DBRS Morningstar Confirms Ratings on All Classes of ELP Commercial Mortgage Trust 2021-ELP

DBRS Limited (DBRS Morningstar) confirmed the credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-ELP issued by ELP Commercial Mortgage Trust 2021-ELP as follows:

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

All trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance given the strong occupancy and geographic diversity of the portfolio. The transaction is secured by the borrower’s fee-simple and leasehold interest in a portfolio of 142 industrial properties totalling approximately 28.0 million square feet (sf) across 17 states. Loan proceeds of $1.8 billion coupled with $591.5 million of sponsor equity facilitated the acquisition of the portfolio at a purchase price of $2.3 billion and covered closing costs.

The interest-only floating-rate loan has a two-year term with three one-year extension options for a fully extended maturity date of November 2026. The loan is currently on the servicer’s watchlist because of its upcoming November 2023 maturity; however, the borrower provided notice to exercise its first extension option, which is currently being processed. According to the issuance documents, the borrower is required to purchase an interest rate cap agreement with a strike rate to achieve a minimum debt service coverage ratio (DSCR) of 1.10 times (x) as a condition to exercise its extension options.

The transaction includes a partial pro rata structure that allows for pro rata paydowns for the first 25% of the original principal balance. Individual assets may be released at a prepayment premium of 105% of the allocated loan amount for the first 25% of the original principal loan balance and increases to 110% thereafter. As of the October 2023 remittance, no properties have been released. The loan benefits from its institutional sponsorship with G Investor and EQT Exeter. G Investor is owned by GIC Realty Private Limited, which is a global investment firm with investments across several asset classes including real estate in more than 40 countries, while EQT Exeter is one of the largest real estate investment managers in the world.

Based on the YE2022 financials, the subject reported a net cash flow (NCF) and DSCR of $103.2 million and 1.80x, respectively, compared with the DBRS Morningstar NCF and DSCR of $108.1 million and 3.34x, respectively. Considering the transaction is newer in vintage, financial reporting is limited because of the lack of loan seasoning. Furthermore, the debt service payments increased significantly between issuance and YE2022 because of the floating-rate nature of the loan; however, this is mitigated by the interest cap rate agreement in place.

As of YE2022, the portfolio was 95.0% occupied, generally in line with the issuance occupancy rate of 97.2%. As noted at issuance, there is considerable rollover risk for the portfolio as more than 70% of the portfolio net rentable area (NRA) is scheduled to roll through the fully extended loan term. However, the subject benefits from a very granular rent roll, with no tenants occupying more than 5.3% of the portfolio NRA. Furthermore, there are also several investment-grade tenants that account for more than 10.0% of the portfolio NRA. In addition, the in-place rents at issuance were generally below market, suggesting rental upside once leases roll.

At issuance, DBRS Morningstar derived a value of $1.6 billion based on the DBRS Morningstar NCF of $108.1 million and a capitalization rate of 6.75%, resulting in a 36.7% haircut from the appraiser’s value of $2.5 billion and a DBRS Morningstar loan-to-value ratio of 109.4%. DBRS Morningstar also made positive qualitative adjustments totalling 7.5% to account for cash flow volatility, property quality, and market fundamentals. The transaction continues to perform as expected given the strong occupancy, geographic diversity of the portfolio and generally stable performance of the industrial sector.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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 (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

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 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].