Morningstar DBRS Changes Trends on Two Classes of BRSP 2021-FL1, Ltd. to Negative from Stable

DBRS Limited (Morningstar DBRS) confirmed its ratings on all classes of commercial mortgage-backed notes issued by BRSP 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)

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

The trend changes reflect the increased credit risk to the transaction as a result of Morningstar DBRS' increased loan-level expected losses for loans secured by office collateral, which represent 35.4% of the current trust balance. In particular, the two largest loans secured by office properties, Mohawk Business Park (Prospectus ID#41; 5.7% of the current pool) and Makers Point (Prospectus ID#39; 5.5% of the current pool), have both been modified in the last year to extend their respective maturity dates and reduce the loans' interest rate spread. Both loans are secured by office properties located in suburban markets with a Morningstar DBRS Market rank of 3 or 4, which historically have exhibited less investor demand and higher probabilities of default (PODs). Business plan progression has been slow to date, with occupancy rates at both properties well below stabilized levels. Morningstar DBRS analyzed both loans with increased loan-to-value ratios (LTVs) and elevated PODs, resulting in expected loss levels for both loans approximately 60.0% greater than the pool's weighted-average (WA) expected loss.

Throughout 2024, 18 loans, representing 70.7% of the current trust balance, are scheduled to mature. Six of these loans, representing 19.5% of the current trust balance, are secured by office properties. Given the ongoing headwinds in the office market, lending activity on office properties slowed significantly in 2023 and continues to struggle through Q2 2024. As such, Morningstar DBRS expects borrowers to face difficulties in executing exit strategies over the near to medium term. While the majority of the loans include extension options, the borrowers may require loan modifications as several loans will be unable to achieve the performance-based extension requirements. Despite the increased credit risk with the transaction's office loans and concerns with upcoming loan maturities, the credit rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayments, with collateral reduction of 14.7% since issuance.

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].

At issuance, the initial collateral consisted of 31 floating-rate mortgages or pari passu participation interests in mortgage loans secured by 41 mostly transitional properties with a cut-off balance totaling $800.0 million. As of the June 2024 remittance, the pool comprises 26 loans secured by 31 properties with a cumulative trust balance of $682.2 million. Most loans are in a period of transition with plans to stabilize and improve the asset's value. The transaction had a Reinvestment Period that expired with the July 2023 payment date. Since the previous Morningstar DBRS credit rating action in July 2023, three loans with a former trust balance of $111.8 million were re-paid in full.

Beyond the office concentration noted above, the transaction also comprises 15 loans, representing 60.6% of the current trust balance, secured by multifamily properties and one loan, representing 4.1% of the pool, secured by a mixed-use property with multifamily, retail, and office components. In comparison with the June 2023 reporting, office represented 29.9% of the collateral while multifamily properties represented 66.6% of the collateral and mixed-use properties represented 3.5% of the collateral.

The loans are secured primarily by properties in suburban markets. Four loans, representing 16.6% 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 remaining 21 loans, representing 83.4% of the pool, are secured by properties in suburban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 3, 4, or 5. In comparison, as of June 2023, properties in urban markets represented 14.1% of the collateral while suburban markets represented 85.9% of the collateral.

Based on the as-is appraised values, leverage across the pool has increased slightly from issuance, with a current WA LTV of 76.4%, up from 74.5% at issuance. However, the WA stabilized LTV decreased over that same period, dropping to 64.6% from 69.2% 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) environments. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 12 loans, representing 54.3% of the current trust balance.

Through May 2024, the lender has advanced cumulative loan future funding of $71.8 million to 23 individual borrowers to aid in property stabilization efforts. The largest future funding advances have been released to the borrowers of the Central Park Plaza loan (Prospectus ID#31; 1.6% of the current pool) ($13.6 million) and the 360 Wythe loan (Prospectus ID#13; 4.1% of current pool) ($11.7 million). The Central Park Plaza loan is secured by six office properties in San Jose, California, and the 360 Wythe loan is secured by a mixed-use property in Brooklyn, New York. The borrowers on both loans have used loan future funding for capital improvement projects and to fund leasing costs. Additional future funding is available for the borrower of the 360 Wythe loan for debt service shortfalls and a potential earn-out, though the earn-out has not been achieved to date. The sponsor for the Central Park Plaza loan has completed the planned exterior renovations and has built out several spec suites, resulting in an occupancy rate of 88.1% as of December 2023. The sponsor for 360 Wythe has successfully leased 96.0% of the multifamily portion of the collateral as of December 2023 and has signed several retail tenants since loan close, resulting in an occupancy rate of 100.0% for the retail portion. The office component was reported as just 8.7% occupied as of December 2023, but this is expected to increase to 70.0% once a recently signed tenant takes occupancy in Q2 2024.

An additional $41.6 million of loan future funding allocated to 22 individual borrowers remains available. The largest amount outstanding is $6.2 million to the borrower of the aforementioned 360 Wythe loan for debt service shortfalls and a future earn-out conditional on the achievement of a 7.25% debt yield and a 1.15 times (x) debt service coverage ratio. Based on the YE2023 net cash flow of $3.2 million and the funded loan balance of $77.7 million, the loan's debt yield is approximately 4.1%.

The second-largest amount of future funding outstanding is $5.6 million to the borrower of the Mohawk Business Park loan. The loan is secured by a Class B office property in Tualatin, Oregon, with loan future funding available to fund capital improvements and leasing costs. Capital improvements funding totaling $6.1 million has been spent over the last six years. The sponsor is currently attempting to lease up the property from the 56.6% occupancy rate reported as of December 2023. A tenant representing 3.2% of net rentable area (NRA) has been signed at a rental rate of $26.00 per square foot (psf) and two tenants, collectively representing 4.5% of NRA, have renewed at an average rental rate of $26.65 psf, in line with Morningstar DBRS' concluded rental rate estimate when the loan was contributed to the pool in 2022. The loan is structured with three 12-month extension options, the first of which was exercised in December 2023. As part of the extension, the loan was modified to reduce the loan's interest rate spread. In connection with the modification, the sponsor made a $250,000 deposit to a shortfall reserve and purchased a new interest rate cap. Given the leasing slowdown in the office market, the property's low occupancy rate, and the loan modification, in its analysis, Morningstar DBRS applied an upward LTV adjustment, reflecting an in-place LTV approaching 100.0% and a stabilized LTV exceeding 90.0%. Morningstar DBRS also increased the loan's POD, resulting in an expected loss approximately 70.0% greater than the pool's WA expected loss.

As of the June 2024 remittance, there are no delinquent loans or loans in special servicing; however, 16 loans, representing 60.8% of the current trust balance, are on the servicer's watchlist for a variety of reasons, mainly for upcoming loan maturity as well as low debt service coverage ratios and occupancy rates. All affected borrowers, with the exception of the 450 Pacific Avenue loan (Prospectus ID#16; 3.4% of the current pool), have outstanding maturity date extension options on their respective loans. The 450 Pacific Avenue loan has a final maturity date in October 2024 and is currently 100.0% occupied by a single tenant, with refinancing conversations currently in progress.

Three loans, representing 16.6% of the current trust balance, have been modified. The modifications have generally allowed borrowers to exercise loan extension options by amending loan terms in return for fresh equity deposits and the purchase of a new interest rate cap agreement. The most common amendments include the removal of performance-based tests and changes to the loans' interest rate spread.

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 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 the 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
DBRS Tower, 181 University Avenue, Suite 700
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

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

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

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].