DBRS Morningstar Confirms Ratings on VMC Finance 2021-FL4 LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by VMC Finance 2021-FL4 LLC as follows:

-- Class A at AAA (sf)
-- Class A-S 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 increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 29.9% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as nine loans are secured by office properties, representing 63.4% of the current trust loan balance. As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows.

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 three loans, representing 14.5% of the current trust balance, collateralized by office properties. That analysis suggested the rated bonds remain sufficiently insulated (relative to the respective rating categories) against potential 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 23 loans secured by 29 transitional properties totaling $927.9 million, excluding $92.3 million of future funding commitments. As of the July 2023 remittance, 15 loans secured by 17 properties remain in the trust with an aggregate principal balance of $650.8 million. Since the previous DBRS Morningstar rating action in November 2022, one loan with a former trust balance of $16.5 million, has been repaid in full. The transaction is static and is structured with a 36-month Permitted Funded Companion Participation Acquisition Period ended with the May 2024 Payment Date. As of July 2023 reporting, the Cash Reinvestment Account had a zero balance.

Beyond the office concentration noted above, the transaction also comprises five loans, representing 31.0% of the current trust balance secured by multifamily properties and one loan, representing 5.6% of the pool secured by a hotel property. In comparison with April 2022 reporting, office properties represented 57.0% of the collateral, multifamily properties represented 38.3% of the collateral, and hotel properties represented 4.7% of the collateral.

The loans are primarily secured by properties in suburban markets as 12 loans, representing 85.5% 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. An additional three loans, representing 14.5% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting an urban market. In comparison, in April 2022, properties in suburban markets represented 83.0% of the collateral and properties in urban markets represented 17.0% of the collateral.

Leverage across the pool has also remained consistent from the pool as of April 2022 reporting as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 73.2%, with a current WA stabilized LTV ratio of 67.7%. In comparison, these figures were 73.2% and 68.2%, respectively, as of April 2022. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through June 2023, the lender had advanced cumulative loan future funding of $47.6 million to 14 of the 15 remaining individual borrowers to aid in property stabilization efforts. The largest advance, $10.3 million, has been made to the borrower of the Columbus Center loan, which is secured by an office property in Coral Gables, Florida. Funds were advanced to the borrower to complete its capital improvement and funds accretive leasing costs. An additional $34.3 million of loan future funding allocated to the same 14 individual borrowers remains available. The largest portion of available funds, $7.5 million, is allocated to the borrower of the City Parkway loan, which is secured by an office property in Orange, California. The loan future funding is available to the borrower to fund accretive leasing costs. The collateral originally included two buildings; however, one building was sold and released from the collateral, resulting in a loan curtailment of $20.9 million in May 2022. The remaining property was 42.0% occupied as of March 2023; however, the leverage is low with an indicative loan to value ratio of 33.0% based on the original property appraised value. In conjunction with the curtailment, the loan was modified to allow all available future funding dollars to be advanced without a pro rata contribution from the borrower.

As of the July 2023 remittance, there are no delinquent loans or loans in special servicing, and there are five loans on the servicer’s watchlist, representing 29.1% of the current trust balance. The loans have been flagged for a variety of reasons including upcoming maturity dates and low occupancy rates or cash flow, which may or may not have resulted in cash flow sweeps being initiated. The largest loan on the servicer’s watchlist, One Financial Plaza (9.1% of the current trust balance), is secured by an office property in Fort Lauderdale, Florida. The loan matures in October 2023, and according to the servicer, the borrower began marketing the property for sale in May 2023 and is expected to review offers in July 2023. If an offer is accepted, closing is expected to occur up to 90 days after an agreement is finalized; however, the collateral manager also noted the borrower is dual tracking a takeout financing strategy if a property sale is not realized.

Eight loans, representing 45.6% of the current trust balance, have been modified. Terms of individual loan modifications vary and have included the waiver of performance-based tests to exercise maturity extensions, the waiver of borrower requirements to purchase new interest rate cap agreements if property operations cover debt service, and the reallocation of existing reserves or future funding dollars among other minor terms. In most instances, individual borrowers were required to contribute fresh equity or cash flow sweeps were initiated to execute the loan modifications.

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/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 the 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 higher 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(es) 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 not demonstrated as the majority of the loans remaining in the transaction are secured by nonstabilized assets.

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

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/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].