Morningstar DBRS Changes Trends on Three Classes of STWD 2019-FL1, Ltd. to Negative, Confirms All Credit Ratings

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on all classes of notes issued by STWD 2019-FL1, Ltd. as follows:

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

At the same time, Morningstar DBRS changed the trends on Classes E, F, and G to Negative from Stable. The trends on all remaining classes are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment as well as the repurchase of one credit risk asset as there has been collateral reduction of 50.0% since issuance. The trend changes on Classes E, F, and G to Negative from Stable reflect the increased credit risk to the largest loan in the pool as well as the increased concentration of collateral located in the underperforming markets of downtown Houston and Los Angeles, which have been susceptible to value declines. In total, four loans, representing 51.5% of the current trust balance, are secured by properties in these two markets. The collateral includes office, multifamily, and hotel properties.

The specially serviced loan, 700 Louisiana and 600 Prairie Street, is secured by a 1.3 million square foot (sf) office tower and parking garage in downtown Houston. The loan transferred to special servicing in December 2023 for maturity default after the loan matured in September 2023. In February 2024, the loan was modified, extending the loan maturity to January 2026. The modification also added a preferred equity partner to contribute up to $30.0 million of capital for leasing costs, capital expenditures, and projected carry costs. As of the December 2023 rent roll, the property was 65.2% occupied, down from 69.1% as of YE2022. According to the servicer, the property generated YE2023 net operating income (NOI) of $18.1 million, which resulted in a debt service coverage ratio (DSCR) of 1.10 times (x) and a debt yield of 7.2%. Despite the recent modification, Morningstar DBRS notes the asset is likely over leveraged. An updated appraisal is currently pending; however, at loan closing, the property was valued on an as-is basis at $321.0 million, implying a cap rate of 5.7% based on the YE2023 NOI. In its current analysis, Morningstar DBRS applied a cap rate adjustment, resulting in a loan-to-value ratio (LTV) above 100.0%.

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].

As of the March 2024 remittance, the trust reported an outstanding balance of $550.0 million with 10 loans remaining in the trust. The transaction had an initial 24-month reinvestment period that ended with the August 2021 payment date; however, the collateral manager was granted a 90-day extension to contribute additional collateral as allowed per the transaction documents. Since Morningstar DBRS’ previous credit rating action in May 2023, six loans with a prior cumulative trust balance of $347.8 million have been successfully repaid in full from the pool, including the $81.million 1310 N Courthouse loan, which was repurchased by the issuer.

The transaction is concentrated by property type as four loans, representing 48.3% of the current trust balance, are secured by multifamily properties; another four loans, representing 29.9% of the current trust balance, are secured by office properties; one loan, representing 11.7% of the current trust balance, is secured by a hotel property; and one other loan, representing 10% of the current trust balance, is secured by a student-housing property. These loans are primarily secured by properties in urban and suburban markets. Six loans, representing 71.1% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6 or 7. The other four loans, representing 28.9% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 3 or 5, which denotes a suburban market. The current pool composition is similar to that in May 2023, with properties in urban markets representing 76.2% of the collateral and properties in suburban markets representing 23.8% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

In total, the lender has advanced $65.6 million in loan future funding to seven of the remaining individual borrowers to aid in property stabilization efforts. The largest loan advances include $25.0 million to the borrower of the Hyatt Regency Houston loan, which used the funds to finance renovations of guest rooms, meeting rooms, and public spaces across the property. The loan, which is now fully funded, is on the servicer’s watchlist for upcoming maturity risk as the loan matures in July 2024; however, the loan includes two additional 12-month extension options through 2026. In its current analysis, Morningstar DBRS applied a cap rate adjustment, resulting in an LTV near 100.0%. In addition, loan future funding advances totaling $14.7 million have been made to the borrower of the previously mentioned 700 Louisiana and 600 Prairie Street loan. While sponsorship has completed the stated planned capital expenditures and the loan is fully funded, the loan continues to underperform in occupancy rate and cash flow.

An additional $28.1 million of unadvanced loan future funding allocated to four individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $15.0 million, is for the borrower of the Hope & Flower loan, which is secured by a multifamily property in downtown Los Angeles. Loan future funding is tied to a performance based earn-out, and according to an update from the collateral manager, it does not expect the property to achieve the performance thresholds.

Four loans, representing 44.3% of the current trust balance, are on the servicer’s watchlist. The largest loan on the servicer’s watchlist is the previously mentioned Hyatt Regency loan. Additionally, the Dublin Corporate Center, representing 1.9% of the current trust balance, is the only reported delinquent loan in the transaction. The loan, which is secured by a Class A office property in Dublin, California, previously transferred to special servicing in December 2023 because of maturity default. The loan returned to the master servicer after it was modified in February 2024, which extended the loan maturity to January 2026. The property was 74.8% occupied as of the December 2023 rent roll with a reported YE2023 NOI DSCR of 0.77x.

Nine loans, representing 98.1% of the current trust balance, have been modified. The modifications have generally allowed borrowers to exercise loan extension options by amending loan terms in return for fresh equity deposits and the purchase of a new interest rate cap agreement. The most common amendments include the removal of performance-based tests and changes to the required strike price on the purchase of a new interest rate cap agreement.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

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 (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797

-- 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 (February 26, 2024), https://dbrs.morningstar.com/research/428623

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

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