Morningstar DBRS Confirms Credit Ratings on All Classes of SREIT Commercial Mortgage Trust 2021-MFP2

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-MFP2 issued by SREIT Commercial Mortgage Trust 2021-MFP2 as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (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 transaction, as evidenced by the net cash flow (NCF) growth since issuance and stable occupancy rates across the portfolio. The portfolio is backed by multifamily properties in desirable submarkets in North Carolina and Florida that continue to exhibit generally stable occupancy rates and report increased average rental rates.

The transaction is secured by the borrower's fee-simple interest in nine garden-style multifamily properties, totaling 3,441 units across North Carolina (six properties, 58.0% of the allocated loan amount (ALA)) and Florida (three properties, 42.0% of the ALA). The sponsor, Starwood Real Estate Income Trust, Inc. (SREIT), contributed $380.1 million of equity in the acquisition of the subject portfolio. The interest-only, floating-rate loan had an initial maturity of December 2023 and was structured with three one-year extension options. Each of the extension options requires the purchase of a new interest rate cap agreement, but they are not subject to performance triggers or financial covenants. According to the servicer, the second maturity extension, which would extend the loan to December 2025, has been requested, leaving the single one-year extension option remaining.

The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 20.0% of the original principal balance, with customary debt yield and loan-to-value ratio (LTV) tests. The prepayment premium for the release of individual assets is 105% of the ALA for the first 20% of the principal amount, and 110% of the ALA thereafter. Morningstar DBRS considers the release premium to be weaker than the generally credit-neutral standard of 115.0%. To date, there have been no property releases.

As of the June 2024 rent roll, the portfolio reported an occupancy of 91.8%, compared with the YE2023 and issuance figures of 93.0% and 95.0%, respectively. The portfolio reported a weighted-average (WA) rental rate of $1,687 per unit, which is a slight increase from the June 2023 figure of $1,672 per unit, and comfortably above the $1,368 per unit at issuance. According to Reis, the WA vacancy rate across the represented submarkets for Q3 2024 was 6.9%, with a five-year forecast vacancy rate of 5.8%. Despite the small year-over-year decrease in occupancy, the NCF as of YE2023 was reported at $39.7 million with a debt service coverage ratio (DSCR) of 1.70 times (x). For comparison, the YE2022 NCF was $37.8 million with a DSCR of 1.59x, and the Morningstar DBRS NCF derived at issuance was $31.8 million with a DSCR of 2.14x. The decline in the DSCR from issuance is attributable to the increased debt service payments given the floating-rate nature of the loan.

Given the properties' locations in Florida and North Carolina, Morningstar DBRS requested an update from the servicer about any potential damages to the subject properties from Hurricane Helene (September 2024) and Hurricane Milton (October 2024). As per the servicer's response, no damages were reported across the portfolio; however, Morningstar DBRS expects concerns about rising insurance costs to persist for properties in high climate risk areas. The purchase of an interest rate cap agreement, while mitigating interest rate volatility risks, is also representative of a sizable cost to the borrower. Given the rise in interest rates since the transaction's closing in 2021, Morningstar DBRS also notes that refinance risks have increased since issuance. Mitigating factors include the significant equity contribution and the cash flow growth since issuance, as well as the overall appeal of the portfolio.

At issuance, Morningstar DBRS derived a value of $470.8 million based on the Morningstar DBRS NCF of $31.8 million and a capitalization rate of 6.75%, resulting in a Morningstar DRBS LTV of 134.6% compared with the LTV of 65.0% based on the appraised value at issuance. Positive qualitative adjustments totaling 5.75% were applied to the LTV Sizing Benchmarks to reflect the continued stable portfolio occupancy, growing average rental rates, and location in well-performing submarkets with an average vacancy rate that is projected to continue to tighten over the next five years.

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/north-american-cmbs-surveillance-methodology).

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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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/north-american-single-assetsingle-borrower-ratings-methodology)

-- 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)

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

-- 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)

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

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.