DBRS Morningstar Confirms Credit Ratings on All Classes of STWD Trust 2021-LIH

DBRS Limited (DBRS Morningstar) confirmed credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-LIH issued by STWD Trust 2021-LIH 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, as evidenced by the stable-to-improving cash flow and occupancy reported since issuance. The portfolio is backed by multifamily properties in robust submarkets that have demonstrated their ability to maintain cash flow stability, and continue to perform in line with DBRS Morningstar’s expectations at issuance.

The $380 million loan is secured by the fee-simple interest in 12 affordable housing multifamily properties totaling 3,082 units throughout five Florida markets including Orlando, Tampa, Daytona Beach, West Palm Beach, and Jacksonville. The properties qualify for and receive 100% exemption from ad valorem taxes pursuant to the Property Tax Exemption Statute (Florida Statute 196.1978(2)). The two-year interest-only floating rate loan had an initial maturity in November 2023; however, according to the servicer, the borrower has exercised its first annual extension option, which will extend the maturity date until November 2024. Their loan is structured with two remaining one-year extension options.

The loan allows for pro rata paydowns for the first 20.0% of the original principal balance. The prepayment premium for the release of individual assets is 105.0% of the allocated loan amount (ALA) for the first 15.0% of the original principal balance (until the outstanding principal balance has been reduced to no less than $323.0 million), and 110.0% premium of the ALA for the release of individual assets thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115.0%, especially given the borrower’s ability at its sole option to obtain an updated appraisal(s) and request the reallocation amount of the loan amount of the related property or properties. To date, there have been no property releases.

As per the trailing six-month (T-6) financial statement ended June 30, 2023, the portfolio reported a consolidated occupancy rate of 98.2%, in line with the occupancy rate of 98.6% at issuance. The annualized T-6 ended June 30, 2023, net cash flow (NCF) was reported at $22.9 million, compared with YE2022 NCF of $22.3 million, and the DBRS Morningstar NCF of $18.4 million at issuance. The debt service coverage ratio (DSCR) for the same time periods were reported at 0.88x (times), 1.60x, and 2.03x, respectively. The decline in DSCR is attributable to the increase in debt service payments given the floating rate nature of the loan amid the current interest rate environment. The borrower currently has an interest rate cap agreement to hedge exposure to rising interest rates, which would result in a minimum DSCR of 1.10x.

As of Q3 2023, Reis reports indicate that the respective submarkets are exhibiting strong fundamentals, with a weighted-average vacancy rate around 1.4% and an average five-year vacancy rate forecast of 1.9% by December 2028. The underlying properties are considered to be in strong, high-growth markets with favorable multifamily demand trends in and around the Florida affordable housing markets. DBRS Morningstar notes the increasing insurance costs for properties in areas prone to climate risk. Although the subject portfolio has not experienced any increase in insurance costs since issuance, DBRS Morningstar notes the likelihood that this line item may pose concerns in the coming years.

At issuance, DBRS Morningstar derived a value of $334.2 million, based on a concluded cash flow of $18.4 million and a capitalization rate of 5.5%, resulting in a DBRS Morningstar Loan-to-Value Ratio (LTV) of 113.7% compared with the LTV of 72.1% based on the appraised value at issuance. DBRS Morningstar made positive qualitative adjustments totaling 7.5% to the LTV sizing benchmarks to account for the portfolio’s historical performance and strong submarket fundamentals. Given ongoing revenues and occupancy, as well as the borrower’s capital expenditure investments since acquisition, DBRS Morningstar expects the portfolio will continue to exhibit stable to improved performance.

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 (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 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].