DBRS Morningstar Upgrades Two Classes of BDS 2021-FL7 Ltd., Confirms Remaining Classes

DBRS, Inc. (DBRS Morningstar) upgraded its ratings on two classes of notes issued by BDS 2021-FL7 Ltd. as follows:

-- Class B to AA (high) (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes of notes in the transaction as follows:

-- Class A at AAA (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 upgrades reflect the increased credit support to the bonds as a result of successful loan repayment since the transaction became static following the May 2023 payment date as well as the overall stable performance of the remaining collateral in the transaction, which is primarily composed of multifamily properties. 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 pool consisted of 22 floating-rate mortgage loans secured by 22 mostly transitional real estate properties. The majority of the collateral was in a period of transition, with plans to stabilize and improve asset value. As of the July 2023 remittance, the pool comprises 22 loans secured by 22 properties with a cumulative trust balance of $493.0 million, representing collateral reduction of 17.8%. Since issuance, 10 loans with a former cumulative trust balance of $293.5 million have been successfully repaid from the pool, including five loans totaling $184.8 million since the previous DBRS Morningstar rating action in November 2022 and two loans totaling $107.0 million since the transaction became static. An additional two loans, with a current trust balance of $74.0 million, were added to the trust between the previous DBRS Morningstar rating action and when the 24-month reinvestment period ended in May 2023.

The transaction is concentrated by property type, as 19 loans, representing 92.2% of the trust balance, are secured by multifamily properties. The remaining collateral includes two industrial properties (4.0% of the current trust balance) and one manufactured housing community (3.8% of the current trust balance). In comparison with the transaction in April 2022 when DBRS Morningstar published its Surveillance Performance Update rating report for the transaction, multifamily properties represented 94.0% of the collateral, industrial properties represented 2.9% of the collateral, and the same manufactured housing community represented 3.1% of the collateral.

The loans are primarily secured by properties in suburban markets as 20 loans, representing 92.8% of the pool, are secured by properties in a DBRS Morningstar Market Rank of 3, 4, or 5, which are suburban in nature. The remaining two loans, representing 7.2% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, in April 2022, properties in suburban markets represented 96.9% of the collateral, and properties in tertiary markets represented 3.1% of the collateral.

Leverage across the pool has remained stable. As of the July 2023 reporting, the weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 73.3%, with a WA stabilized LTV ratio of 62.3%. In comparison, these figures were 71.1% and 65.1%, 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 2022 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 $41.2 million to 18 of the 28 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Mailwell Drive ($6.6 million) and Seventh Apartments ($5.8 million) loans. The Mailwell Drive loan is secured by an industrial property in Milwaukie, Oregon. The advanced funds have been used to complete the borrower’s capital expenditure (capex) plan to modernize the property and to fund accretive leasing costs. According to the Q1 2023 collateral manager update, the property is 100% leased and the borrower is completing both tenants’ respective build-outs. The tenants were scheduled to take occupancy in Q2 2023, at which time, the borrower would begin to pursue its exit strategy on the loan. The Seventh Apartments loan is secured by a multifamily property in Phoenix. The advanced funds were used to complete the borrower’s capex plan across the property including upgrades to unit interiors, amenities, common areas, and building exteriors. There remains $0.4 million of available future funding to the borrower.

An additional $32.8 million of loan future funding allocated to 17 individual borrowers remains available. The largest portion of available funds, $15.1 million, is allocated to the borrower of the 40th Avenue Industrial loan, which is secured by an industrial property in Denver. The borrower’s business plan entails a complete modernization of the existing collateral budgeted at $13.1 million with an additional $5.7 million of leasing costs budgeted. According to the Q1 2023 update from the collateral manager, site improvement work was ongoing and additional permits necessary to begin building core and shell work were expected to be received in Q2 2023. The property was 19% occupied.

As of the July 2023 remittance, there are no delinquent loans or loans in special servicing, and there are four loans on the servicer’s watchlist, representing 15.9% of the current trust balance. The loans were flagged for below breakeven debt service coverage ratios, deferred maintenance items, or upcoming maturity dates. Regarding upcoming loan maturity, only two loans, representing 7.5% of the current trust balance, have scheduled maturity dates within the next six months and both borrowers have loan extension options available. According to the collateral manager, four loans, representing 18.8% of the current cumulative trust loan balance, have been modified. In general, the modifications have allowed a reallocation of existing reserves or uses for future funding dollars, property management changes, and a debt yield performance waiver to obtain future funding dollars.

ENVIRONMENTAL, SOCIAL, AND 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 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 ratings assigned to Classes C, D, E, F, and G materially deviate from the credit ratings 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 the sustainability of loan performance trends not demonstrated as the majority of the loans remaining in the transaction are secured by properties that have yet to fully stabilize.

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].