Morningstar DBRS Confirms Credit Ratings on Shelter Growth CRE 2021-FL3 Issuer Ltd

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by Shelter Growth CRE 2021-FL3 Issuer Ltd (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C to at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the increased credit support available to the bonds as a result of successful loan repayments, with collateral reduction of 48.4% since issuance. While the paydown is a positive development, Morningstar DBRS also notes that the transaction is somewhat exposed to adverse selection as four of the remaining 10 loans, representing nearly half of the current trust balance, are in special servicing. The issues with those loans are primarily summarized as an inability to execute on the respective business plans, with varying levels of increased risk observed for those loans as a result. To account for those increased risks, Morningstar DBRS' analysis for this review considered stressed scenarios to increase the loan level expected losses (ELs), generally reflective of stressed values for the collateral properties or upward probability of default (POD) adjustments based on the level and source of the increased stress. For further information on the driver loans for the transaction, please see the loan writeups in the Surveillance Performance Update Report that accompanies this press release. While this approach increased the pool EL by nearly a full percentage point from the prior credit rating action's analysis, there was no downward pressure for the credit ratings as the transaction benefits from an unrated first-loss bond of $32.9 million, as well as two below investment-grade bonds, i.e., Class G and Class H, totalling $36.9 million, which combine for significant cushion against realized losses should the increased risks for those loans ultimately result in dispositions.

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 as well as business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 20 floating-rate mortgages secured by 26 transitional properties with a cut-off date balance totalling approximately $453.9 million. As of the October 2024 remittance, the pool comprised 10 loans secured by 15 properties with a cumulative trust balance of $234.3 million. Most of the loans are backed by collateral in a period of transition with plans to stabilize performance and improve the asset value. The collateral pool for the transaction is static with no reinvestment period; however, the Issuer did have the right to use principal proceeds to acquire fully funded future funding participations during the Permitted Funded Companion Participation Acquisition period, which expired in September 2023. Since issuance, 10 loans have been repaid from the pool, including three loans with a former cumulative trust balance of $36.8 million that repaid since the previous Morningstar DBRS credit rating action in November 2023.

The transaction is concentrated by loans secured by multifamily properties with seven loans, representing 78.8% of the current pool balance, secured by apartment property types, while the remaining three loans are secured by three different property types in senior-housing, student-housing, and office.

Leverage across the pool has remained generally consistent with the issuance metrics as of the October 2024 reporting, as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 71.7%, with a current WA stabilized LTV of 61.9%. In comparison, these figures were 71.5% and 65.6%, respectively, at issuance. Most of the individual property appraisals for the remaining collateral were completed in 2021 and as such, may not fully reflect the effects of increased interest rates and/or widening capitalization rates since that time. To account for this factor, Morningstar DBRS applied upward LTV adjustments to increase the loan level ELs where applicable.

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 private rating letters 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 DBRS Morningstar 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 US 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 credit ratings assigned to Classes C, F, and G materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan level event risk given the transaction is partially exposed to adverse selection highlighted by the high concentration of loans in special servicing.

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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 Version 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/morningstar-dbrs-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840/legal-criteria-for-us-structured-finance

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/410863.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].