Morningstar DBRS Confirms Credit Ratings on All Classes of BSPDF 2021-FL1 Issuer, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by BSPDF 2021-FL1 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stability of the transaction as the majority of loan collateral, including 13 loans, representing 58.9% of the current trust balance, is secured by multifamily properties. Multifamily properties have historically proved better able to retain property value and cash flow compared with other property types. In its analysis for the review, Morningstar DBRS determined the majority of individual borrowers are progressing with their business plans to increase property cash flow and property value. The transaction also benefits from collateral reduction of 18.7% since issuance.

The transaction is partially exposed to adverse selection as three loans, representing 24.8% of the current trust balance, including the two largest loans in the trust, are secured by office properties. The borrowers of these loans have been unable to materially increase property occupancy rates and cash flows, with loans exhibiting increased credit risk from closing. These risks are mitigated as Morningstar DBRS applied increased loan-to-value (LTV) and probability of default adjustments to increase the individual loan expected loss levels in its analysis. Additionally, the unrated first-loss bond of $68.8 million provides significant cushion against realized losses should the increased risks for those loans ultimately result in defaults and dispositions. 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 $630.5 million with 22 loans secured by 25 properties remaining in the trust. As noted above, there has been a collateral reduction of 18.7% since the transaction became static in October 2023, following the post-closing, 24-month Reinvestment Period. Of the original 21 loans from the transaction closing in October 2021, 12 loans, representing 70.7% of the current pool balance, remain in the trust. Since the previous Morningstar DBRS credit rating action in September 2023, one loan, representing 2.8% of the current pool balance, has been added to the trust while six loans with a former cumulative trust balance of $132.2 million were successfully paid in full.

Beyond the multifamily and office concentrations noted above, four loans, representing 11.6% of the current trust balance, are secured by hotel properties and two loans, representing 4.7% of the current trust balance, are secured by industrial properties. As of August 2023, multifamily collateral represented 67.5% of the trust balance, office collateral represented 21.1%, and hotel collateral represented 7.4%.

The pool collateral is concentrated in properties located in suburban markets as 15 loans, representing 55.4% of the pool, are secured by properties in such markets, as defined by Morningstar DBRS, with Morningstar DBRS Market Ranks of 3, 4, or 5. An additional four loans, representing 34.0% of the pool, are secured by properties with Morningstar DBRS Market Ranks of 6 and 8, denoting urban markets, while the remaining three loans, representing 10.6% of the pool, are secured by properties with Morningstar DBRS Market Ranks of 1 or 2, denoting rural and tertiary markets. Those proportions compare with the pool as of August 2023, when properties in suburban markets represented 62.3% of the collateral, properties in urban represented 28.8% of the collateral, and properties in tertiary and rural markets represented 8.8% of the collateral.

Leverage across the pool has remained similar since issuance as the current weighted-average (WA) as-is appraised value LTV is 71.2% with the current WA stabilized LTV of 61.0%. In comparison, these figures were 71.4% and 62.9%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the 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 16 loans, representing 88.3% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

As of August 2024, there are no loans in special servicing; however, two loans, representing 4.1% of the current trust balance, are delinquent. The larger loan, Green Oak Apartments (Prospectus ID#14; 3.1% of the current pool balance), is secured by a 188-unit multifamily property in Arlington, Texas. The loan matured in July 2024 and is currently categorized as a nonperforming maturity balloon asset as the sponsor, Tides Equities, LLC (Tides), has not paid monthly debt service since the loan matured. The senior loan has a current balance of $19.4 million after existing reserves of $1.6 million were used to pay down the loan balance. There is also $4.6 million of mezzanine debt held by Electra Capital.

According to an update from the collateral manager, the servicer is discussing resolution strategies with the mezzanine debt lender and the borrower. Tides has experienced stress across its commercial real estate portfolio in recent years as a result of increased debt service payments and slowed rental rate growth. Regarding the subject loan, Tides has not progressed in the business plan to use $2.9 million of loan future funding to renovate all 188 units as only 48 units have been upgraded, according to the Q1 2024 update. Additionally, the collateral manager reported unapproved liens remained held against the property as of Q1 2024. As of March 2024, the property was 91.0% occupied with a trailing 12-month (T-12) net cash flow (NCF) of $1.0 million and a debt service coverage ratio (DSCR) of 0.88 times (x). The property was valued at $24.5 million at closing; however, given the status of the loan and property performance, Morningstar DSCR suspects the borrower's initial equity may be fully eroded. In its current analysis, Morningstar DBRS applied upward LTV and probability of default adjustments to increase the loan expected loss level. The adjustments resulted in a loan expected loss approximately two times greater than the expected loss for the pool.

Six loans, representing 36.4% of the current trust balance, are on the servicer's watchlist as of the July 2024 reporting. The loans have generally been flagged for low DSCRs. The largest loan on the servicer's watchlist, 345 Seventh Avenue (Prospectus ID#1, 11.8% of the current trust balance), is secured by an office property in Midtown Manhattan. The borrower's business plan is to complete upgrades across the lobby and tenant amenities and to stabilize occupancy. While the upgrades have been completed, the borrower has not succeeded in improving occupancy, which was quoted at 44.1% as of the March 2024 rent roll with T-12 NCF of $2.4 million. The loan matures in September 2024 and Morningstar DBRS expects the lender will need to modify the loan as property cash flow does not support the $74.1 million senior loan or the $7.0 million mezzanine debt, also provided by the issuer. Given the increased credit risk associate with the loan, Morningstar DBRS applied upward LTV and probability of default adjustments with the resulting increased loan expected loss in excess of the expected loss for the pool.

A total of nine loans, representing 43.0% 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.

Throughout 2024, 13 loans, representing 59.5% of the current trust balance, have scheduled maturity dates. The only loan without an existing extension option is The View at Middlesex (Prospectus ID4, 7.2% of the current trust balance), which is secured by a multifamily property in Middlesex, New Jersey. Morningstar DBRS expects the borrower to successfully execute its exit strategy as it has completed the initial lease-up of the property and stabilized operations. According to the collateral manager, the property was 96.0% occupied as of March 2024 and achieved the stabilized NCF projection of $3.1 million. Regarding the remaining 12 maturing loans, 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 July 2024, the lender had advanced $69.3 million in cumulative loan future funding to 16 of the outstanding individual borrowers to aid in property stabilization efforts, including $26.0 million since the previous Morningstar DBRS rating action in August 2023. The largest advance to a single borrower ($18.5 million) has been made to the 5 Post Oak Park loan, which is secured by a 28-story, 566,618-sf office tower in Houston. The borrower's business plan is to invest up to $31.0 million between $20.2 million of loan future funding and $10.8 million of additional equity to complete a significant $8.0 million capital expenditure program across the property and finance leasing costs. According to the Q1 2024 update from the collateral manager, the building upgrades are largely complete and the borrower remains focused on executing new leases. The loan matured in August 2024 and the lender modified the loan, waiving the minimum property performance tests to allow the borrower to exercise the extension option. The lender also placed the remaining $9.2 million of unadvanced future funding dollars into an interest-bearing reserve, which remain available to the borrower. According to the Q1 2024 update from the collateral manager, the borrower has successfully increased the leased rate of the property to 73.1% and has executed lease renewals with several key tenants, including UBS Financial Services, Inc. (55,000 sf). Both the T-12 NCF figure of $5.3 million and DSCR of 0.97x are expected to improve as new tenants take occupancy and begin paying rent, though it may be difficult for the borrower to achieve the issuer's original stabilized NCF projection of $8.9 million. In its analysis, Morningstar DBRS applied an upward LTV adjustment to reflect the increased credit risk of the loan given the decline in office demand across tenants, lenders, and investors alike.

An additional $13.2 million of loan future funding allocated to seven individual borrowers remains available. The largest amount ($5.6 million) is available to the borrower of the Highwoods Preserve V loan, which is secured by an office property in suburban Tampa, Florida. The available funds are for accretive leasing costs; however, the borrower has made little progress in its business plan since loan closing in November 2021 as the occupancy rate at the property was 44.9% as of March 2024. The loan exhibits increased credit risk with T-12 NCF of $0.9 million and loan maturity in December 2024. The issuer originally projected stabilized figures of 87.5% and $2.7 million, respectively. Based on the original As-Is appraised property value of $30.7 million, the implied cap rate using the T-12 NCF figure is 3.0%, which is not supportable. In its analysis, Morningstar DBRS analyzed the loan with increased LTV and probability of default adjustments with a loan expected loss approximately two times greater than the expected loss for the overall pool.

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.

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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, 2024), https://dbrs.morningstar.com/research/438283
-- 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].