DBRS Morningstar Confirms Ratings on All Classes of SREIT Trust 2021-IND

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-IND issued by SREIT Trust 2021-IND:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

These rating actions reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. The transaction benefits from tenant granularity, institutional sponsorship, favorable asset quality, and strong leasing trends, all of which contribute to potential cash flow stability over time.

The loan is secured by the fee-simple interest in a portfolio of 15 industrial properties totaling nearly 2.5 million square feet, concentrated throughout infill areas of the Phoenix (11 properties representing 85.9% of the portfolio’s net rentable area (NRA)) and Las Vegas (four properties representing 14.1% of the portfolio’s NRA) metropolitan statistical areas. Both markets are generally high-growth markets with favorable industrial demand trends.

Loan proceeds of $341.2 million along with $165.4 million of borrower equity financed the borrower’s acquisition of the underlying portfolio for $485.3 million and covered closing costs associated with the transaction. The portfolio benefits from institutional-quality sponsorship from Starwood Capital Group Holdings, L.P. (Starwood), which indirectly controls the sponsor, Starwood Real Estate Income Trust, Inc. Starwood is a private investment firm that has raised more than $75.0 billion of equity capital since its inception in 1991 and reported management interests in at least $115.0 billion in assets at the time of this publication.

The floating-rate interest-only loan has an initial term of 24 months, with three one-year extension options available and a fully extended maturity date in October 2026. The servicer has confirmed that the borrower has exercised its first one-year extension option, extending the loan’s maturity through October 2024. The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydowns associated with property releases for the first 20% of the unpaid principal balance. The borrower can release individual properties with a prepayment premium of just 105% of the allocated loan amount until the original principal balance has been reduced to 85% of the original loan balance, at which point, release premiums increase to 110% of the allocated loan amount for individual property releases. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the partial pro rata structure and weak release premiums.

According to the March 2023 rent roll, the portfolio reported an average occupancy rate of 98.8%, up from the 98.0% at issuance. While there is a concentration of tenants, representing 19.1% of the NRA, rolling prior to 2024, and 48.2% of the NRA, with scheduled lease expirations during the fully extended loan term, the portfolio has historically averaged an occupancy rate of approximately 95.0% since 2018 and benefits from a diverse tenant composition, with only two tenants occupying more than 5.0% of the NRA. As of the YE2022 financials, the portfolio reported a net cash flow (NCF) of $17.4 million (reflecting a debt service coverage ratio (DSCR) of 1.46 times (x), compared with the DBRS Morningstar NCF of $16.4 million (reflecting a DSCR of 2.40x) derived at issuance. While the loan’s DSCR has fallen as a result of the rising interest rates, revenue has shown a moderate growth of 3.2% since issuance.

At issuance, DBRS Morningstar derived a value of $233.6 million, based on a capitalization rate of 7.0% and a DBRS Morningstar NCF of $16.4 million, resulting in a loan-to-value ratio (LTV) of 146.0%, compared with the LTV of 72.6% based on the appraised value at issuance. The properties benefit from tenant granularity and strong leasing trends helping to reduce cash flow volatility as well as favorable asset quality, property type, and market fundamentals. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks, totaling 6.0% to account for the cash flow volatility, properties’ quality, and market fundamentals.

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 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023) https://www.dbrsmorningstar.com/research/410191

Rating North American CMBS Interest-Only Certificates (December 19, 2022) https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023) https://www.dbrsmorningstar.com/research/415687

North American Commercial Mortgage Servicer Rankings (August 23, 2023) https://www.dbrsmorningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (December 7, 2022) https://www.dbrsmorningstar.com/research/407008

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/417279.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].