DBRS Morningstar Confirms All Ratings on HGI CRE CLO 2021-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of commercial mortgage-backed notes (CMBS) issued by HGI CRE CLO 2021-FL2, Ltd. (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 (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 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 20 mortgage loans or senior notes secured by multifamily properties with an initial cut-off date balance totaling $514.5 million and a maximum funded transaction balance of $579.5 million. The transaction is managed, with the Reinvestment Period scheduled to end with the September 2023 Payment Date. Through this date, the Issuer may acquire Funded Companion Participations and new loan collateral into the trust, subject to the Eligibility Criteria. According to the Eligibility Criteria, all collateral will be secured by multifamily assets. As of May 2023 reporting, the Reinvestment Account had a $25.1 million balance.

As of the May 2023 remittance, the pool comprises 30 loans secured by 35 properties with a cumulative trust balance of $519.6 million, as there has been a collateral reduction of 6.0%. Since issuance, five loans with a former cumulative trust balance of $136.9 million have been successfully repaid from the pool. Of the original 20 loans, 16 loans, representing 77.2% of the current trust balance, remain in the transaction as of May 2023 reporting. Since the previous DBRS Morningstar rating action in November 2022, five loans with a current trust balance of $3.9 million, or 0.8% of the pool, 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-two loans, representing 67.4% 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 five loans, representing 14.3% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market; while three loans, representing 18.3% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6, denoting an urban market. In comparison, in June 2022, properties in suburban markets represented 70.4% of the collateral, properties in tertiary markets represented 19.0% of the collateral, and properties in urban markets represented 10.5% 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 72.5%, with a current WA stabilized LTV ratio of 67.9%. In comparison, these figures were 74.2% and 67%, respectively, at issuance. 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 $30.9 million allocated to 18 of the 30 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 $27.6 million piece in the subject transaction, a $19.8 million piece held in the HGI CRE CLO 2021-FL1, Ltd. transaction (also rated by DBRS Morningstar), and a non-securitized $4.3 million piece. An additional $34.8 million of loan future funding allocated to 17 of the remaining individual borrowers remains available. The largest portion of available funds ($6.8 million) is allocated to the borrower of The Lofts at Twenty25 loan, which is secured by a multifamily property in downtown Atlanta. The available funds will be used to complete the borrower’s capital improvement plan. The borrower has not made an advance draw request since loan closing.

As of the May 2023 remittance, there are no delinquent loans or loans in special servicing, and there are 10 loans on the servicer’s watchlist, representing 37.1% 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 10 loans on the servicer’s watchlist remain in the midst of executing their respective business plans with no single loan maturity occurring until 2024. DBRS Morningstar expects the loans to remain current.

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 (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

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

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023)
https://www.dbrsmorningstar.com/research/415687

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].