Morningstar DBRS Confirms Credit Ratings on All Classes of STWD Trust 2021-LIH

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-LIH issued by STWD Trust 2021-LIH 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 (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations are reflective of the overall stable performance of the transaction, as evidenced by the stable-to-improving cash flow and occupancy reported since issuance. The portfolio is backed by multifamily properties in strong performing submarkets of Florida, a factor that has contributed to the overall ability to maintain cash flow stability and continue to perform in line with Morningstar DBRS' expectations at issuance.

Given the properties' location in Florida, it is noteworthy that there can be exposure to significant weather events, as recently demonstrated by hurricane activity with Hurricane Helene (September 2024) and Hurricane Milton (October 2024), which affected various parts of the state. The servicer reports that the borrower has confirmed that Woodbridge at Walden Lake (6.4% of the allocated loan amount (ALA)) and Westminster (9.2% of the ALA) sustained the most damage across the portfolio with those storms; repair costs across both properties are estimated to total approximately $1.0 million. Eight of the total 236 units at the Woodbridge at Walden Lake property may be unavailable for some time because of water intrusion. The remaining properties in the portfolio reported minor damages that have estimated repair costs of less than $25,000 each.

The $380 million loan is secured by the fee-simple interest in 12 affordable housing multifamily properties totaling 3,082 units throughout five Florida markets including Orlando, Tampa, Daytona Beach, West Palm Beach, and Jacksonville. The properties qualify for and receive 100% exemption from ad valorem taxes pursuant to the Property Tax Exemption Statute (Florida Statute 196.1978(2)). The two-year interest-only floating-rate loan had an initial maturity in November 2023; however, the borrower has exercised its second of three annual extension options, extending the maturity date to November 2025. The loan is structured with one remaining one-year extension option; though there are no performance-contingent tests for the extension option, an Interest Rate Cap agreement must be in place.

The loan allows for pro rata paydowns for the first 20.0% of the original principal balance. The prepayment premium for the release of individual assets is 105.0% of the ALA for the first 15.0% of the original principal balance (until the outstanding principal balance has been reduced to no less than $323.0 million), and 110.0% of the ALA for the release of individual assets thereafter. Morningstar DBRS considers the release premium to be weaker than a generally credit-neutral standard of 115.0%, especially given the borrower's ability at its sole option to obtain an updated appraisal(s) and request the reallocation amount of the loan amount of the related property or properties. To date, there have been no property releases.

The portfolio reported a consolidated occupancy rate of 99.0% in June 2024, in line with the occupancy rate of 98.6% at issuance. As per the financial statement for the trailing six months (T-6) ended June 30, 2024, the annualized net cash flow (NCF) was reported at $26.1 million, compared with YE2023 NCF of $24.3 million, and the Morningstar DBRS NCF of $18.4 million at issuance. The debt service coverage ratio (DSCR) for the same time periods were reported at 0.89 times (x), 0.88x, and 2.03x, respectively. The decline in DSCR from issuance expectations is attributable to the increase in debt service payments given the floating-rate nature of the loan amid the current interest rate environment. The borrower currently has an interest rate cap agreement through November 2026 to hedge exposure to rising interest rates, which would result in a minimum DSCR of 1.10x.

As of Q2 2024, Reis reports indicate that the respective submarkets are exhibiting strong fundamentals, with a weighted-average (WA) vacancy rate of approximately 1.0% and an average five-year vacancy rate forecast of 1.3% by December 2029. Though the underlying properties are considered to be in strong, high-growth markets with favorable multifamily demand trends, Morningstar DBRS notes the increasing insurance costs for the subject portfolio, which increased approximately 66% since closing and which is expected to remain elevated through maturity.

At issuance, Morningstar DBRS derived a value of $334.2 million, based on a concluded cash flow of $18.4 million and a capitalization rate of 5.5%, resulting in a Morningstar DBRS Loan-to-Value Ratio (LTV) of 113.7% compared with the LTV of 72.1% based on the appraised value at issuance. Morningstar DBRS made positive qualitative adjustments totaling 7.5% to the LTV sizing benchmarks to account for the portfolio's historical performance and strong submarket fundamentals. Given ongoing revenues and occupancy, as well as the borrower's capital expenditure investments since acquisition, Morningstar DBRS expects the portfolio will continue to exhibit stable to improved performance.

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/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings).

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
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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 Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699

-- 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 (October 28, 2024), https://dbrs.morningstar.com/research/441840

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

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.