DBRS Morningstar Confirms Credit Ratings on All Classes of LCCM 2021-FL3 Trust

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Offered Notes issued by LCCM 2021-FL3 Trust:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. 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 initial collateral consisted of 35 floating-rate mortgage loans secured by 48 mostly transitional properties, with a cut-off balance totaling $729.4 million. As of the September 2023 remittance, the pool comprised 31 loans secured by 38 properties with a cumulative trust balance of $684.9 million. Most loans are in a period of transition with plans to stabilize and improve the asset value.

The transaction is managed and is structured with a 24-month Reinvestment Period ending with the December 2023 Payment Date. The current Cash Reinvestment Account had a current balance of $42.8 million as of the September 2023 remittance. Since the previous DBRS Morningstar credit rating action in November 2022, five loans, representing 16.6% of the current trust balance, have been added to the transaction. Since issuance, 11 loans, with a former cumulative loan balance of $196.9 million, have successfully repaid from the trust, the majority of which (10 loans, totaling $181.5 million) repaid since November 2022.

The transaction is concentrated by property type as 13 loans, representing 33.7% of the current trust balance, are secured by multifamily properties, followed by six loans, representing 32.1% of the current trust balance, secured by office properties. Given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ business plan execution and/or exit strategies upon loan maturity. In its analysis for this review, DBRS Morningstar evaluated these risks by increasing the probability of default for six loans, representing 30.5% of the current trust balance, collateralized by both office and non-office property types. This analysis suggested the rated bonds remain sufficiently insulated (relative to the respective credit rating categories) against potential loan delinquency and increased credit risk.

Beyond the multifamily and office concentration noted above, the transaction also comprises six loans, representing 14.9% of the current trust balance, secured by industrial properties; four loans, representing 12.8% of the pool, secured by mixed-use properties; and two loans, representing 6.6% of the pool, secured by retail properties. In comparison, at issuance, multifamily properties represented 40.9% of the pool, office properties represented 18.9%, industrial properties represented 13.2%, mixed-use properties represented 9.0%, and retail properties represented 6.1%.

The loans are primarily secured by properties in urban markets as 13 loans, representing 50.6% 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. An additional 16 loans, representing 45.1% 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. The remaining two loans, representing 4.2% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting rural and tertiary markets, respectively. In comparison, at issuance, properties in urban markets represented 54.3% of the collateral, suburban markets represented 39.5% of the collateral, and properties in tertiary markets represented 6.2% of the collateral. Leverage across the pool has remained in line with issuance levels as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 67.4%, with a current WA stabilized LTV of 63.1%. In comparison, these figures were 67.3% and 63.1%, 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 or 2022 and may not reflect the current rising interest rate or widening capitalization rate environments.

Through September 2023, the collateral manager had advanced $38.5 million in loan future funding to 24 of the outstanding individual borrowers to aid in property stabilization efforts. In total, an additional $88.9 million of loan future funding allocated to 16 borrowers to further aid in property stabilization efforts remains outstanding. The loan with both the largest amount of future funding remaining ($26.9 million) and advanced to date ($10.4 million) is the Citigroup Center loan (Prospectus ID#1; 9.5% of the pool). The loan is secured by an office tower in downtown Miami. The loan is pari passu with accompanying notes secured in one other commercial real estate collateralized loan obligation transaction, LCCM 2021-FL2, also rated by DBRS Morningstar. The funds are available to the borrower to fund costs associated with the ongoing capital improvement and lease-up plan. Additionally, $9.4 million is allocated to the borrower of the Renasant loan, which is secured by an office property in Birmingham, Alabama. Since loan closing, the lender has advanced approximately $2.0 million to the borrower, which has been used to finance the planned capital improvement projects and leasing costs.

As of the September 2023 remittance, no outstanding loans have been modified or are flagged as delinquent or specially serviced. There are two loans, however, representing 2.6% of the pool, that surpassed the respective September 2023 maturity dates and are deemed nonperforming matured balloons. The larger of the two loans, Northeast Philly Last Mile Portfolio (Prospectus ID#23; 1.8% of the pool), is secured by a portfolio of five industrial properties totaling 118,509 square feet throughout Philadelphia. According to the Q2 2023 business plan update provided by the collateral manager, the borrower is likely to exercise the loan’s first extension option, which is subject to a minimum debt yield (DY) hurdle of 8.0%. According to the financials for the T-12 period ended March 31, 2023, the net cash flow DY was reported to be 8.4%. The 4411 Bibb Boulevard loan (Prospectus ID#37; 0.7% of the pool) is secured by an industrial warehouse and distribution facility in Tucker, Georgia. Although an update regarding a potential loan extension has not been provided, the loan is structured with two one-year extension options. The first extension is not subject to a performance test; however, the second extension is subject to a minimum DY hurdle of 8.0%. An additional loan matured in September 2023 but has not been flagged by the servicer. The 22 Gateway loan (Prospectus ID#34; 1.1% of the pool) is secured by an industrial property in Edwardsville, Illinois. According to the Q2 2023 business plan update, the property had been marketed for sale at a list price of $13.0 million. While the highest bid received of $12.6 million is above the issuance as-is and stabilized appraisal values of $10.2 million and $12.5 million, respectively, a property sale was not executed and the borrower is reportedly currently evaluating other offers.

According to September 2023 reporting, there were 15 loans, representing 39.7% of the pool, on the servicer’s watchlist for a variety of reasons, including pending loan maturity as well as low debt service coverage ratios and occupancy rates. While these figures do not include the Citigroup Center loan, a pari passu piece of the A note is on the servicer’s watchlist as of September 2023 reporting for the LCCM 2021-FL2 transaction. Regarding the loans being monitored for upcoming maturity, according to the individual Q2 2023 business plan updates provided by the collateral manager and the latest servicer commentary, most of the affected borrowers are expected to exercise loan extension options or execute exit strategies. The borrower of only one loan, representing 1.7% of the pool, had not indicated a resolution. Despite the performance declines of the loans on the watchlist, in most instances DBRS Morningstar expected temporary declines in property performance at issuance as borrowers worked toward completing the respective business plans. DBRS Morningstar does recognize, however, that select borrowers may face additional headwinds because of specific property type challenges and current economic headwinds such as rising interest rates and expanding capitalization rates.

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 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 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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)

A description of how DBRS Morningstar analyses 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].