Morningstar DBRS Confirms All Credit Ratings on Shelter Growth CRE 2023-FL5 Issuer Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by Shelter Growth CRE 2023-FL5 Issuer Ltd. (the Issuer) as follows:

-- Class A 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 collateral in the transaction as borrowers are progressing with the stated business plans. The pool also benefits from favorable property type concentrations as eight loans, representing 52.4% of the current trust balance, are secured by multifamily properties, and six loans, representing 47.6% of the current trust balance, are secured by industrial properties. Historically, loans secured by these property types have exhibited lower default rates and the ability to retain and increase asset value. 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].

At closing, the transaction consisted of 15 floating-rate mortgage loans, secured by 16 properties, with an aggregate cut-off date balance of $353.3 million, including the one delayed-close loan. The loans are primarily secured by cash-flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset's value. When the transaction closed in June 2023, an aggregate unfunded future funding commitment of $48.7 million to aid in property stabilization efforts remained available to individual borrowers. The transaction is static but contains a Permitted Funded Companion Participation Acquisition period through the December 2024 payment date, whereby the Issuer can acquire funded pari passu companion participations into the trust.

As of May 2024, the pool consists of 14 loans secured by 15 properties as one loan with a former trust balance of $22.3 million was successfully repaid in April 2024. There is a current balance of $0.4 million in the Permitted Funded Companion Participation Acquisition Account. The pool is primarily secured by properties in suburban markets, with 11 loans, representing 72.1% of the pool, with a Morningstar DBRS Market Rank of 3 or 4. An additional three loans, representing 27.9% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting a tertiary market. In comparison, in June 2023, properties in suburban markets represented 75.6% of the collateral, and properties in tertiary markets represented 24.4% of the collateral.

The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 66.0% as of the May 2024 reporting, with a current WA stabilized LTV of 55.8%. In comparison, these figures were 66.7% and 59.3%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 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 11 loans, representing 90.3% of the current trust balance.

Through April 2024, the collateral manager had advanced cumulative loan future funding of $32.9 million to 11 of the outstanding individual borrowers, with $22.1 million having been advanced since the SGCP 2023-FL5 transaction closed in June 2023. The largest cumulative advances ($12.2 million since loan closing and $11.9 million since June 2023) to one borrower has been made to the borrower of the Phoenix Greenwood Campus loan, which is secured by a 2.7 million square foot (sf) industrial campus across 13 buildings in Greenwood, South Carolina. The borrower's business plan is to complete capital expenditures (capex) across the collateral to modernize the portfolio and to fund leasing costs. Initial loan future funding of up to $15.8 million was allocated as $5.8 million for capex and $10.0 million for leasing costs. Morningstar DBRS did not receive an update regarding the allocation of the advanced funds to date, but according to the collateral manager's Q4 2023 update, the capex plan was 63.0% complete with a projected completion date of November 2025, and the property was 62.3% occupied.

An additional $24.2 million of loan future funding allocated to 12 individual borrowers remains available. The largest portion of available funds ($7.7 million) is allocated to the borrower of the Fontana Truck Yard loan, which is secured by a 6.0-acre parcel of land in Fontana, California. The borrower's business plan is to build a 12,500-sf industrial building with the remaining space designated as industrial outdoor storage. Through April 2024, the lender had advanced $0.7 million for carry costs as according to the collateral manager's Q4 2023 update, development of the site was expected to commence in April 2024 with building construction to commence in June 2024.

As of May 2024, there are no specially serviced or delinquent loans nor have any loans been modified to date. There are four loans on the servicer's watchlist, representing 20.2% of the current trust balance. All loans have been flagged for upcoming loan maturity. Each loan has outstanding maturity extension options, and Morningstar DBRS expects individual borrowers to exercise these options if necessary. To exercise the respective options, borrowers are required to purchase new interest rate cap agreements. None of the current loan extension options require property performance tests to be achieved in order to be exercised.

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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (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 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.

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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://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 (February 26, 2024), https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

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].