Morningstar DBRS Confirms Credit Ratings on All Classes of BDS 2021-FL10 Ltd.

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the classes of notes issued by BDS 2021-FL10 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)
 
All trends are Stable.

The credit rating confirmations reflect the favorable collateral composition of the transaction as the trust continues to be primarily secured by the multifamily collateral. Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. Additionally, the majority of individual borrowers are progressing the stated business plans to increase property cash flow 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].

The transaction closed in December 2021 with an initial collateral pool of 32 short-term, floating-rate mortgage loans secured by 35 mostly transitional properties with a cut-off date balance of $932.1 million. 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 July 2024 remittance, the pool comprised 38 loans secured by 39 properties with a cumulative trust balance of $1.2 billion. Since issuance, eight loans with a cumulative trust balance of $237.6 million have been paid in full, six of which (totaling $194.2 million) were paid in full since Morningstar DBRS' previous credit rating action in August 2023. Additionally, four loans, totaling $162.2 million have been added to the trust since Morningstar DBRS' previous credit rating action in August 2023.

The transaction benefits from a significant concentration of loans backed by multifamily properties, representing 91.7% of the current trust balance. The remaining assets are concentrated by industrial, manufactured housing, and hotel properties. The loans are primarily secured by properties in suburban markets with 33 loans, representing 88.3% of the current trust balance, in locations with Morningstar DBRS Market Ranks of 3, 4, and 5. One additional loan, representing 1.7% of the pool, is secured by a property in an urban location with a Morningstar DBRS Market Rank of 7, and four loans, representing 10.0% of the pool, are secured by properties in tertiary markets, as defined by Morningstar DBRS, with a Morningstar DBRS Market Rank of 2. In terms of leverage, the pool has a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 72.3% and a WA Stabilized LTV of 62.6%. In comparison, these figures were 71.6% and 65.1%, 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 faced by borrowers and lenders. In its analysis, Morningstar DBRS applied upward LTV adjustments across 15 loans, representing 53.6% of the current trust balance.

Through June 2024, the lender advanced a cumulative $85.0 million in loan future funding allocated to 29 individual borrowers to aid in property stabilization efforts. The largest advance, $18.7 million was made to the borrower of American Steel Collection (3.3% of the current pool balance), which is secured by a portfolio of four industrial properties in Oakland, California. The borrower's business plan focuses on increased occupancy and rental rates to market levels by completing approximately $32.8 million in capital expenditures. An additional $37.4 million of loan future funding allocated to nine individual borrowers remains available. The largest unadvanced portion of $16.5 million is allocated to the borrower of the aforementioned American Steel Collection. Approximately $6.6 million in future funding allocated to the borrowers of seven individual loans has been forfeited as funds were not utilized within the specified term. In addition to this loan, Morningstar DBRS identified a number of loans that are lagging in their original business plans. Morningstar DBRS' analysis includes additional adjustments to the loan-level probability of default for these assets to reflect these concerns.

Thirty-two of the outstanding loans, representing 84.0% of the current trust balance, are scheduled to mature by YE2025; however, almost all of the loans have remaining extension options. While required performance tests may not be met across all collateral properties, borrowers and lenders may agree to terms to allow loan maturity dates to be extended. As of July 2024, there are no loans in special servicing, and 28 loans are on the servicer's watchlist, representing 72.6% of the current trust balance. Twenty-one of these loans are primarily being monitored for upcoming maturities, the remaining loans being flagged for deferred maintenance items and/or performance-related concerns as the borrowers execute their business plans. Occupancy rates and cash flow may remain depressed at select properties as the borrowers work toward property stabilization.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 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 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.

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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- 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 DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279, (July 17, 2023).

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