Morningstar DBRS Confirms All Credit Ratings of HGI CRE CLO 2021-FL1, LTD.

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes issued by HGI CRE CLO 2021-FL1, LTD. 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 (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, which has largely remained in line with Morningstar DBRS' expectations as the trust continues to be primarily secured by multifamily collateral.

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 initial collateral included 23 mortgage loans or senior notes secured by multifamily properties with an initial cut-off date balance totaling $498.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values for the underlying assets. The transaction was a managed vehicle with an 18-month reinvestment period, which expired with the January 2023 Payment Date.

As of the April 2024 remittance, the pool comprises 27 loans secured by 27 properties with a cumulative trust balance of $358.6 million, as there has been collateral reduction of 35.8%. Since issuance, 21 loans with a prior cumulative trust balance of $471.1 million have been successfully repaid from the pool, including seven loans totaling $133.5 million that have repaid since the previous Morningstar DBRS rating action in June 2023.

The pool is primarily secured by properties in suburban markets, with 17 loans, representing 56.5% of the pool, with a Morningstar DBRS Market Rank of 3, 4, or 5. An additional eight loans, representing 33.4% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting a tertiary market, while two loans, representing 10.1% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 6, denoting an urban market. In comparison, in June 2023, properties in suburban markets represented 55.8% of the collateral, properties in tertiary markets represented 25.6% of the collateral, and properties in urban markets represented 11.2% of the collateral.

The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 68.2% as of the March 2024 reporting, with a current WA stabilized LTV of 78.1%. In comparison, these figures were 73.9% and 62.7%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current rising interest rate or widening capitalization rate (cap rate) environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for 14 loans, representing 87.3% of the current trust balance.

Through March 2024, the collateral manager had advanced cumulative loan future funding of $56.7 million to 24 of the outstanding individual borrowers. The largest advance, $10.6 million, has been made to the borrower of the Marbella Apartments loan, which is secured by a multifamily property in Corpus Christi, Texas. Funds were advanced to fund the borrower's capital improvement plan across the property. The loan is currently being monitored on the servicer's watchlist for cash flow concerns as the property was 57.3% occupied as of the December 2023 rent roll, with negative cash flow reported as of September 2023 financials. The loan matures in June 2024 and has two 12-month extension options remaining; however, according to the collateral manager, the loan will likely be modified as the borrower will not be able to meet the performance-based extension requirements. In its analysis, Morningstar DBRS applied an upward LTV adjustment and increased the loan's probability of default to increase the loan's expected loss to a level that was approximately two times the pool average expected loss.

An additional $14.2 million of loan future funding allocated to six individual borrowers remains available. The largest portion of available funds is allocated to the borrower of The Lofts at Twenty25 ($5.9 million), which is secured by a redeveloped 623-unit, high-rise multifamily property in Atlanta. The available funds will fund the borrowers' capital improvement plans. According to the financials provided by the collateral manager, the property was 29.4% occupied as of the February 2024 rent roll, down from 46% as of March 2023 and 57.6% at closing. The collateral manager noted that the drop in occupancy was related to a number of tenant evictions. In addition, the borrower has extinguished all available funds from the interest reserve and is covering debt service out of pocket. The loan has an initial maturity date of July 2025. In its analysis, Morningstar DBRS applied an upward LTV adjustment and increased the loan's probability of default to increase the loan's expected loss.

As of April 2024, there were no specially serviced or delinquent loans; however, 16 loans, representing 57.3% of the current pool balance, were on the servicer's watchlist. The loans have primarily been flagged for upcoming loan maturity dates and low occupancy rates. The largest loan on the servicer's watchlist, Tzadik Portfolio - Pool 1, is secured by a portfolio of five multifamily properties in Florida. The loan is being monitored for low in-place cash flows; the loan posted a 0.59 times (x) debt service coverage ratio as of year-end 2023. The borrower is progressing with its business plan, which calls for the completion of property-wide renovations. As of the March 2024 reporting, the lender has advanced nearly all of the $7.6 million future funding component. As of February 2024, the portfolio had a combined occupancy of 88.2%. In its analysis, Morningstar DBRS applied an upward LTV adjustment, increasing the loan's expected loss in excess of deal average.

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 ratings assigned to Classes B, C, and F 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 yet demonstrated as the majority of the loan collateral in the transaction has yet to stabilize.

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.

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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

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