Morningstar DBRS Downgrades Credit Rating on One Class of GPMT 2021-FL4, Ltd.

DBRS, Inc. (Morningstar DBRS) downgraded the credit rating on one class of notes issued by GPMT 2021 2021-FL4, Ltd. as follows:

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

Morningstar DBRS also confirmed the credit ratings on all other classes of notes 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)

The trend on Class E has been changed to Negative from Stable while the trend on Class F remains Negative. Class G has been assigned a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions. The trends on the remaining classes are Stable.

The credit rating downgrade reflects the increased risk to the transaction at the bottom of the capital stack from the expected resolution of the two loans in special servicing, which represent 8.2% of the current trust balance, as of the August 2024 reporting. Both loans are secured by office collateral and, in its analysis for this review, Morningstar DBRS analyzed each loan with a liquidation scenario. The cumulative expected losses are contained to the unrated $54.4 million first loss bond; however, the credit support to Class G is materially affected in this analysis. Additional details on the loans and Morningstar DBRS' analysis can be found below.

The Negative trends reflect the continued increased credit risk surrounding the total office collateral in the transaction, which includes an additional seven loans and represents 44.0% of the current trust balance. The majority of the borrowers of these loans have been unable to meaningfully increase property occupancy rates and cash flows since their respective loan closings and, as such, the likelihood of borrowers being able to refinance loans or sell properties at loan maturity remains low. In its analysis for this review, Morningstar DBRS stressed the as-is and/or the as-stabilized loan-to-value ratios (LTVs) of these loans, resulting in increased loan-level expected losses. Individual loan expected loss figures ranged from approximately 8.0% to 22.0%. 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].

As of the August 2024 remittance, the transaction had an outstanding balance of $517.6 million with 20 loans secured by the 27 properties remaining in the trust. There has been a collateral reduction of 16.7% since the transaction became static in December 2023, following the post-closing, 24-month reinvestment period. Of the original 23 loans from the transaction closing in November 2021, 15 loans, representing 75.6% of the current pool balance, remain in the trust. Since the previous Morningstar DBRS credit rating action in September 2023, one loan, representing 7.4% of the current pool balance, has been added to the trust, while four loans with a former cumulative trust balance of $151.6 million were successfully paid in full.

Beyond the office concentration noted above, six loans, representing 31.4% of the current trust balance, are secured by multifamily properties; two loans, representing 7.2% of the current trust balance, are secured by student-housing properties; and one loan, representing 5.0% of the current trust balance, is secured by an industrial property. This compares with the pool breakdown as of August 2023 when office collateral represented 31.0% of the trust balance and multifamily collateral represented 49.1% of the trust balance.

Leverage across the pool has remained similar to issuance as the current weighted-average (WA) as-is appraised value LTV is 71.2% with the current WA as-stabilized LTV of 65.6%. In comparison, these figures were 71.5% and 67.9%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the majority of individual property appraisals were completed in 2021 or 2022, and do not reflect the current higher interest rate or widening capitalization rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 14 loans, representing 77.8% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

The largest loan in special servicing, 500 North Michigan Avenue (Prospectus ID#25; 4.3% of the current trust balance), is secured by a mixed-use office and retail property in Chicago, located along the Magnificent Mile commercial corridor. The loan transferred to special servicing for imminent default; however, as of August 2024, the loan remains current on debt service payments. Prior to the transfer, the loan experienced performance issues and had been modified four times between October 2021 and August 2023 to remove original members from the ownership structure, replenish and/or reallocate operating shortfall reserves, amend completion guarantees and loan terms, and extend the maturity date multiple times. As of the August 2024 reporting, the loan had a balance of $80.0 million with $22.3 million in the trust. The borrower has not succeeded in its business plan to use up to $30.0 million in loan future funding to complete various capital expenditure projects and finance accretive leasing costs. As of the Q2 2024 update from the collateral manager, the property was 33.5% occupied with operations generating a 2.2% debt yield.

According to servicer commentary, a discounted payoff sale of the property has been approved with an expected close date in Q4 2024 and Morningstar DBRS has requested confirmation of the sale price. At loan closing, the property was valued at $91.4 million; however, given the current status of the asset and the decreased desirability of the Magnificent Mile commercial corridor location, Morningstar DBRS suspects the market value of the property has decreased by as much as 45.0%. Morningstar DBRS analyzed the sale of seven comparable Class A office properties within a 0.75-mile radius of the subject between September 2022 and April 2024, noting the sale price per square foot (psf) ranged from $42.00 psf to $246.00 psf with an average sale price of $114.00 psf. While the subject property is expected to sell for more than the average price psf of that range, Morningstar DBRS expects the trust to realize a loss upon the closing of the sale. In its analysis for this review, Morningstar DBRS projected a loan loss severity of approximately 40.0%.

The other specially serviced loan, Vista 25 (Prospectus ID#26; 3.8% of the current trust balance), is secured by a Class B+ office property in Greenwood Village, Colorado. The loan transferred to special servicing in February 2024 for imminent payment default and is currently four months delinquent with debt service last paid in April 2024. The borrower has owned the subject since 2019 and had invested $3.1 million in the property for capital improvements prior to loan closing. Its current business plan is to use $3.5 million of loan future funding to continue property upgrades, complete additional speculative (spec) suite buildouts, and finance accretive leasing packages; however, leasing progress has been slow. As of Q2 2024, the property was 49.7% occupied and operations generated a 3.3% debt yield.

According to the servicer, a resolution strategy is still being determined as the borrower appears to be committed to the asset and has been cooperative to date. The collateral manager's Q2 2024 update noted a Cooperation Agreement was executed with the borrower in which the sponsor made a $0.3 million payment and agreed to terms of an interim business plan focused on the completion of specific property upgrades, spec suite buildout, and ongoing leasing efforts. Reportedly, there is tenant interest in the spec suites; however, given the small footprint of these spaces, potential revenue growth is muted. The property was appraised at $30.1 million at loan closing; however, given the current performance and loan delinquency, Morningstar DBRS suspects the current market value may have fallen by up to 50.0%. While the resolution strategy has yet to be determined, Morningstar DBRS liquidated the loan in its analysis for this review, with a loss severity in excess of 40.0%.

Seven loans, representing 36.8% of the current trust balance, are on the servicer's watchlist as of the August 2024 reporting. The loans have generally been flagged for low debt service coverage ratios (DSCRs) and upcoming maturity dates. The largest loan in the trust and previously on the servicer's watchlist, Hurt Building (Prospectus ID#15; 9.2% of the current trust balance), is secured by an office building in downtown Atlanta. The borrower's business plan is to use $6.1 million of future funding to finance new and renewal leasing costs to stabilize the property. The loan matured in July 2024 and was modified to allow the borrower to extend the maturity date to July 2025. Terms of the modification are favorable to the borrower and include the waiver of the performance-based debt yield extension test, a 50-basis-point reduction in the pay rate on the loan with the deferred amount to be capitalized, the re-allocation of $2.4 million of future funding to be used for capital improvements ($1.6 million) and debt service shortfalls ($0.8 million), the waiver of monthly deposits for replacement reserves, and the deferral of the requirement to purchase a new interest rate cap agreement. In return, the borrower agreed to place the loan into a cash trap; however, according to the YE2023 report, the DSCR was 0.98 times, hence there is no excess cash to trap. According to the Q2 2024 collateral manager's update, the property was 64.5% occupied and only $0.9 million of loan future funding had been advanced to the borrower since loan closing with $0.8 million advanced in the past year. Morningstar DBRS has requested an updated rent roll and leasing updates with a response from the servicer pending; however, according to the property's website, 138,972 square feet (31.1% of the net rentable area (NRA)) are available immediately, implying a current occupancy rate of 68.9%. The loan has a final maturity date in July 2026. In its analysis for this review, Morningstar DBRS applied upward LTV adjustments, resulting in a loan expected loss similar to the expected loss for the overall pool.

A total of 11 loans, representing 58.8% of the current pool balance, have been modified. The loan modification terms vary from loan to loan; however, common terms have allowed borrowers to extend maturity dates without meeting required property performance tests, property capital expenditure completion dates have been extended, and borrowers have been allowed to waive or defer the requirement to purchase new interest rate cap agreements. In most cases, borrowers have been required to contribute additional equity to the loans in order to secure a loan modification.

Excluding the 500 North Michigan Avenue loan, five loans, representing 23.4% of the current trust balance, have scheduled maturity dates throughout 2024. Each loan has an outstanding extension option available to the borrower and, if property performance does not qualify to exercise the related options, Morningstar DBRS expects the borrower and lender to negotiate mutually beneficial loan modifications to extend the loans, which would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase a new interest rate cap agreement.

Through June 2024, the lender had advanced $72.8 million in cumulative loan future funding to13 of the outstanding individual borrowers to aid in property stabilization efforts, including $20.5 million since the previous Morningstar DBRS rating action in August 2023. The largest advance to a single borrower ($16.0 million) has been made to the previously mentioned 500 North Michigan Avenue loan. The second-largest advance ($12.5 million) has been made to the borrower of the 5600 Glenridge loan, which is secured by an office property in suburban Atlanta. The borrower's business plan is to use up to $23.2 million of future funding to complete a significant $12.9 million capital improvement program across the property and fund leasing costs. According to the Q2 2024 update from the collateral manager, the borrower has completed the majority of property upgrades to the lobbies, exterior building facade, restrooms, tenant amenities, and the parking garage. There remains $10.6 million of future funding for leasing costs, which equates to $43.00 psf of available leasing funds as the property was only 5.9% occupied as of June 2024. Morningstar DBRS notes this loan has increased credit risk from closing given the current occupancy rate and negative cash flow with the loan's final maturity date occurring in March 2025. In its analysis, Morningstar DBRS applied increased LTV and probability of default adjustments, resulting in a loan expected loss in excess of twice the expected loss for the overall pool.

An additional $69.1 million of loan future funding allocated to 18 individual borrowers remains available. The largest amount ($16.2 million) is available to the borrower of the Lakeside Square loan, which is secured by a Class A office property in Dallas. The available funds are for accretive leasing costs. The loan closed in November 2023, and according to the Q2 2024 collateral manager update, the borrower appears to be successfully executing its business plan as it has signed renewal leases with four of the five largest tenants at the property totaling 33.5% of the NRA as well as a new lease with a tenant for 2.6% of the NRA. As of June 2024, the property was 68.9% occupied. The loan matures in November 2025 and includes one 12-month extension option, providing the borrower sufficient time to stabilize property occupancy and cash flow.

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 private rating letters 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/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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 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. 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' outlooks and credit ratings are monitored.

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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
-- 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://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].