Morningstar DBRS Upgrades Credit Ratings on Three Classes of PFP 2021-8, Ltd.

DBRS, Inc. (Morningstar DBRS) upgraded its credit ratings on the following classes of notes issued by PFP 2021-8, Ltd.:

-- Class B Notes to AAA (sf) from AA (high) (sf)
-- Class D Notes to A (sf) from BBB (high) (sf)
-- Class E Notes to A (low) (sf) from BBB (sf)

Morningstar DBRS also confirmed its credit ratings on the remaining classes of notes as follows:

-- Class C Notes at A (high) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable. Morningstar DBRS notes interest can be deferred to the Class C, Class D, Class E, Class F, and Class G Notes. As such, Morningstar DBRS has capped the credit ratings of the Class C, Class D and Class E Notes as shown above.

The credit rating upgrades reflect the increased credit support to the bonds as there has been collateral reduction of 68.0% since issuance as a result of successful loan repayment, an increase from 41.2% from the previous Morningstar DBRS credit rating action in February 2024. The transaction continues to primarily consist of office and multifamily collateral, representing 41.6% and 38.3% of the current trust balance, respectively. The increased credit support to the bonds also serves as a mitigant to the transaction in the context of loans secured by office properties, as the majority of these borrowers are behind in their respective business plans to increase property cash flow and value. Furthermore, all borrowers of these loans are likely to face difficulties in securing refinance capital or selling the properties at respective loan maturity. Seven of the eight outstanding loans secured by office properties, representing 35.0% of the current trust balance, mature throughout 2025. The transaction benefits from an unrated $90.8 million first loss piece as well as below investment-grade rated bonds totaling $96.4 million. In the event select office loans become distressed, the current credit ratings to Classes F and G reflect the potential credit risk, justifying the Stable trends.

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 info-DBRS@morningstar.com.

The pool's collateral initially consisted of 46 floating-rate loans secured by 55 properties, many of which were in a period of transition with plans to stabilize and improve asset values. As of the January 2025 reporting, there were 17 loans in the transaction, secured by 18 properties. Since the previous Morningstar DBRS credit rating action, 10 loans with a cumulative former trust balance of $299.8 million have been repaid in full. The transaction was structured with a 36-month Permitted Funded Companion Participation Acquisition Period, which ended with the September 2024 Payment Date. Beyond the multifamily and office concentrations noted above, there are two hotel properties, representing 11.0% of the current pool balance and two industrial properties, representing 9.0% of the current pool balance.

The collateral pool exhibits similar leverage from issuance with a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 66.8% and a WA stabilized LTV of 59.5%. In comparison, these figures were 68.7% and 57.3%, respectively, at closing. Morningstar DBRS recognizes these appraised values may be inflated as the majority of the individual property appraisals were completed between 2019 and 2021 and may not reflect the current higher interest rate or widening capitalization-rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 14 loans, representing 84.9% of the current pool balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

Through December 2024, the lender had advanced $33.8 million in loan future funding to 11 of the remaining individual borrowers to aid in property stabilization efforts. There is no available loan future funding remaining to any remaining borrowers as access to any formerly remaining funds has expired. The largest cumulative advance ($11.6 million) made to a single borrower is the Greenwood Corporate Plaza loan (Prospectus ID#18, 10.0% of the current pool balance), which is the largest loan in the pool. The loan is secured by a four-building office property in Greenwood, Colorado, totaling 412,869 square feet. The borrower's business plan at closing was to complete a $3.8 million capital expenditure (capex) program and spend up to an additional $9.2 million on leasing costs. The borrower is behind in its business plan and the loan was modified in July 2024 to allow the borrower to exercise the first maturity date extension option. Additional terms included a reduction in the pay rate to 6.50% with any overage accrued and due at maturity, ongoing monthly rollover, and capex deposits were waived, loan payments were converted to interest only, and the second maturity extension option can be exercised in July 2025 if the property has a minimum occupancy rate of 50.0%.

As of October 2024, the property was 65.8% occupied, a slight improvement from the December 2023 occupancy rate of 62.9%. It appears a portion of the advanced future funding dollars were converted and deposited into existing reserve accounts, as according to December 2024 reporting, $1.8 million held in reserve are held in Advance Leasing and Renovation Reserve accounts. The trailing 12-month period ended October 31, 2024, net operating income of $2.2 million is indicative of a 5.7% cap rate based on the original in place appraised property value of $38.6 million. As such, Morningstar DBRS believes the current market value has declined and in its current analysis, applied an upwards cap rate adjustment, resulting in a stressed LTV and loan expected loss approximately two times greater than the expected loss for the pool.

As of the January 2025 remittance, there were no loans in special servicing; however, there are 13 loans, representing 74.9% of the current trust balance on the servicer's watchlist. The loans have been flagged for low occupancy rates, low debt service coverage ratios and upcoming maturity dates. In total, 16 loans, representing 93.4% of the current trust balance, have scheduled maturity date throughout 2025. While most loans have outstanding extension options, not all borrowers are expected to qualify given current property performance metrics. In these cases, Morningstar DBRS expects lenders and borrowers to agree to mutually beneficial loan modifications to allow borrower to extend loans with borrowers likely required to contribute fresh equity to the transaction. To date, borrowers across 11 loans, representing 63.9% of the current trust balance, have received loan modifications or forbearances, which have generally allowed borrowers to exercise extension options, waive the purchase of new interest rate cap agreements or to receive temporary payment relief. In exchange borrowers have made principal curtailments, deposited funds into interest reserve accounts and agreed to cash management.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (December 13, 2024) https://dbrs.morningstar.com/research/444617.

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes C, D, E, F, and G Notes 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 to Classes C, D, and E Notes is the structural features (loan or transaction) and/or provisions in other relevant methodologies outweigh the quantitative model output as interest can be deferred to the classes. The rationale for the material deviations to Classes F and G Notes is uncertain loan-level event risk as the majority of office collateral in the transaction has yet to stabilize.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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 CMBS Multi-Borrower Rating Methodology (December 13, 2024)/North American CMBS Insight Model Version 1.2.0.0
https://dbrs.morningstar.com/research/444616
-- 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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024)
https://dbrs.morningstar.com/research/428623
-- Legal Criteria for U.S. Structured Finance (December 3, 2024)
https://dbrs.morningstar.com/research/444064

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.