Morningstar DBRS Confirms All Credit Ratings of FS Rialto 2021-FL3 Issuer, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-FL3 issued by FS Rialto 2021-FL3 Issuer, 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 overall stable performance of the outstanding collateral in the transaction as borrowers are generally progressing through their respective business plans. Additionally, the transaction benefits from a concentration of loans backed by multifamily collateral, which has historically proven to better retain property value and cash flow compared with other property types. Morningstar DBRS notes the increased credit risk related to some of the borrower's business plans and loan exit strategies that have lagged, including two loans in special servicing (1.7% of the current trust balance) and 14 loans (53.3% of the current trust balance) with scheduled maturity dates throughout 2024, primarily because of increased debt service costs stemming from the high interest rate environment. This risk is somewhat mitigated by the unrated, first-loss note of $99.2 million as well as the substantial balance currently rated below investment grade by Morningstar DBRS across Classes F and G, totaling $106.3 million, which provides significant cushion against realized losses should the increased risks for those loans ultimately result in defaults and disposition. Morningstar DBRS analyzed 24 loans with increased loan-to-value ratios and/or elevated probability of defaults (PODs) to increase the expected loss at the loan level, as applicable, reflecting the widening of capitalization rates and downward pressure on values 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 info-DBRS@morningstar.com.

The initial collateral consisted of 26 floating-rate mortgage assets with an aggregate cut-off date balance of $1.13 billion secured by 68 mostly transitional commercial real estate properties. The transaction is structured with a Reinvestment Period that expired with the October 2023 Payment Date. As of the August 2024 remittance, the transaction had an outstanding balance of $1.04 billion with 29 floating-rate loans remaining in the trust, representing collateral reduction of 7.5%. Of the original loans, 17 remain in the transaction, representing 75.9% of the current trust balance. Since Morningstar DBRS' previous credit rating action in August 2023, three loans totaling $32.4 million (3.1% of the current trust balance) million have been contributed to the trust Additionally, six loans with a former cumulative trust balance of $116.5 million have repaid from the trust, and one loans with a former trust balance of $18.2 million was purchased out of the trust by the issuer as a credit risk asset since August 2023. As of the August 2024 reporting, 26 loans, representing 92.0% of the current trust balance, were secured by the greatest property type concentration, multifamily properties, followed by one each hotel, retail, and industrial property at 5.0%, 2.7%, and 0.3%, respectively.

As of August 2024, two loans, representing 1.7% of the current pool balance, are reported as 90 days to 120 days delinquent and are specially serviced for payment default. The Nob Hill loan (Prospectus ID #27; 0.9% of the current pool balance) is secured by a garden apartment property in Houston. The loan transferred to special servicing in June 2024 for payment default, with the last debt service payment made in March 2024. As of Q1 2024, the property was 72.6% occupancy, down from about 84% at YE2023. Prior to the transfer, the borrower had used $18.4 million of loan future funding to complete 300 unit renovations, exterior renovations, and the correction of deferred maintenance, with renovated units reportedly achieving monthly rental rate premiums between $100 and $125 per unit. There remains $5.5 million of available future funding renovation dollars; however, the sponsor has halted renovations and shifted its focus to curing delinquencies by removing nonpaying tenants and renting vacant units as they become available. In addition, marketed rental rates have been lowered in an effort to increase occupancy.

The other specially serviced loan, 3500 The Vine (Prospectus ID #30; 0.8% of the current pool balance), is secured by a garden apartment property in Peachtree Corners, Georgia, a suburb of Atlanta. The loan transferred to special servicing in May 2024 and is paid through April 2024. As of Q1 2024, the property was 76.6% occupied, down from 81% at YE2023. Prior to the transfer, the borrower had used $3.1 million of loan future funding to complete 100 unit renovations and exterior repairs, with the renovated units reportedly achieving monthly rental rate premiums of $160 per unit. There are currently no units under renovation and the loan has been in a cash sweep period since August 2023. There remains about $700,000 of available future funding to the borrower; however, it appears no additional funds will be advanced given the pause on unit renovations and the status of the loan. In its analysis for both specially serviced loans, Morningstar DBRS applied an increased POD adjustment to increase the loan level expected loss for each loan. The resulting expected loss for each loan is approximately 1.5 times greater than the expected loss for the pool.

The servicer reported nine loans, representing 41.1% of the current trust balance, were on the servicer's watchlist as of the August 2024 reporting because of upcoming maturity dates and/or low debt service coverage ratio (DSCR) figures as of the most recent reporting. Four loans, representing 21.3% of the current trust balance, were also classified as nonperforming matured loans. Based on the most recent reporting, 18 loans representing 69.8% of the current trust balance, have a DSCR that is below breakeven, suggesting more loans should be on the servicer's watchlist for a low DSCR. In total, seven loans, representing 28.8% of the current pool balance, have been modified. Terms for modifications vary from loan to loan; however, common terms have allowed borrowers to extend maturity dates without meeting required property performance tests, renovation completion dates have been extended, and borrowers have been allowed to waive or defer the requirement to purchase new interest rate cap agreements. In many cases, borrowers are generally required to contribute additional equity to the loans in order to secure a modification.

As previously mentioned, 14 loans, have scheduled maturity dates throughout 2024; the majority of which have extension options. In the event property performance does not qualify to exercise the related options, Morningstar DBRS expects the borrowers and lenders to negotiate mutually beneficial loan modifications to extend loans, some of which would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase new interest rate cap agreements.

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/Governance factor(s) 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 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 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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.

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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.