Morningstar DBRS Confirms Credit Ratings on All Classes of A10 Bridge Asset Financing 2021-D, LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of notes issued by A10 Bridge Asset Financing 2021-D, LLC as follows:

-- Class A-1 FL at AAA (sf)
-- Class A-1 FX 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)

All trends are Stable.

Although the subject transaction is exhibiting increased risks in a relatively high concentration of loans backed by office collateral (four loans, 33.2% of the current trust balance) and a high concentration of loans in special servicing (three loans, 18.5% of the current trust balance), the rating confirmations and Stable trends with this review generally reflect the primary mitigating factor in the increased credit support to the bonds as a result of successful loan repayments, resulting in a collateral reduction of 33.6% since issuance. In addition, the analysis for this review considered liquidation scenarios for two of the three specially serviced loans, with the total projected losses contained to the unrated $25.2 million equity bond. The analysis also considered stressed scenarios for other loans with increased risks from issuance, with the resulting increase in loan level expected losses generally well outside of the pool average expected loss.

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 and with 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 initial collateral consisted of 26 loans secured by 31 mostly transitional properties with an initial balance of $304.4 million. As of the March 2023 remittance, the trust reported an outstanding balance of $215.8 million with 15 loans remaining in the trust. Since the previous DBRS Morningstar rating action in May 2023, two loans with a former trust balance of $35.3 million have paid in full. The remaining loans in the transaction beyond the office concentration noted above include four loans secured by traditional multifamily properties (29.1% of the current trust balance), two loans secured by industrial properties (14.5% of the current trust balance), and two loans secured by student housing properties (13.0% of the current trust balance).

Leverage across the pool is slightly elevated from issuance levels with a weighted-average (WA) appraised As Is LTV of 58.6% and a WA appraised Stabilized LTV of 56.4%. In comparison, these figures were 50.7% and 51.6% at issuance. Morningstar DBRS notes the majority of individual property appraisals were completed in 2020 and 2021, which do not take into account the current financing and investment sales environments, a factor suggesting those figures may be artificially low. As such, , Morningstar DBRS applied upward LTV adjustments to 10 loans in the analysis for this review, representing 76.6% of the current trust balance.

In total, the lender has advanced $48.9 million in loan future funding to 12 of the remaining individual borrowers to aid in property stabilization efforts through March 2024. An additional $26.5 million of unadvanced loan future funding allocated to nine outstanding individual borrowers remains outstanding. The largest cumulative loan advance, $15.7 million, has been made to the borrower of the 1450 Infinite Drive loan, which is secured by a 161,655-square-foot (sf) office property in Louisville, Colorado. The funds are being used for capital expenditures and leasing costs to reposition the property from traditional office use into a life sciences property, complete with research and development and laboratory space; however, in the past year only $0.2 million of the total advance has been advanced to the borrower, suggesting stabilization progress has stalled. According to YE2023 reporting provided by the collateral manager, the occupancy rate was 51.2%, a decrease from 54.9% at YE2022 and from 63.4% at loan closing. As a result of the low occupancy rate, cash flows are also down, with a YE2023 net operating income of $0.7 million. The loan remains current despite a below breakeven debt service coverage ratio of 0.25 times. The loan does not mature until December 2025 and there are also two, one-year extension options, providing the borrower additional time to achieve stabilization. There remains $8.2 million of future funding available to the borrower (the largest of any individual loan in the trust), allocated solely to fund leasing costs for new or renewal tenants. The borrower remains committed to the property and there appears to be demand for the renovated product; however, Morningstar DBRS applied increased LTV adjustments to the loan in the current analysis to reflect the current investment sales environment and slower than expected leasing momentum. The resulting loan expected loss is approximately two times greater than the expected loss for the pool.

The largest loan in special servicing, 99 Rhode Island – Exeter (Prospectus ID#10, 11.2% of the current trust balance) Is secured by an office property in the South of Market (SOMA) submarket of San Francisco. The property was vacant at loan closing with the borrower’s business plan focused on completing a $2.0 million capital expenditure (capex) program and utilizing up to $8.4 million to fund leasing costs. The borrower originally targeted filling the space with a single tenant in the market for creative office space, but the lack of demand and generally high availability in the submarket were insurmountable factors and the borrower ultimately stopped making debt service payments in July 2023, when the loan was transferred to special servicing. The special servicer and the loan sponsor, Exeter Property Group, continue to discuss workout options but nothing concrete has been determined as of the date of this press release. In the analysis for this review, Morningstar DBRS liquidated the loan based on a discount to the September 2023 As Is appraised property value of $32.3 million, with the resulting loss severity at approximately 20.0%.

The second loan in special servicing secured by an office property is Two Vantage Way (Prospectus ID#20, 5.4% of the current trust balance). The collateral is an office building in the Metrocenter submarket of Nashville, Tennessee. The borrower’s business plan was to complete a $2.4 million capex plan and utilize up to $7.2 million for leasing costs to stabilize the property. To aid in business plan completion, the loan was structured with $8.3 million of future funding ($2.0 million for capex and $6.3 million for leasing costs). The loan transferred to special servicing in December 2023 for imminent default and remains delinquent for that month’s debt service payment. According to the servicer, the borrower and lender are currently in discussions regarding a resolution strategy with no further update available at this time. At loan closing, the property had an As Is valuation of $16.5 million ($148.53 psf); however, Morningstar DBRS believes the current market as-is value of the property has likely declined significantly since closing. According to September 2023 reporting provided by the collateral manager, the property was 11.5% occupied by three tenants and generated negative cash flow. In comparison with the submarket, Q4 2023 Reis data for the Downtown/Metrocenter submarket noted an average asking rental rate of $30.10 psf, an average effective rental rate of $22.55 psf and a vacancy rate of 21.6%. The current whole-loan balance of $15.1 million consists of the $11.0 million senior trust note and the subordinate $4.1 million B-note, which provides credit support to the senior debt in the event the loan is ultimately liquidated from the trust. Given the relatively low senior note balance, Morningstar DBRS’s analysis considered a stressed scenario with an increased LTV ratio and an increased Probability of Default penalty to increase the loan level expected loss to nearly three times the pool average expected loss.

ENVIRONMENTAL, SOCIAL, AND 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 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 (January 23, 2024; 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 ratings assigned to Classes C and D 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 stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the sustainability of loan performance trends not demonstrated as the majority of the loan collateral in the transaction has yet to stabilize.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 v 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].