Morningstar DBRS Confirms Credit Ratings on All Classes of Morgan Stanley Capital I Trust 2021-ILP

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

-- Class A Certificates at AAA (sf)
-- Class B Certificates at AA (low) (sf)
-- Class C Certificates at A (sf)
-- Class D Certificates at BBB (sf)
-- Class E Certificates at BBB (low) (sf)
-- Class F Certificates at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the stable performance of the underlying collateral, which remains healthy, as the YE2023 reported net cash flow (NCF) of $38.7 million is above the Morningstar DBRS NCF of $32.9 million derived at issuance. The collateral consists of the borrower's fee-simple and leasehold interest in a portfolio of 61 industrial properties totaling approximately 6.9 million square feet (sf) in urban areas across eight markets and five states, with approximately 69.0% of the portfolio's net rentable area (NRA) in Chicago, Phoenix, Dallas-Fort Worth, Philadelphia, Houston, and San Antonio. The average size of the properties in the portfolio is 113,596 sf, with a weighted-average (WA) build year of 1983. The proportion of office space across the portfolio totals 19.2%. The tenant roster features a wide array of industries and sectors, ranging from food production to large-scale medical supply manufacturing, with no single tenant representing more than 2.5% of NRA.

The subject financing was part of a larger $673.0 million recapitalization of the collateral. The sponsorship group, which includes Investcorp and GIC, contributed $247.4 million of cash equity to facilitate the recapitalization, representing 33.7% of the purchase price. Morningstar DBRS generally views financings involving significant amounts of cash equity contributions from the transaction sponsors favorably given the stronger alignment of economic incentives when compared with cash-out financings. Based in New York, London, and Bahrain, Investcorp had more than $50.0 billion in assets under management as of 2023, spread across multiple asset classes including commercial real estate, private equity, and credit management. GIC is a Singapore-based investment firm with more than $750 billion in assets under management across various asset classes as of 2023. GIC was founded by the Government of Singapore to manage its foreign reserves.

The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan is scheduled to mature in November 2024; however, servicer commentary indicates that the borrower has exercised the second extension option, extending loan maturity to November 2025. There are no performance triggers, financial covenants, or fees required for the borrower to exercise any of the three one-year extension options, but each option is conditional upon, among other things, no events of default and the borrower's purchase of an interest rate cap agreement for each extension term. The borrower will be required to maintain a debt yield above 6.0% throughout the loan term or cash management provisions will be triggered.

The transaction features a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the original principal balance, where individual properties may be released from the trust at a price of 105.0% of the allocated loan amount (ALA). Proceeds are applied sequentially for the remaining 70.0% of the pool balance with the release price increasing to 110.0% of the ALA. Morningstar DBRS applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premium. The release provisions require the pool to maintain a minimum debt yield of 8.8% after each property release. Prior to the last review, the outstanding trust balance was reduced nominally by $1.5 million because of a prepayment related to the release of one small property totaling 0.3% of the ALA at issuance.

Historically, the portfolio has demonstrated strong occupancy trends, with a WA occupancy rate of 94.8% at issuance. As of the YE2023 reporting, the portfolio was 97.0% occupied compared with the YE2022 figure of 99.0%. Morningstar DBRS' initial analysis of the portfolio indicates that leases representing 11.9% of portfolio NRA are set to expire in 2024, followed by 13.5% collectively in 2025 and 2026. Based the YE2023 reporting, the NCF of $38.6 million reflected a debt service coverage ratio (DSCR) of 1.25 times (x), compared with the YE2022 NCF of $34.4 million, reflecting a DSCR of 2.47x. The decline in the DSCR is primarily driven by the significant increase in debt service due to the loan's floating-rate nature, as effective gross income remains 8.2% above the Morningstar DBRS figure while expenses have only increased by 7.9%.

In the analysis for this review, Morningstar DBRS applied a standard surveillance haircut to the YE2023 NCF and maintained the capitalization rate of 7.25% applied at issuance, which resulted in a Morningstar DBRS value of $522.6 million, a variance of -29.9% from the issuance appraised value of $745.7 million for the remaining collateral. The updated Morningstar DBRS value implies a loan-to-value ratio (LTV) of 85.1%, compared with the LTV of 59.6% on the issuance appraised value for the remaining collateral and the 98.3% Morningstar DBRS LTV at issuance. To evaluate the potential for credit rating upgrades given the increases in cash flow, Morningstar DBRS applied a conservative haircut to the YE2023 NCF and a 7.25% capitalization rate, resulting in a stressed value of $426.6 million. The LTV sizing benchmarks resulting from that stressed analysis indicated that credit rating upgrades were not warranted with this review. The implied Morningstar DBRS LTV for the stressed scenario is 104.2%. As part of the analysis, Morningstar DBRS maintained positive qualitative adjustments totaling 4.0% in the LTV sizing benchmark to reflect the low historical vacancy, low cash flow volatility, and desirable property quality.

The credit ratings assigned to the Class C, D, E, and F Certificates are lower than the results implied by the LTV sizing benchmarks by three or more notches. These variances are warranted given the lack of demonstrated sustained loan performance trends. Although the improvement in NCF since issuance is notable, based on the conservative upgrade stress applied, the LTV sizing benchmarks indicated that upgrades were not warranted with this review.

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) 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 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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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.

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