DBRS Morningstar Confirms Ratings on LCCM 2021-FL2 Trust

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by LCCM 2021-FL2 Trust 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 us at [email protected].

At issuance, the initial collateral consisted of 23 floating-rate mortgages or pari passu participation interests in mortgage loans secured by 27 mostly transitional properties, with a cut-off balance totaling $607.5 million. As of the July 2023 remittance, the pool comprises 23 loans secured by 50 properties with a cumulative trust balance of $607.4 million. Most loans are in a period of transition with plans to stabilize and improve the asset value.

The transaction is managed and is structured with a 24-month Reinvestment Period ending with the July 2023 Payment Date. The current Cash Reinvestment Account has a current balance of $0.1 million as of the June 2023 remittance. Since the previous DBRS Morningstar rating action in November 2022, two loans, representing 4.9% of the current trust balance, have been added to the transaction. Since issuance, 15 loans, with a former cumulative loan balance of $323.8 million, have successfully repaid from the trust.

The transaction is concentrated by property type as six loans, representing 34.7% of the current trust balance, are secured by office properties. While all loans remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In the analysis for this review, DBRS Morningstar evaluated these risks by stressing the current property values or increasing the probability of default for four loans, representing 33.5% of the current trust balance, collateralized by both office and nonoffice property types. That analysis suggested the rated bonds remain sufficiently insulated (relative to the respective rating categories) against potential loan delinquency and increased credit risk.

Beyond the office concentration noted above, the transaction also comprises seven loans, representing 27.1% of the current trust balance secured by multifamily properties and three loans, representing 15.9% of the pool secured by mixed-use properties. In comparison with March 2022 reporting, office properties represented 29.2% of the collateral, multifamily properties represented 21.1% of the collateral and mixed-use properties represented 32.1% of the collateral.

The loans are secured rather equally by properties in urban and suburban markets. Six loans, representing 38.6% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6, 7, or 8. Ten loans, representing 34.5% 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. The remaining seven loans, representing 26.9% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting rural and tertiary markets, respectively. In comparison, as of March 2022, properties in urban markets represented 59.4% of the collateral, suburban markets represented 25.0% of the collateral, and properties in tertiary markets represented 15.6% of the collateral.

Leverage across the pool has increased slightly from issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 68.5%, with a current WA stabilized LTV of 64.7%. In comparison, these figures were 65.9% and 64.1%, 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 June 2023, the collateral manager had advanced $66.3 million in loan future funding to 12 of the outstanding individual borrowers to aid in property stabilization efforts. The majority of this amount has been released to the borrowers of the Regions Harbert Plaza ($19.6 million), Puerto Rico Industrial Portfolio ($17.6 million) and The Met ($11.5 million) loans. The Regions Harbert Plaza loan is secured by an office property in Birmingham, Alabama. The borrower used the advanced funds to complete its capital improvement and lease up plans at the subject, with $12.1 million associated with the lease renewal of the largest tenant. The Puerto Rico Industrial Portfolio loan is secured by five industrial parks totaling 21 properties throughout Puerto Rico. The borrower used the advanced funds to complete capital improvement projects and to fund leasing cost across the portfolio. The loan has no future funding remaining. The Met loan is secured by a mixed-use property in Atlanta. The borrower has used advanced to funds to date for capital improvement projects, leasing costs, and loan carry costs. An additional $10.7 million of loan future funding is allocated to the borrower for continued capex and accretive leasing costs.

In total, an additional $98.4 million of loan future funding allocated to 16 borrowers to further aid in property stabilization efforts remains outstanding. Of this amount, $29.3 million is allocated to the borrower of the Citigroup Center loan, which is secured by an office tower in downtown Miami, Florida. The funds are available to the borrower to fund costs associated with the borrowers ongoing capital improvement and lease-up plan. Additionally, $17.7 million is allocated to the borrower of the Clark Tower loan, which is secured by an office property in Memphis, Tennessee. Since loan closing, the borrower has not made a draw request as the funds are suited for planned capital improvement projects and leasing costs.

As of the June 2023 remittance, there are no delinquent loans or loans in special servicing; however, five loans, representing 27.5% of the current trust balance, are on the servicer’s watchlist for a variety of reasons, including pending loan maturity as well as low debt service coverage ratios and occupancy rates. All affected borrowers have outstanding maturity extension options on the respective loans. While temporary declines in property performance were expected by DBRS Morningstar in some cases at issuance as borrowers worked toward completing their business plans, DBRS Morningstar does recognize that select borrowers may face additional headwinds because of their specific property type and current economic challenges.

Three loans, representing 17.5% of the current pool balance, have been modified. The largest modified loan, Regions Harbert Plaza, represents 9.3% of the trust balance. The loan was first modified in June 2021 with subsequent modifications in September 2022 and March 2023. Each modification was necessary to extend loan maturity as the borrower needed more time to complete its business plan. In exchange for the current one-year maturity extension to March 2024, the borrower was required to make a $1.25 million principal curtailment and to deposit $1.0 million into a shortfall reserve. The borrower is also required to make an additional $1.25 million principal curtailment and $1.0 million shortfall reserve deposit in September 2023 as well as purchase a new interest rate cap agreement every three months through loan maturity, which is budgeted at a total cost of $1.0 million. As of February 2023, the property was 66.5% occupied with $7.5 million of loan future funding available for capital improvement and accretive leasing costs. Given the increased credit risk of the loan, DBRS Morningstar adjusted its probability of default assumptions, resulting in an increased loan expected loss approximately two times the transaction’s WA expected loss.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 04, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit 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 (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/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].