Morningstar DBRS Confirms Credit Ratings on All Classes of ELP Commercial Mortgage Trust 2021-ELP

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-ELP issued by ELP Commercial Mortgage Trust 2021-ELP as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (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-to-improving performance of the underlying collateral, as evidenced by the year-over-year growth in net cash flow (NCF) and steady overall occupancy rates for the collateral portfolio, which have averaged above 90.0% since issuance.

At issuance, the loan was secured by the borrower's fee-simple and leasehold interests in a portfolio of 142 industrial properties totalling approximately 28.0 million square feet (sf) across 18 markets and 17 U.S. states. As of the October 2024 reporting, only one property, 7172 Columbia Gateway Drive, has been released. The current trust balance of $1.8 billion represents a nominal collateral reduction of 0.1% since issuance. Property releases are subject to a payment release price of 105.0% of the allocated loan amount (ALA) for the first 25.0% of the original principal balance and 110.0% of ALA thereafter. Proceeds from the first 25.0% of property releases are distributed on a pro rata basis across the capital stack, with all subsequent principal repayment applied sequentially. Morningstar DBRS adjusted its LTV thresholds to account for the structure of the transaction as well as what Morningstar DBRS considered to be generally weak release premiums associated with the partial release of properties permitted by the mortgage loan documents.

The loan sponsors, EQT Exeter and EG Industrial Properties, LLC (G Investor), entered a contract to recapitalize a larger platform of more than 300 industrial properties for approximately $6.9 billion in 2020. G Investor contributed approximately $2.7 billion in connection with the broader recapitalization, of which approximately $591.5 million was allocated to the subject portfolio. Loan proceeds totalling $1.8 billion, along with sponsor equity, were used to finance the acquisition of the portfolio at a purchase price of $2.3 billion and cover closing costs. G Investor is owned by GIC Realty Private Limited, which is a global investment firm with investments across several asset classes, including real estate in more than 40 countries, while EQT Exeter is one of the largest real estate investment managers in the world.

The interest-only, floating-rate underlying loan had an initial two-year term with three one-year extension options. The loan is currently scheduled to mature in November 2024; however, the servicer has confirmed that the borrower intends to exercise its second extension option. To exercise the extension option, the borrower is required to purchase an interest rate cap agreement with a strike rate such that the new cap results in a minimum debt service coverage ratio (DSCR) of 1.10 times (x) (subject to a maximum strike rate of 4.50%).

The remaining collateral is located across 17 states, with the largest market concentrations in Memphis, Tennessee (22 properties; approximately 19.6% of net operating income (NOI)), Indianapolis (32 properties; approximately 16.0% of NOI), and Louisville, Kentucky (15 properties; approximately 11.1% of NOI). The portfolio primarily consists of general industrial, warehouse/distribution and research and development/flexible space with approximately 8.0% of the net rentable area classified as office space. According to the financial reporting for the trailing six months ended June 30, 2024, the portfolio generated annualized NCF of $122.3 million (a DSCR of 0.96x) ¿ 9.0% and 13.1% greater than the YE2023 and Morningstar DBRS figures of $112.2 million (a DSCR of 0.93x) and $108.1 million (a DSCR of 3.58x), respectively. As of June 2024, the portfolio was approximately 94.0% occupied, generally in line with the issuance occupancy rate of 97.2%. Although occupancy and cash flow remain healthy, the loan's DSCR has declined from issuance, primarily because of an increase in debt service obligations given the floating-rate nature of the loan.

At issuance, Morningstar DBRS derived a value of $1.6 billion based on the Morningstar DBRS NCF of $108.1 million and capitalization rate of 6.75%. The Morningstar DBRS value represents a -36.7% variance from the issuance appraised value of $2.5 billion. The resulting Morningstar DBRS loan-to-value ratio (LTV) was 109.3% compared with the LTV of 69.3% based on the appraised value at issuance. Morningstar DBRS maintained positive qualitative adjustments totalling 7.5% to reflect low cash flow volatility, generally strong property quality, and stable market fundamentals. The subject portfolio benefits from both favorable geographic diversification and favorable tenant granularity, both of which contribute to potential cash flow stability over time.

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 01, 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 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

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

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.