Morningstar DBRS Confirms Credit Ratings on All Classes of LCCM 2021-FL3 Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Offered Notes issued by LCCM 2021-FL3 Trust 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 transaction as majority of the individual borrowers continue to progress in their stated business plans to increase property cash flow. The transaction structure also benefits from approximately $114.0 million in below-investment grade credit support, inclusive of the $53.8 million unrated Class H bond. 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. To access this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

At issuance, the initial collateral consisted of 35 floating-rate mortgage loans secured by 48 mostly transitional properties, with a cut-off balance totaling $729.4 million. As of the September 2024 remittance, the pool comprised 24 loans secured by 24 transitional properties, with a cumulative trust balance of $631.5 million. The transaction is a managed vehicle and was structured with a 24-month reinvestment period that expired with the December 2023 payment date. Since issuance, 26 loans with a cumulative trust balance of $423.1 million have been paid in full, and 13 of these (totaling $196.4 million) were paid in full since Morningstar DBRS' previous credit rating action in October 2023. Additionally, eight loans, totaling $141.5 million, have been added to the trust since the October 2023 Morningstar DBRS credit rating action. The remaining loans in the transaction are concentrated by property type, with 11 loans backed by multifamily properties (39.1% of the current trust balance), five loans (28.5% of the current trust balance) secured by office properties, and four loans (19.0% of the current trust balance) by mixed-use properties. In comparison, at issuance, multifamily properties represented 40.9% of the pool, office properties represented 18.9%, and mixed-use properties represented 9.0%.

As of September 2024, no loans were in special servicing; however, there are two loans, representing 5.9% of the pool, that surpassed their respective July 2024 and August 2024 maturity dates and are no longer remitting payments. The issuer has the option to exchange underperforming loans out of the pool, conditional upon a rating agency confirmation. A third loan, Aventura Corporate Center (7.9% of the pool) has also passed its maturity date but continues to remit monthly payments, and discussions surrounding a loan modification or a potential sale of asset remain ongoing. Five loans, representing 18.5% of the current trust balance, are being monitored on the servicer's watchlist for upcoming maturities. While borrowers continue to progress in their business plans to stabilize the assets, the majority of loans report DSCRs below 1.0x based on the most recent financials, largely as a result of the floating-rate nature of all the loans in the pool. Occupancy remains depressed at select properties; however, it is expected to improve as the borrowers work toward achieving their respective business plans.

The loans are primarily secured by properties in urban and suburban markets. Ten loans, representing 42.3% of the current trust balance, are secured by properties in urban markets, as defined by their Morningstar DBRS Market Ranks of 6, 7, and 8. Ten loans, representing 40.9% of the pool, are secured by properties in Morningstar DBRS Market Ranks of 3, 4, and 5, denoting suburban markets, while four loans, representing 16.7% of the pool, are secured by properties in tertiary markets, as defined by their Morningstar DBRS Market Rank of 1 and 2. Leverage across the pool has remained relatively unchanged since issuance; the current WA as-is appraised LTV is 71.9% and the WA stabilized LTV is 62.5%. In comparison, these figures were 67.3% and 63.1%, 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 for this review, Morningstar DBRS applied upward LTV adjustments to four loans, representing 23.8% of the current trust balance.

Through June 2024, the lender had advanced a cumulative $88.2 million in loan future funding to 17 individual borrowers to aid in property stabilization efforts. The largest advance of $29.9 million was made to the borrower of McArthur Studios (3.5% of the current pool balance), which is secured by a 152,000 sf mixed-use (multifamily/event/studio) property located in the McArthur Park neighborhood of Los Angeles. The borrower's business plan focuses on completing building system upgrades as well as a complete renovation of the lobby, ballrooms, and event spaces. An additional $42.7 million of loan future funding allocated to 12 individual borrowers remains available. The largest unadvanced portion of $12.2 million was allocated to the borrower of the Citigroup Center (10.3% of the pool), which is discussed in detail within the Rating Report. 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.

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

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 info-DBRS@morningstar.com.

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
DBRS Tower, 181 University Avenue, Suite 700
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)
Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702)
North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283)
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/417279 (July 17, 2023).

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