Morningstar DBRS Changes Trends on Two Classes of LoanCore 2021-CRE6 Issuer Ltd. to Negative, Confirms All Credit Ratings

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of commercial mortgage-backed notes issued by LoanCore 2021-CRE6 Issuer 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)

Morningstar DBRS changed the trends on Classes F and G to Negative from Stable. The trends on the remaining classes are Stable.

The Negative trends are reflective of Morningstar DBRS' concerns surrounding the trust's significant exposure to assets backed by office properties. In total, seven loans, representing 36.0% of the current trust balance, are secured by office properties, including the largest and second-largest loans in the pool - 433 North Camden (Prospectus ID#1; 10.6% of the current trust balance) and 110 Atrium (Prospectus ID#12; 9.7% of the current trust balance). In general, these loans are exhibiting increased credit risk since issuance as performance declines and softening submarket conditions have delayed the execution of the borrowers' respective business plans. While the remaining office loans have extension options, performance across the properties will not satisfy the required thresholds for exercising the extension options. As such, Morningstar DBRS expects those borrowers to face difficulties in executing loan extensions/modifications that will likely require equity contributions and/or new rate cap agreements.

The transaction closed in November 2021 with an initial collateral pool of 31 floating-rate mortgage loans secured by 46 mostly transitional properties with a cut-off date balance of $1.22 billion. Most of the loans were in a period of transition with plans to stabilize and improve asset value. The transaction was structured with a Reinvestment Period that expired with the November 2023 Payment Date. As of the May 2024 remittance, the pool comprised 25 loans secured by 40 properties with a cumulative trust balance of $1.1 billion. Since issuance, 16 loans, with a cumulative trust balance of $720.0 million, have been paid in full, nine of which (totalling $447.8 million) were paid in full since Morningstar DBRS' previous credit rating action in June 2023, resulting in a collateral reduction of 13.5%. Additionally, five loans, totalling $120.1 million, have been added to the trust since Morningstar DBRS' previous credit rating action in June 2023.

Beyond the office concentration noted above,12 loans, representing 46.6% of the current trust balance, are secured by multifamily properties, which have historically exhibited lower default rates compared with other property types. The remaining assets are secured by hotel, mixed-use, and industrial collateral. In comparison with the June 2023 reporting, multifamily properties represented 65.7% of the collateral while office properties represented 25.9%.

The remaining loans are secured primarily by properties in suburban and urban markets. Fourteen loans, representing 58.8% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 3, 4, or 5, denoting a suburban market. Ten loans, representing 35.2% of the pool, are secured by properties in urban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 6, 7, or 8. 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. One loan, representing 6.0% of the pool, is secured by a property in a tertiary market, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 2.

Leverage across the pool has decreased as of the May 2024 reporting compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 66.5%, with a current WA stabilized LTV of 61.8%. In comparison, these figures were 71.1% and 64.3%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and may not reflect the current environment of rising interest rates or widening capitalization rates. In its analysis, Morningstar DBRS applied upward LTV adjustments for 15 loans, representing 66.3% of the current trust balance. These loans included the 10 largest loans in the pool and all the office loans, which resulted in individual loan-level expected loss levels ranging from approximately 50.0% to 200.0% of the pool's WA expected loss.

Through May 2023, the lender has advanced a cumulative $82.9 million in loan future funding allocated to 16 of the 25 remaining individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of loans secured by office properties, including 433 North Camden ($15.0 million), 110 Atrium ($11.7 million), and 251 West 39th Street ($9.0 million). These properties are located in Beverley Hills, California; Bellevue, Washington; and Manhattan, respectively, with the advanced funds used primarily to fund capital expenditure projects and accretive leasing costs. An additional $55.1 million of loan future funding allocated to 14 individual borrowers remains available. The largest portion of the available funds, $14.6 million, is allocated to the borrower of the aforementioned 110 Atrium loan.

As of the May 2024 remittance, one loan, representing 1.5% of the current trust balance, is in special servicing. The loan, 1900 W Lawrence Avenue, is secured by a mixed-use property consisting of 59 residential units and 19,000 square feet of retail space in Chicago. The loan initially matured in July 2023 but did not transfer to special servicing until December 2023. According to the special servicer, both parties are negotiating forbearance terms. As per the November 2023 rent roll, the consolidated occupancy rate at the subject was 94.9%, with net cash flow of $1.6 million and debt service coverage ratio of 0.53 times for the trailing 12 months ended November 30, 2023, 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 approximately two times the transaction's expected loss.

Nine loans, representing 28.4% of the current trust balance, are on the servicer's watchlist, all of which are flagged for upcoming maturity risk. In total, 21 loans, representing 88.7% of the cumulative trust loan balance, have scheduled maturity dates through YE2024, however, according to the collateral manager, the majority of the borrowers are expected to exercise loan extension options. Another nine loans, representing 41.4% of the current trust balance, have been modified. The terms of the individual loan modifications vary and have included the waiver of performance-based tests to exercise maturity extensions as well as the purchase of new rate agreements. 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].

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental, Social, or 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S Structured Finance (April 15, 2024), https:\dbrs.morningstar.com\research\431205

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/417279.

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