Morningstar DBRS Upgrades Credit Ratings on Four Classes of PFP 2021-8, Ltd.; Confirms All Other Classes

DBRS, Inc. (Morningstar DBRS) upgraded its credit ratings on four classes of notes issued by PFP 2021-8, Ltd. as follows:

-- Class B to AA (high) (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)
-- Class D to BBB (high) (sf) from BBB (sf)
-- Class E to BBB (sf) from BBB (low) (sf)

Morningstar DBRS also confirmed its credit ratings on all remaining classes of notes as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating upgrades reflect the increased credit support to the bonds as there has been collateral reduction of 41.2% since issuance as a result of successful loan repayment, an increase from the reduction of 24.3% at the previous Morningstar DBRS credit rating action in July 2023. The transaction continues to primarily consist of multifamily collateral, representing 54.2% of the current trust balance across 10 loans. The second most common property type is office, as 27.5% of the current trust balance is secured by office collateral. The increased credit support to the bonds also serves as a mitigant against loans secured by office properties in this transaction as some borrowers of these loans are behind in their respective business plans, and all borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at their respective loan maturity. All 10 loans secured by office properties mature throughout 2024 and, given the hesitancy lenders exhibited for that property type in 2023, Morningstar DBRS expects those borrowers will continue to face refinance difficulty over the near to medium term.

In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction as well as 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].

The pool’s collateral initially consisted of 46 floating-rate loans secured by 55 properties, many of which were in a period of transition with plans to stabilize and improve asset values. As of the February 2024 reporting, there were 27 loans in the transaction, secured by 31 properties. Since the previous Morningstar DBRS rating action in July 2023, nine loans with a cumulative former trust balance of $223.8 million have been repaid in full. The transaction was structured with a 36-month Permitted Funded Companion Participation Acquisition Period that is scheduled to end with the September 2024 Payment Date. As of the February 2024 remittance, there were no available funds in the Permitted Funded Companion Participation Acquisition Account.

Beyond the multifamily and office concentrations noted above, four loans, representing 11.7% of the current pool balance, are secured by hotel properties and three loans, representing 6.6% of the current pool balance, are secured by industrial properties. The transaction is concentrated by properties in suburban locations, which Morningstar DBRS defines as markets with a Morningstar DBRS Market Rank of 3, 4, or 5. As of February 2024, 19 loans, representing 62.3% of the cumulative loan balance, were secured by properties in suburban markets. Four loans, representing 22.5% of the cumulative loan balance, were secured by properties in urban markets, defined as markets with a Morningstar DBRS Market Rank of 6, 7, or 8, while four loans, representing 15.2% of the cumulative loan balance, were secured by properties in tertiary markets, defined as markets with a Morningstar DBRS Market Rank of 2. Historically, urban markets have shown greater liquidity and demand than suburban and tertiary markets.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 67.4% and a WA stabilized LTV of 59.1%. In comparison, these figures were 68.7% and 57.3%, respectively, at closing. As the majority of individual property appraisals were conducted between 2019 and 2022, it is possible values have decreased since that time, particularly for the office property types, given the current interest rate and capitalization rate environment. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 15 loans, representing 57.4% of the current trust balance.

Through December 2023, the lender had advanced $61.5 million in loan future funding to 15 of the remaining individual borrowers to aid in property stabilization efforts, with the largest advances made to the borrowers of the Fort Collins Portfolio ($11.7 million) and Greenwood Corporate Plaza ($11.6 million) loans. The Fort Collins Portfolio loan is secured by two multifamily properties totaling 288 units in Fort Collins, Colorado. The borrower used available loan future funding to complete an extensive capital expenditure (capex) project across the properties, including unit conversions to add bedrooms along with other upgrades. The capex project is completed and the loan is fully funded. As of the individual property December 2023 rent rolls, the portfolio had a combined occupancy rate of 91.0% with an average rental rate of $2,066 per unit, surpassing the Morningstar DBRS stabilized rental rate projection of $1,636 per unit. The loan matures in May 2024 and, according to the collateral manager, the borrower has yet to decide if it will exercise the last remaining extension option or attempt to sell the property or refinance the loan. The loan currently qualifies for an extension based on the property meeting the 8.5% debt yield test; however, the borrower will also be required to purchase a new interest rate cap agreement.

The Greenwood Corporate Plaza loan is secured by a four-building office property totaling 412,869 sf in Greenwood Village, Colorado,. The borrower’s business plan at closing was to complete a $3.8 million capex program and spend up to an additional $9.2 million on leasing costs. According to the Q4 2023 update from the collateral manager, only $0.5 million of loan future funding allocated for capex remains outstanding; however, it appears the lender may have placed a significant portion of loan future funding into an interest-bearing reserve rather than advancing all of the $11.6 million to the borrower as the portfolio occupancy rate as of December 2023 was 62.9%, up marginally from 58.8% as of October 2021. According to the February 2024 servicer reporting, there was $0.5 million in the Renovation Advance Reserve and $4.3 million in the combined Accretive Leasing Advance and Tenant Rollover Advance Reserves. The loan matures in July 2024 and, given the low occupancy rate and YE2023 net cash flow of $2.0 million, Morningstar DBRS notes the increased credit risk to the loan as the borrower will likely need to exercise an extension option. As property performance does not currently meet the required minimum 8.5% debt yield test, the borrower will have to pay down the loan or the loan will have to be modified to qualify for the extension. In its current analysis, Morningstar DBRS applied LTV adjustments to both the in-place and stabilized property value assumptions made by the appraiser at closing, which resulted in a loan expected loss approximately two times greater than the pool expected loss.

An additional $11.8 million of loan future funding, allocated to 10 individual borrowers remains available. The largest portion, $4.4 million, is allocated to the borrower of the 116 Inverness loan, which is secured by an office property in Englewood, Colorado. The remaining available future funding is allocated as $1.4 million for capex and $3.0 million for leasing costs as the borrower continues to implement its business plan, which initially contemplated a $1.9 million capex program with up to $4.5 million for leasing costs. To date, the borrower has faced similar challenges with signing new and renewal leases as the property was 71.2% occupied as of October 2023, according to the collateral manager. The collateral manager did note the borrower had recently signed three new leases, which would increase the occupancy rate to 79.2%, in line with the submarket. The loan matures in May 2024 and, according to the collateral manager, the borrower may market the property for sale prior to deciding on potentially extending the loan. Property performance currently meets the required minimum debt service coverage ratio of 1.10 times, however, the borrower would also be required to purchase a new interest rate cap agreement.

As of the February 2024 remittance, no loans were in special servicing or on the servicer’s watchlist. One loan, San Carlos Tech Center (Prospectus ID#22; 3.3% of the current trust balance), which is secured by an industrial property in San Carlos, California, was previously flagged as 60 days delinquent as the loan was last paid in November 2023; however, according to the collateral manager the loan was modified in December 2023. Terms of the modification allow the borrower to accrue debt service payments from December 2023 through the newly extended January 2025 loan maturity date. In return, the borrower was required to deposit $0.5 million into the combined capex and leasing reserve as well satisfy outstanding lien waivers for outstanding development costs.

The borrower’s business plan is to convert the single-story, 45,800-square foot property into a multitenant life sciences facility; however, the property has been fully vacant since July 2022 when a tenant that had previously occupied 74.2% of the net rentable area vacated. At issuance, the property was valued at $33.0 million with an appraised land value of $26.5 million. The loan has a current balance of $21.7 million with a potential fully funded balance of $22.5 million as the loan is structured with future funding allocated for capex and leasing costs. Given the current state of the property and the borrower’s business plan, Morningstar DBRS believes the current market value of the asset has declined from issuance. In its analysis, Morningstar DBRS increased the potential fully funded loan balance to incorporate the accrual of debt service through loan maturity and assumed the current value of the property is equal to the original land value. Morningstar also increased the probability of default on the loan given the increased risks to the business plan. The adjustments resulted in a loan expected loss approximately two times greater than the expected loss for the pool.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes C, F, and G materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk given the concentration of loans secured by office collateral and all loans mature in the next 12 months.

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.

Morningstar DBRS 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.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/422859

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

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

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

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

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