative trust balance of $492.0 million, as there has been collateral reduction of 11.9%. Since issuance, 14 loans with a former cumulative trust balance of $338.3 million have been successfully repaid from the pool. Of the original 23 loans, only nine loans, representing 42.7% of the current trust balance, remain in the transaction as of May 2023 reporting. Since the previous DBRS Morningstar rating action in November 2022, 14 loans with a current trust balance of 27.9% have been added to the trust.

The transaction is concentrated by property type, as all loans are secured by multifamily properties. The loans are primarily secured by properties in suburban markets. Twenty-one loans, representing 55.8% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional 10 loans, representing 25.6% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market, while three loans, representing 18.6% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market. In comparison, in February 2022, properties in suburban markets represented 72.9% of the collateral, properties in tertiary markets represented 17.0% of the collateral, and properties in urban markets represented 10.1% of the collateral.

Leverage across the pool has improved slightly from issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 69.2%, with a current WA stabilized LTV ratio of 65.8%. In comparison, these figures were 73.2% and 78.8%, respectively, at issuance and 73.8% and 73.7%, respectively, as of March 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through April 2023, the lender had advanced cumulative loan future funding of $39.0 million to 23 of the 34 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $10.6 million, has been made to the borrower of the Marbella Apartments loan, which is secured by a multifamily property in Corpus Christi, Texas. Funds were advanced to the borrower to complete its capital improvement project across the property. The full $10.6 million future funding component has been advanced with the A-note consisting of a $19.8 million piece in the subject transaction, a $27.6 million piece held in the HGI CRE CLO 2021-FL2 transaction (also rated by DBRS Morningstar), and a non-securitized $4.3 million piece. An additional $38.0 million of loan future funding allocated to 13 of the remaining individual borrowers remains available. The largest portions of available funds are allocated to the borrowers of The Lofts at Twenty25 ($6.8 million) and The Chelsea ($6.2 million) loans, which are secured by multifamily properties in Atlanta and Raleigh, North Carolina, respectively. The available funds will fund the borrowers’ capital improvement plans. Neither borrower has made an advance draw request since the respective loan closing.

As of the May 2023 remittance, there are no delinquent loans or loans in special servicing, and there are 15 loans on the servicer’s watchlist, representing 30.9% of the current trust balance. The loans have generally been flagged for low occupancy rates and below threshold debt service coverage ratios; however, several loans were flagged for deferred maintenance issues, which DBRS Morningstar does not view as material credit concerns. Regarding properties that are not generating sufficient cash flow to cover operations and debt service, the servicer noted several common factors for the performance declines. These include planned tenant evictions and taking units offline to complete upgrades, increased repairs and maintenance and marketing expenses to upgrade units and execute new leases, and an increase in the benchmark interest rate, which has resulted in higher debt service costs as all loans have floating interest rates. The borrowers of all 15 loans on the servicer’s watchlist remain in the midst of executing the respective business plans with no single loan maturity occurring until 2024. DBRS Morningstar expects the loans to remain current.

An additional five loans, representing 26.0% of the current trust balance, have been modified. In all instances, the modifications were executed to amend terms regarding the individual loans’ floating interest rate spreads, which may have reflected a change in the spread amount and/or the floating rate benchmark. DBRS Morningstar determined that the changes did not materially impact the credit of the affected loans.

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).

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].