DBRS Morningstar Confirms Ratings on All Classes of PFP 2021-8, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by PFP 2021-8, Ltd. 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 increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 24.3% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as 10 loans are secured by office properties (22.2% of the current trust balance). 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 all loans secured by office properties. That analysis suggested rated bonds remain sufficiently insulated (relative to the respective rating categories) against potential loan delinquency and increased credit risk. 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 collateral consisted of 46 floating-rate mortgages secured by 55 mostly transitional commercial real estate properties totaling approximately $1.1 billion, excluding approximately $125.9 million of future funding commitments. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is static and is structured with a Replenishment Period through the September 2024 Payment Date, whereby the Issuer can use principal proceeds to acquire related funded loan participations into the trust subject to stated criteria. The transaction will pay sequentially following the end of the Replenishment Period.

As of the June 2023 remittance, the pool comprises 36 loans secured by 57 properties with a cumulative trust balance of $853.8 million. Since issuance, eight loans with a former cumulative trust balance of $215.7 million have been successfully repaid from the pool. As of the June 2023 remittance, there was $5.0 million available in the Permitted Funded Companion Participation Acquisition account.

Beyond the office concentration noted above, the transaction also comprises 14 loans, representing 56.0% of the current trust balance secured by multifamily properties and four loans, representing 9.1% of the pool secured by hotel properties. In comparison with July 2022 reporting, multifamily properties represented 58.4% of the collateral, office properties represented 19.9% of the collateral, and hotel properties represented 7.7% of the collateral.

The loans are secured primarily by properties in urban and suburban markets. Twenty-three loans, representing 58.8% 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. Five loans, representing 20.9% 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. The remaining eight loans, representing 20.3% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, as of July 2022, properties in suburban markets represented 56.3% of the collateral, urban markets represented 16.5% of the collateral, and properties in tertiary markets represented 27.2% of the collateral.

Leverage across the pool has remained relatively in line with issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 68.2%, with a current WA stabilized LTV ratio of 61.6%. In comparison, these figures were 68.7% and 57.3%, 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 $47.3 million in loan future funding to 21 of the outstanding individual borrowers to aid in property stabilization efforts. The majority of this amount has been released to the borrowers of the Fort Collins Portfolio ($11.7 million) and the NYC Multifamily Portfolio ($6.2 million) loans. Both properties are secured by portfolios of multifamily properties. The Fort Collins Portfolio is backed by two multifamily properties in Fort Collins, Colorado, while the NYC Multifamily Portfolio is backed by three Class B properties in Midtown Manhattan. The borrowers for each of the respective properties used the advanced funds to complete their capital improvement projects, which primarily consists of unit renovations. The Fort Collins Portfolio loan is now fully funded while the NYC Multifamily Portfolio has $3.2 million remaining for future advances.

In total, an additional $59.4 million of loan future funding allocated to 21 borrowers to further aid in property stabilization efforts remains outstanding. Of this amount, $17.9 million is allocated to the borrower of the River Center Office Campus loan, which is secured by a six-building, Class A office property in Red Bank, New Jersey.

The funds are available to the borrower to fund costs associated with the borrower’s ongoing capital improvement and lease-up plan. The amount available remains unchanged from the previous year as there has been minimal leasing activity at the property since loan closing as the property was 68.4% occupied, according to the Q1 2023 collateral manager report. An additional update from the collateral manager noted the remaining $17.9 million of available future funding was placed into an interest bearing account in July 2023 as the Forced Funding Date passed, and it appears the borrower still desires access to the funds. According to the Q1 2023 financials provided by the collateral manager, the loan reported an annualized trailing three months ended March 31, 2022, net operating income of $5.8 million, a decline from $6.2 million at Q1 2022. The loan has an initial maturity date of July 2024 and includes two 12-month extension options.

As of the June 2023 remittance, there are no loans in special servicing or on the servicer’s watchlist. One loan, representing 1.0% of the pool balance, was reported as three months delinquent. The loan is secured by a 66,092 square foot shopping center in Billings, Montana. As of January 2023, the property was 85.07% occupied, unchanged since issuance. DBRS Morningstar is awaiting further information from the collateral manager regarding the delinquency and strategy to bring the loan current. In its current analysis, DBRS Morningstar did not update its original expected loss assumption on the loan.

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 (July 4, 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 credit rating assigned to Class C materially deviates from the credit rating implied by the predictive model. 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 stress implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk, given the high concentration of office loans in the transaction as noted above.

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].