Morningstar DBRS Confirms Credit Ratings on All Classes of STWD 2019-FL1, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of notes issued by STWD 2019-FL1, Ltd.:

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

Morningstar DBRS also changed the trends on Classes E, F, and G to Stable from Negative, while the trends on Classes A-S, B, C, and D remain Stable.

The credit rating confirmations and trend changes reflect the increased collateral reduction to the transaction, which, as of January 2025 reporting, totaled 65.1% since closing with an additional 15.1% in collateral reduction realized since the previous Morningstar DBRS credit rating action in March 2024. In its previous review, Morningstar DBRS noted its concern of increased credit risk to the transaction related to the concentration of loans secured by properties in the downtown Houston and Los Angeles markets, which have been underperforming in recent years. While select borrowers remain behind in the respective business plans, the credit ratings reflect the outstanding credit risks and the increased subordination to the notes supports the trend changes. As of January 2025, the unrated, first-loss piece has a balance of $77.0 million and the below-investment-grade rated bonds, Class F and Class G, have balances of $53.6 million and $33.0 million, respectively.

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.

As of the January 2025 remittance, the trust reported an outstanding balance of $383.8 million with seven loans remaining in the trust. Since the previous Morningstar DBRS credit rating action, three loans were paid in full, totaling $156.2 million. The trust is concentrated by loans secured by multifamily (three loans representing 43.1% of the current trust balance) and office (three loans representing 40.1% of the current trust balance) collateral. The remaining loan is secured by a hotel property in downtown Houston.

The largest loan in the trust, 700 Louisiana and 600 Prairie Street (Prospectus ID#2, 25.0% of the current trust balance), is secured by a 1.3 million-square-foot (sf) office tower and parking garage in downtown Houston. The loan has a current A note balance of $252.0 million with a $96.0 million piece securitized in the trust. The loan was modified in February 2024, extending the loan maturity to January 2026 with a potential fully extended maturity date of January 2028. A preferred equity partner was also added to the transaction with plans to contribute up to $30.0 million of capital for leasing costs, capital expenditures, and projected carry costs. As of the December 2024 rent roll, the property was 67.2% occupied, up from 65.2% as of December 2023. The occupancy rate continues to trail the Morningstar DBRS and Issuer stabilized rates concluded at loan closing of 81.2% and 85.9%, respectively. According to the collateral manager, the property generated net operating income (NOI) of $18.4 million at YE2024, resulting in a debt service coverage ratio (DSCR) of 1.14 times (x) and a debt yield of 7.3% In comparison, these figures were $18.1 million, 1.10x and 7.2% at YE2023 as year-over-year performance remains relatively unchanged. In keeping with its previous analysis, Morningstar DBRS continues to assert the asset is likely over leveraged as the implied cap rate is 6.5% when calculated off the updated 2024 property valuation of $284.0 million. According to the CBRE United States Cap Rate Survey H1 2024, Class A Value-Add office properties in the downtown Houston market were valued with cap rates ranging from 11.50% to 12.50%. The reported cap rate range for stabilized Class A properties in the market was between 8.75% of 9.50%. Morningstar DBRS notes the borrower has up to three additional years to stabilize the collateral; however, In its current analysis, Morningstar DBRS applied an upward cap rate adjustment, resulting in a loan-to-value ratio (LTV) above 100.0%; however, the analyzed property value shortfall is contained to the unrated first loss piece.

All remaining borrowers have received loan modifications or forbearance agreements, which have provided borrowers capital relief, loan extensions, and/or additional loan funding to complete business plans. As of January 2025 reporting, four loans, representing 56.5% of the current trust balance, are on the servicer's watchlist and have been flagged for low occupancy rates, low property cash flow and/or upcoming loan maturity. The largest loan on the servicer's watchlist, Hyatt Regency Houston (Prospectus ID#9, 16.8% of the current trust balance), is secured by a 955-key full-service hotel in downtown Houston. The loan was added to the servicer's watchlist in August 2024 after the property sustained damage during a May 2024 storm, including damage to the roof, rooftop mechanical systems, and water intrusion issues across several floors. Morningstar DBRS did not receive an update regarding the restoration process and insurance claim process; however, servicer commentary noted the repairs were estimated to cost $3.5 million to $4.0 million with a 90-day completion timeline. The loan is also being monitored for the upcoming July 2025 maturity date, though the borrower does retain one, final 12-month extension option. According to the YE2024 income statement, property occupancy was 47.7% with an average daily rate (ADR) of $203.73 and revenue per available room (RevPAR) of $97.10. While the occupancy rate remains low and is below the Morningstar DBRS stabilized figure of 54.0%, it has improved from the YE2023 figure of 42.2% and YE2022 figure of 39.5%. The loan has a current senior note balance of $97.6 million with a $64.6 million piece securitized in the trust. The appraiser valued the property at loan closing in 2019 with an in-place value of $111.0 million, indicative of an LTV 87.9% and a 11.7% cap rate based on the YE2024 net cash flow (NCF) of $13.0 million. While Morningstar DBRS did not receive an update regarding the borrower's exit strategy given the upcoming loan maturity, the performance of the property justifies the leverage on the property.

Including the Hyatt Regency Houston loan, three loans, totaling 42.9% of the current trust balance, have scheduled maturity dates through July 2025. The 1213 Walnut Street loan (Prospectus ID#26, 13.7% of the pool) is secured by a Class A, high-rise apartment property in downtown Philadelphia. The loan is currently on the servicer's watchlist for the upcoming March 2025 maturity date. The loan originally matured in December 2024, but the borrower was provided a short-term maturity extension. According to December 2024 rent roll, the property was 80.7% occupied with an average rental rate of $2,724 per unit. The property generated a trailing 12-months (T-12) ended November 30, 2024, NCF of $7.0 million, equating to a 0.70x DSCR and a 5.6% debt yield. At loan closing, the property was valued at $153.2 million, equating to a current LTV of 81.6% and 4.6% cap rate based on the T-12 NOI. In its current analysis, Morningstar DBRS determined the indicative cap rate to be aggressive and applied an upward adjustment with the resulting adjusted LTV slightly above 100.0%, suggesting the borrower may need to contribute fresh equity to refinance the existing debt or execute a loan modification if it does not sell the property.

The Lakeshore Towers loan (Prospectus ID#29, 12.4% of the current trust balance) is secured by a Class A 0.9 million-sf office property in Irvine, California. The loan is on the servicer's watchlist for the pending final March 2025 maturity date; however, the loan has been flagged for ongoing low occupancy and cash flow. According to the December 2024 rent roll, the property was 64.0% occupied with a YE2024 NOI of $6.3 million, which trails the Morningstar DBRS stabilized figures of 87.5% and $15.7 million, respectively. The senior loan has a $197.2 million balance with a $47.7 million piece securitized in the trust. At loan closing, the property was valued at $271 million, indicative of an LTV of 72.6% and a 2.3% cap rate based on the YE2024 NOI. Given the low cap rate, Morningstar DBRS does not expect the borrower to be able to exit the loan at maturity and will likely request a loan modification and maturity extension. If an agreement is finalized, Morningstar DBRS expects the lender to require the borrower to make a fresh equity contribution in the form of a loan curtailment or deposit(s) into reserve accounts. In its current analysis, Morningstar DBRS applied a stressed haircut to the original appraised property value, resulting in an LTV above 100.0%; however, the analyzed property value shortfall is contained to the unrated first loss piece.

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.

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 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.

DBRS, Inc.
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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 (December 13, 2024), https://dbrs.morningstar.com/research/444616/

-- 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

-- 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.