DBRS Morningstar Confirms Credit Ratings on All Classes of SREIT Commercial Mortgage Trust 2021-MFP2

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-MFP2 issued by SREIT Commercial Mortgage Trust 2021-MFP2 as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (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 overall stable performance of the transaction, as evidenced by the increasing average rental rates and revenues since issuance. The portfolio is backed by multifamily properties in generally desirable markets and performance remains in line with DBRS Morningstar’s expectations at issuance.

The transaction is secured by the borrower’s fee-simple interest in a portfolio of nine garden-style multifamily properties, totaling 3,441 units across North Carolina (58.0% of the allocated loan amount (ALA)) and Florida (42.0% of the ALA). Loan proceeds of $633.8 million along with $380.1 million of sponsor equity funded the borrower’s acquisition of the portfolio, covered closing costs, and funded a $6.9 million upfront capex reserve. The reserve was established to fund renovations to help maintain the overall quality of the properties. The interest-only floating-rate loan has an initial maturity in December 2023, with three one-year extension options for a fully extended maturity date of November 2026. As per the issuance documents, the borrower is required to purchase an interest rate cap agreement for each extension. As of this review, the first extension option has been exercised with an updated maturity date of November 2024.

The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 20.0% of the original principal balance, with customary debt yield and loan-to-value ratio (LTV) tests. The prepayment premium for the release of individual assets is 105% of the ALA for the first 20% of the principal amount, and 110% of the ALA thereafter. DBRS Morningstar considers the release premium to be weaker than the generally credit-neutral standard of 115.0%. To date, there have been no property releases.

As of the June 2023 rent roll, the portfolio was 93.2% occupied with a weighted-average (WA) rental rate of $1,672 per unit, compared with the issuance occupancy rate of 95.5% and WA rental rate of $1,368 per unit. As per Reis, the Q3 2023 WA vacancy rate was 5.4% with an market rental rate of $1,673 per unit, relatively in line with the subject’s performance.

According to the most recent financials, the annualized trailing six-month (T-6) ended June 30, 2023 ,net cash flow (NCF) was reported at $40.1 million with a debt service coverage ratio (DSCR) of 0.91 times (x), compared with the YE2022 NCF of $37.8 million and DSCR of 1.59x. Despite the increase in NCF, DSCR declined as a result of an increase in debt service payments given the floating-rate nature of the loan amid the current interest rate environment. Additionally, DBRS Morningstar also notes the increasing insurance costs for properties in areas prone to climate risk in Florida. Although the subject portfolio has not experienced any significant increase in insurance costs, with YE2022 insurance costs reported approximately 5.0% higher than issuance, DBRS Morningstar notes the likelihood that this line item may pose concerns in the coming years. Although the interest rate cap agreement mitigates against large swings in the interest rate, the significant cost to the borrower is also a consideration. In addition, DBRS Morningstar notes that the refinance risks have increased from issuance given the current interest rate environment and low in-place coverage. The sponsor’s significant equity contribution to close the subject transaction, as well as the overall desirability of the collateral portfolio should provide motivation for additional capital injection to continue purchasing the required rate caps and to secure a replacement loan at the final maturity in 2026.

At issuance, DBRS Morningstar derived a value of $470.8 million based on the DBRS Morningstar NCF of $31.8 million and a capitalization rate of 6.75%, resulting in a DBRS Morningstar LTV of 134.6% compared with the LTV of 65.0% based on the appraised value at issuance. Positive qualitative adjustments totaling 5.75% were applied to the LTV Sizing Benchmarks to reflect the low cash flow volatility, desirable property quality, and favorable market fundamentals.

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].