Morningstar DBRS Downgrades Credit Ratings on Two Classes of VMC Finance 2021-FL4 LLC

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on two classes of notes issued by VMC Finance 2021-FL4 LLC (the Issuer) as follows:

-- Class F to CCC (sf) from BB (low) (sf)
-- Class G to CCC (sf) from B (low) (sf)

Morningstar DBRS also confirmed its credit ratings on the remaining classes of notes as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

Morningstar DBRS also changed the trend on Class E to Negative from Stable. The trends on the remaining classes are Stable with the exception of Class F and Class G, which have a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings. 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].

The credit rating downgrades and trend change reflect the increased credit risk to the transaction given the increased concentration of loans in special servicing, which include six loans, representing 61.0% of the current trust balance. All six loans are secured by office collateral and five of the loans, representing 47.8% of the current trust balance, are delinquent. In its current analysis, Morningstar DBRS liquidated the five delinquent loans, with resulting individual loan loss severities ranging from approximately 20.0% to 55.0%. The projected cumulative losses are expected to be contained to the unrated $80.0 million first loss piece; however, the projected deterioration to the bottom of the transaction structure is material. The two largest specially serviced loans are discussed in greater detail below. Additionally, as a result of the increase in delinquency, accumulated interest shortfalls to Class F and Class G totaled $0.5 million and $0.9 million, respectively, as of June 2024 reporting. The interest shortfalls to Class F first occurred in May 2024, while the shortfalls to Class G first occurred in March 2024. Morningstar DBRS expects interest shortfalls to both classes to continue to accrue given the concentration of delinquent loans and expected prolonged resolution timelines for those loans.

The credit rating confirmations on the remaining classes reflect the increased credit support to the bonds as a result of successful loan repayment, which serves as a mitigant to the existing adverse selection risk in the transaction. There has been collateral reduction of 52.3% since issuance as of the June 2024 remittance. Since the previous Morningstar DBRS credit rating action in July 2023, five loans with a former cumulative trust balance of $193.9 million have been repaid in full.

The initial collateral pool consisted of 23 floating-rate mortgages secured by 29 transitional properties totaling $927.9 million, excluding $92.3 million of remaining future funding commitments. The collateral pool for the transaction is static; however, the Issuer was able to acquire funded loan participation interests into the trust over the 36-month Permitted Funded Companion Participation Acquisition Period, which ended with the May 2024 Payment Date.

As of the June 2024 remittance, the pool comprises 10 loans secured by 12 properties with a cumulative trust balance of $440.4 million. The transaction is concentrated by property type as nine loans are secured by office properties, totaling 91.7% of the current trust loan balance. The remaining loan is secured by a hotel property. Seven loans, representing 79.3% of the current trust loan balance, are secured by properties in suburban markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 3, 4, or 5. The remaining three loans are secured by properties with a Morningstar DBRS Market Rank of 6 or 7, denoting an urban market.

Through May 2024, the lender had advanced cumulative loan future funding of $35.5 million to nine of the 10 remaining individual borrowers to aid in property stabilization efforts; however, only $2.0 million total had been advanced to four individual borrowers since the previous Morningstar DBRS rating action in July 2023. The largest cumulative advance to a single borrower since loan closing, $10.5 million, has been made to the borrower of the Columbus Center loan, which is secured by an office property in Coral Gables, Florida. The loan is currently specially serviced and delinquent, with debt service last paid in February 2024. Funds were advanced to the borrower to complete capital expenditure (capex) projects and fund leasing costs; however, only $0.2 million has been advanced since July 2023. An additional $2.6 million of future funding remains outstanding, but given the status of the loan, Morningstar DBRS does not expect any additional dollars to be advanced.

An additional $21.9 million of loan future funding allocated to eight of the remaining individual borrowers remains available. The largest portion of available funds, $7.5 million, is allocated to the borrower of City Parkway loan, which is secured by an office property in Orange, California. The collateral originally included two office properties; however, one asset was released in May 2022 with proceeds of $20.9 million used to pay down the loan to the current balance of $16.5 million. The remaining collateral is a 10-story, 200,925-square-foot (sf) office building, which was 45.9% occupied as of March 2024. The property is not cash flowing, but the loan remains current with a March 2025 maturity date. The outstanding future funding equates to approximately $70.00 per sf of available leasing dollars. While leasing traction has been minimal, the leverage on the loan is moderate given the principal curtailment.

The largest loan in special servicing is the previously mentioned Columbus Center (Prospectus ID#3, 15.3% of the current trust balance) loan. The borrower's business plan at closing was to utilize future funding of $13.0 million and additional borrower equity of $8.9 million to complete a $11.3 million capex program and fund $10.9 million in leasing costs to increase rental rates and occupancy to market. The loan transferred to special servicing in March 2024 after the borrower did not purchase the required new interest rate cap agreement. The loan subsequently become delinquent and remains pending for the March 2024 payment. According to the servicer, the likely resolution strategy is a deed in lieu of foreclosure with negotiations ongoing with the borrower.

According to documents provided by the servicer, the property was 62.3% occupied as of March 2024 with a trailing 12-month ended March 31, 2024 (T-12), net cash flow (NCF) of $3.4 million. At closing, the property had an As-Is appraised value of $97.2 million, which Morningstar DBRS deems aggressive as the implied cap rate is 3.5% based on the T-12 NCF figure. As such, Morningstar DBRS believes the current market value of the property is significantly lower. In its current analysis, Morningstar DBRS assumed a distressed property value given the status of the loan and liquidated it from the trust. The resulting loan loss severity was nearly 30.0%.

The second-largest loan in special servicing, One Financial Plaza (Prospectus ID#4; 13.2% of the current trust balance), is secured by a 28-story office property in Fort Lauderdale, Florida, originally built in 1972. The borrower's business plan was to utilize $3.0 million of future funding to finance leasing costs. The loan transferred to special servicing in February 2024 for maturity default as the loan matured in January 2024. The loan remains current on monthly debt service payments and the borrower was granted a forbearance to provide additional time to sell the property. According to the servicer, the borrower's broker is discussing second round offers with potential buyers; however, no further update on timing is available at this time. If the borrower is not able to execute a property sale, the lender is reportedly willing to pursue foreclosure actions. According to the March 2024 rent roll provided, the property was 88.1% occupied with a T-12 NCF of $5.1 million. The property was reappraised at $61.5 million in March 2024, down from $85.0 million at loan closing. The updated indicative loan-to-value ratio (LTV) is 96.4% based on the current funded A-note of $59.3 million. While the elevated LTV is a concern, the updated valuation may be supportable as the implied cap rate based on the T-12 net cash flow is 8.4%.

As of the June 2024 remittance, there are three loans on the servicer's watchlist, representing 30.7% of the current trust balance. The loans have generally been flagged for low occupancy rates and debt service coverage ratios (DSCRs). The largest loan on the servicer's watchlist is the Brookwood Portfolio loan (Prospectus ID#1, 19.7% of the current trust balance), which was flagged for a year-end (YE) 2023 DSCR of 0.41 times in addition to the June 2024 maturity date. The collateral includes seven individual office buildings throughout North San Diego County in California. Reportedly, the borrower and lender are in negotiation to allow the borrower to exercise the remaining one-year extension option with the borrower's goal to potentially sell individual properties. At YE2023, the portfolio was 84.5% occupied with a $6.8 million cash flow, equal to a 7.6% debt yield on the outstanding $89.1 million A-note.

Six loans, representing 45.2% of the current trust balance, have been modified. Individual loan modifications have generally been executed to provide relief to borrowers by waiving performance-based maturity extension tests, the purchase of new interest rate cap agreements or to provide a forbearance. The exception is the previously noted City Parkway loan, whereby the modification allowed the borrower to sell and release one of the collateral properties to pay down the loan.

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); 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.

Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's outlooks and credit ratings are monitored.

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Tel. +1 312 332-3429

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

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].