Morningstar DBRS Changes Trends on Three Classes of GPMT 2021-FL3 to Negative from Stable, Confirms All Credit Ratings

DBRS, Inc. (Morningstar DBRS) confirmed its ratings on all classes of notes issued by GPMT 2021-FL3, 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)

The trends on all classes are Stable except for the trends on Classes E, F, and G, which were changed to Negative from Stable with this rating action. Morningstar DBRS changed the trends on these classes to reflect increased loss expectations for the pool, primarily driven by the three loans in special servicing, which represent 19.9% of the current trust balance. Additionally, Morningstar DBRS identified a select number of non-specially serviced loans with reported values that may be inflated as the majority of the individual property appraisals were completed in 2021 or 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 loan-to-value (LTV) and/or probability of default (POD) adjustments for a total of 11 loans, which represent 69.6% of the current trust balance.

The largest loan in the pool, Times Square West, representing 14.0% of the current trust balance, is secured by an office building with ground-level retail located in the Times Square submarket of Midtown Manhattan. The loan, which transferred to special servicing in May 2024 for maturity default, has been modified several times since issuance because of disruptions with its business plan. The most recent modification, which occurred in May 2023, extended the loan maturity to May 2024. Despite this, the loan's performance outlook is bleak as the property's office portion remains completely vacant and the overall occupancy rate is only 11.6% as of the March 2024 rent roll. Morningstar DBRS views the credit risk for this asset as materially increased from closing given the lack of performance improvement combined with the leasing and financing challenges currently facing the office sector. The property was appraised for $105.0 million at issuance, implying an issuance LTV of 65.5%. While an updated appraisal has not been received, Morningstar DBRS believes the asset's current market value has declined further with an LTV in excess of 100.0%. Morningstar DBRS also increased the loan's POD in the current analysis, making its expected loss (EL) approximately two times greater than the transaction's EL.

At issuance, the initial collateral consisted of 27 floating-rate mortgages secured by 32 mostly transitional properties with a cut-off balance totaling $823.7 million, excluding approximately $143.3 million of future funding commitments. The transaction closed in December 2021 with an initial collateral pool of 23 floating-rate mortgage loans secured by 24 mostly transitional real estate properties, with a cut-off pool balance of $558.8 million. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is static and was structured with a Companion Participation Acquisition Period that expired with the May 2023 payment date.

Through March 2024, the collateral manager had advanced cumulative loan future funding of $177.4 million to 17 of the outstanding individual borrowers. The largest loan advances included $67.4 million to the borrower of the aforementioned Times Square West loan. An additional $18.7 million of loan future funding to be allocated to 11 individual borrowers remains available. The largest portion of available funds, $5.6 million, is allocated to the borrower of 516-530 West 25th St. loan (Prospectus ID#; % of pool), which is secured by a 90,727 square foot office building located in the West Chelsea submarket of Manhattan. As of the March 2024 rent roll, the property was 26.3% occupied. The loan was modified several times with the most recent modification, which occurred in December 2023, extending loan maturity through December 2024. In its analysis, Morningstar DBRS applied an upward LTV adjustment, reflective of an in-place LTV near 100.0%. Morningstar DBRS also increased the loan's POD in its current analysis to bring the loan's EL in line with the pool average.

As of the May 2024 remittance, the pool comprised 18 loans secured by 23 properties with a cumulative trust balance of $627.2 million.

In addition to its high exposure to loans in special servicing, the pool also exhibits a high concentration of office loans, which have been susceptible to value declines as the properties have been unable to successfully execute their stated business plans. In total, eight loans, representing 49.3% of the current trust balance, are secured by office properties. Offsetting some of the concern about office properties is the increased credit support to the bonds as a result of successful loan repayments, with a collateral reduction of 23.8% since issuance. The significant loss protection provided by the unrated Preferred Shares Class also mitigates concerns about Morningstar DBRS' increased loss expectations; however, should the pool performance exhibit a further decline or additional loans default, the classes carrying Negative trends may be subject to credit rating downgrades.

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 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, 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) 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.

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://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
-- 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/410863.

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