DBRS Morningstar Changes Trend on Two Classes of GPMT 2021-FL4, Ltd. to Negative from Stable; Confirms All Classes

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by GPMT 2021-FL4, 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)

The trends on Class F and Class G were changed to Negative from Stable; the trends on all other classes remain Stable.

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].

The rating confirmations reflect the overall stable performance of the transaction; however, DBRS Morningstar changed the trends on Class F and Class G to Negative to reflect the increased risks surrounding the concentration of loans collateralized by properties (most of which are office property types) that have struggled to stabilize. As of August 2023 reporting, the trust includes seven loans secured by office properties, representing 31.0% of the current trust balance. The concentration of loans backed by office properties has increased from five loans with 21.5% of the balance at transaction closing. Six of the seven current office loans in the pool are secured by properties in the Atlanta, Denver, and Los Angeles metropolitan areas, with the remaining asset in Greenwich, Connecticut. Each location has been materially affected by increasing vacancy rates in recent years. In the analysis for this review, DBRS Morningstar reflected these risks by stressing property values across all seven loans. The stressed loan-to-value ratios (LTVs) ranged between 87.4% and 128.8% on an as-is basis and 78.5% and 87.0% on a stabilized basis. Based on this analysis, DBRS Morningstar determined these increased risks are limited to the below investment-grade rated classes given the significant cushion against loss in the transaction structure below those classes.

There is one loan on the servicer’s watchlist, 500 North Michigan Avenue, representing 3.2% of the current trust balance. The loan was originated in 2019 and is secured by a mixed-use office and retail property in Chicago. The borrower’s business plan to complete a $30.0 million capital improvement and accretive leasing program has stalled, and the loan was modified three times between October 2021 and February 2023 to remove original members from the ownership structure, replenish and/or reallocate operating shortfall reserves, and to amend completion guarantees and loan terms. As of August 2023, the loan has an outstanding balance of $79.8 million with a $22.3 million piece in the trust and outstanding future funding of $10.1 million. A maturity extension option was exercised in August 2022, which required the sponsor to contribute a $5.0 million paydown. Based on the low in-place occupancy rate and debt yield, the requirements for the available 12-month extension option at August 2023 have not been met, suggesting another curtailment would be required for the sponsor to exercise. The property was last appraised in September 2022 at an in-place valuation of $94.0 million; however, DBRS Morningstar believes the current market value has declined. In the analysis for this review, DBRS Morningstar applied both an LTV and probability of default (POD) stress, which resulted in a loan-level expected loss approximately two times the overall expected loss for the pool.

The transaction closed in November 2021 with an initial collateral pool of 23 floating-rate mortgage loans secured by 31 mostly transitional real estate properties, with a cut-off pool balance totaling approximately $621.4 million. The transaction is a managed vehicle with a 24-month Reinvestment Period scheduled to end with the November 2023 Payment Date. As of August 2023, the pool comprises 24 loans secured by 32 properties with an outstanding balance of $606.0 million. There is currently $15.4 million in the Reinvestment Account. Since the previous DBRS Morningstar rating action in November 2022, three loans with a cumulative trust balance of $67.9 million, have been added to the trust, and two loans, with a former cumulative trust balance of $73.2 million, have been repaid from the trust. In total, five loans, with a former cumulative trust balance of $154.8 million have been repaid from the trust since closing.

Beyond the loans secured by office properties noted above, the transaction is concentrated by property type as 13 loans, representing 55.3% of the current trust balance, are secured by multifamily properties; two loans, representing 6.2% of the current trust balance are secured by mixed-use properties, and two loans, representing 6.1% of the current trust balance, are secured by student housing properties. In comparison at closing, multifamily properties represented 62.9% of the collateral, mixed-use properties represented 2.4% of the collateral, and student housing properties represented 5.8% of the collateral.

The loans are primarily secured by properties in suburban markets as 17 loans, representing 71.3% 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 four loans, representing 15.9% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting a tertiary market, while three loans, representing 12.7% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6, denoting an urban market. In comparison at closing, properties in suburban markets represented 75.6% of the collateral, properties in tertiary markets represented 18.7% of the collateral, and properties in urban markets represented 5.7% of the collateral.

Through June 2023, the lender had advanced loan future funding of $83.0 million to 17 of the outstanding individual borrowers, with $77.7 million of future funding remaining for a total of 20 borrowers. Beyond the $19.9 million of loan proceeds advanced to the borrower of the 500 North Michigan Avenue loan, the largest advance ($11.3 million) has been made to the borrower of the Park at Wakefield & Wellington loan. That loan is secured by a multifamily property in Hoover, Alabama, with the advanced funds used to fund the borrower’s $14.7 million capital improvement program, split evenly between in-unit renovations and amenity/property exterior upgrades. The Q2 2023 update from the collateral manager noted exterior renovations were substantially completed, and all tenant amenity upgrades were expected to be completed by YE2023. The borrower has $3.7 million of future funding remaining.

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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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 (August 23, 2023), https://www.dbrsmorningstar.com/research/419592

-- 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].