Morningstar DBRS Confirms All Credit Ratings of H.I.G. RCP 2023-FL1, LLC

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the classes of notes issued by H.I.G. RCP 2023-FL1, LLC 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 collateral in the transaction as borrowers are progressing with the stated business plans. The pool benefits from favorable property type concentrations as five loans, representing 42.5% of the pool, are secured by multifamily properties, and four loans, representing 32.5% of the pool are secured by industrial properties. Historically, loans secured by these property types have exhibited lower default rates and the ability to retain and increase asset value. Morningstar DBRS also recognizes the notable paydown since issuance and increased credit support to the capital stack as four loans have been paid in full, resulting in collateral reduction of 29.3% since closing. 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 info-DBRS@morningstar.com.

At closing, the transaction consisted of 16 floating-rate mortgage loans, secured by 35 mostly transitional properties, with a cut-off date balance of $672.6 million. When the transaction closed in November 2023, the aggregate unfunded future funding commitment totaled $80.8 million to aid individual borrowers in their property stabilization efforts. The transaction is static but contains a Permitted Funded Companion Participation Acquisition period through the October 2025 Payment Date, whereby the issuer can acquire funded pari passu companion participations into the trust.

As of October 2024, the pool consists of 12 loans secured by 31 properties. Beyond the multifamily and industrial concentrations noted above, there are two loans, representing 16.9% of the pool, secured by self-storage properties and one loan, representing 8.2% of the pool, secured by a hotel. The pool is primarily secured by properties in suburban markets, with six loans, representing 50.3% of the pool, with a Morningstar DBRS Market Rank of 3 or 4. An additional four loans, representing 29.3% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting a tertiary market. In comparison, at issuance, properties in suburban markets represented 40.7% of the collateral, and properties in tertiary markets represented 23.4% of the pool.

The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 69.1% as of the October 2024 reporting, with a current WA stabilized LTV of 51.4%. In comparison, these figures were 64.6% and 61.9%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current high interest rate or wide capitalization rate (cap rate) environment. In the analysis for this review, Morningstar DBRS raised LTVs for nine loans, representing 73.4% of the current trust balance, generally reflective of higher cap rate assumptions as compared with the implied cap rates based on the appraisals.

Through Q2 2024, the collateral manager had advanced cumulative loan future funding of $30.8 million to five of the outstanding individual borrowers per Morningstar DBRS' calculations. The largest cumulative advance ($20.4 million) since November 2023 to a single borrower was for the borrower of the Ardmore at Flowers & Ardmore at Topside loan (Prospectus ID#16; 4.2% of the pool), which is secured by two multifamily properties, totaling 678 units, in Knoxville, Tennessee, and Raleigh, North Carolina. The borrower's business plan is to finish building the properties as well as stabilize occupancy and rental rates. While Morningstar DBRS did not receive an update regarding the allocation of the advanced funds to date, according to the Q2 2024 quarterly collateral report, the sponsor has received the certificate of occupancy for all units across both properties. According to the individual property October 2024 rent rolls, Ardmore at Flowers was 66.2% occupied with an average rental rate of $1,511 per unit and Ardmore at Topside was 66.0% occupied with an average rental rate of $1,625 per unit as both properties remained in the initial lease-up phase. The borrower has approximately $1.4 million of future funding remaining.

An additional $31.2 million of loan future funding allocated to six individual borrowers remains available. The largest portion of available funds ($16.8 million) is for the borrower of the Kauai Beach Resort loan (Prospectus ID#13; 8.2% of the pool), which is secured by a 149-key, beachfront resort on the island of Kauai in Hawaii. The borrower's business plan is to acquire and rebrand the property from an independent hotel to an Outrigger hotel through a value-add renovation program. Through Q2 2024, $1.1 million of future funding had been advanced, with the borrower successfully bringing the hotel under the Outrigger management system. Although performance since issuance has been stable, according to the Q2 2024 collateral manager's report, the renovation program is likely to commence in H2 2024.

As of October 2024, there are no specially serviced or delinquent loans in the pool, nor have any loans been modified. There are also no loans on the servicer's watchlist. Six loans, representing 48.9% of the pool, are scheduled to mature over the next 12 months. Each loan has outstanding maturity extension options, subject to performance hurdles and the requirement to purchase new interest rate caps, among other terms. Morningstar DBRS expects most of the individual borrowers to successfully exercise these options, if necessary. To date, the borrower of only one loan, Vancouver Tech Center (Prospectus ID#15; 6.8% of the pool), has exercised its first extension option, extending loan maturity to November 2024. Morningstar DBRS has reached out to the servicer about the borrower's plans regarding the upcoming maturity and if it will potentially exercise the second, one-year extension option. Per a recent update, the borrower has yet to confirm. According to the loan agreement, the second extension option is subject to the property meeting a minimum 9.0% debt yield hurdle and the borrower purchasing a new interest rate cap agreement. Based on the property's Q2 2024 annualized NCF of $2.5 million, the implied debt yield equates to approximately 7.7%, suggesting a loan modification may be necessary to exercise the second extension option.

Morningstar DBRS' credit ratings on the notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

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 (August 13, 2024), 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 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), 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

-- 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, 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.

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

Financial Obligations of the issuer are listed as follows:
Class A Interest Distribution Amount
Class A Notes Principal Amount
Class A-S Interest Distribution Amount
Class A-S Notes Principal Amount
Class B Interest Distribution Amount
Class B Notes Principal Amount
Class C Interest Distribution Amount
Class C Notes Principal Amount
Class D Interest Distribution Amount
Class D Notes Principal Amount
Class E Interest Distribution Amount
Class E Notes Principal Amount
Class F Interest Distribution Amount
Class F Notes Deferred Interest
Class F Notes Principal Amount
Class G Interest Distribution Amount
Class G Notes Deferred Interest
Class G Notes Principal Amount