DBRS Morningstar Confirms All Ratings on BDS 2021-FL8 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by BDS 2021-FL8 Ltd. (the Issuer):

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (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 remains in line with DBRS Morningstar’s expectations since the last rating action. 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 transaction closed in July 2021 with a cut-off pool balance totaling approximately $576.4 million, excluding approximately $47.2 million of future funding commitments. At issuance, the pool consisted of 23 floating-rate mortgage loans secured by 23 mostly transitional real estate properties. The majority of the collateral is in a period of transition, with plans to stabilize and improve asset value. The collateral pool for the transaction is static; however, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations subject to stated criteria. The replenishment period ends with the August 2023 Payment Date. As of the May 2023 remittance, the Replenishment Account had a balance of $8.3 million.

As of May 2023, the pool comprises 19 loans secured by 19 properties with a cumulative trust balance of $460.7 million. Since issuance, four loans with a former cumulative trust balance of $129.1 million have successfully repaid from the pool resulting in collateral reduction 18.6%. Of these four loans, one loan (The Laurel Preston Hollow; former trust balance of $42.8 million), has repaid since DBRS Morningstar’s last rating action in November 2022.

In general, borrowers are progressing toward completion of their stated business plans. Through May 2023, the collateral manager had advanced $11.8 million in loan future funding to 11 of the 19 remaining individual borrowers to aid in property stabilization efforts. The two loans with the largest future funding advances to date are the Arbors on Oakmont loan ($2.1 million) and the Villas at Montebella Apartment Homes loan ($2.0 million). Both of these loans are secured by multifamily assets, with the borrowers using future funding advances to renovate and upgrade unit interiors and tenant amenities as well as upgrade exterior items across the respective properties. An additional $27.0 million of unadvanced loan future funding allocated to 15 individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $9.8 million, is to the borrower of the Eleven One Eleven loan, which is secured by an office property in Reston, Virginia. The borrower’s business plan is to fund leasing costs and minor capital improvements associated with backfilling vacant space after two tenants vacated the property, bringing occupancy down to 81.4% as of March 2023 from 93.5% at YE2021. In addition, a secondary component of the borrower’s business plan noted at issuance, revolves around the sale of a 1.5-acre parcel of land to a local home developer at a minimum purchase price of $6.0 million. DBRS Morningstar did not give credit to the potential sale and subsequent loan paydown in its original or current analysis.

The pool is concentrated by multifamily properties as 17 loans, representing 83.1% of the current trust balance, are secured by traditional multifamily assets. The remaining two loans, representing 16.9% of the current pool balance, are secured by office assets. In comparison, multifamily and office assets accounted for 85.4% and 14.6% of the pool balance in May 2022. The pool continues to be composed of properties in suburban markets, those identified with a DBRS Morningstar Market Rank of 3, 4, and 5. As of May 2023, this includes 15 loans, representing 77.0% of the current trust balance. As of May 2022, 80.2% of the collateral was secured by properties in suburban markets. The transaction is also concentrated by loan size, as the largest 10 loans represent 67.8% of the pool. According to the May 2023 reporting, the weighted-average (WA) as-is appraised loan-to-value ratio (LTV) was 70.9% and the WA stabilized appraised LTV was 67.6%. This compares to 70.8% and 67.5%, respectively, at closing.

There are currently no delinquent loans; however, three loans, totaling 19.0% of the trust balance are on the servicer’s watchlist, two of which are being monitored for deferred maintenance issues. The largest loan on the watchlist, 606-654 Venice Boulevard (Prospectus ID#4; 7.4% of the pool balance) is being monitored for an upcoming maturity in September 2023. The interest-only loan was structured with an initial 16-month term and included two one-year extension options, pushing the fully extended maturity date to September 2024. The loan is secured by a five-building, 63,598-square-foot (sf) creative office complex in the Los Angeles neighborhood of Venice. The property was previously 100.0% leased to Snap Inc. (Snap), which had been the sole tenant at the property since May 2015. Snap was not expected to renew its lease upon expiration as it had already begun to transition operations to its new office space at the Santa Monica Business Park. In Q4 2022, the borrower negotiated a termination agreement with Snap, with the tenant paying an $8.5 million termination fee. The loan was subsequently modified to allow for Snap’s termination fee to be used to pay senior debt service obligations.

The borrower engaged CB Richard Ellis (CBRE) to lease-up the property and noted marketing efforts began in the second week of January 2023. Since then, CBRE has had multiple inquiries with most of the prospective tenants coming from creative media and tech-related industries. The servicer has reached out to the borrower regarding its plans to either payoff the loan or extend the term; however, the final extension option is subject to, among other criteria, the collateral’s achievement of minimum debt service coverage ratio and debt yield hurdles, which will likely not be achieved given the property is currently vacant and not cash flowing. As such, the borrower and lender will have to agree to a modification in order to extend the loan.

Although DBRS Morningstar maintains a cautious view on the loan’s current exit strategy, the property continues to benefit from its desirable location and a low LTV of 61.5%, based on the appraiser’s concluded as-is value of $60.0 million and projected go-dark value only slightly lower at $58.8 million, at issuance. The performance of the Marina/Culver City office submarket appears to be relatively unchanged year-over-year, with an average asking rental rate of $45.82 per sf (psf) gross and a vacancy rate of 17.8%, according to Q1 2023 Reis data. In comparison, these figures were $47.14 psf gross and 17.4%, respectively, as of Q1 2022. Given the pending September 2023 maturity date, challenging financing market, and non-stabilized nature of the property, DBRS Morningstar adjusted the loan’s probability of default in its current analysis, increasing the expected loss of the loan.

Additionally, the collateral manager confirmed that no other loans in the transaction have been modified and no borrowers have submitted forbearance requests.

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 (May 17, 2022) 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.

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 credit rating assigned to Class F materially deviates from the rating implied by the predictive model, as the quantitative results suggested higher ratings. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is the sustainability of loan performance trends, which has not been demonstrated. This is primarily related to two top-five loans that are secured by office assets, which continue to face uncertainty related to end-user demand and investor appetite amid the current economic backdrop.

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 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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/North American CMBS Insight Model version 1.1.0.0 (March 16, 2023; 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)

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].