Morningstar DBRS Confirms Credit Ratings on All Classes of A10 SACM 2021-LRMR

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-LRMR issued by A10 SACM 2021-LRMR as follows:

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

All trends are Stable.

The credit rating confirmations reflect Morningstar DBRS' view that despite the delays in the business plan, the borrower continues to make meaningful progress and ultimately remains committed to achieving property stabilization. During 2024, the borrower increased its capital improvement budget by approximately $22.3 million, which is to be funded entirely out of pocket, and signed, modified, or renewed leases with 18 tenants, representing 32.3% of the property net rentable area (NRA), which were either signed at or above market rental rates and had a weighted-average lease term of nearly 8.5 years. In addition, the loan is structured with a $25.0 million limited guaranty by the sponsor, which may be terminated upon the loan meeting certain performance metrics including an average occupancy rate of 90.0% for a period of six months, a net operating income (NOI) debt yield of 9.0% for a period of three months, and a loan-to-value ratio (LTV) of 60.0% based on an updated appraisal.

The loan is secured by the borrower's fee-simple and leasehold interests in Larimer Square, a 246,000-square-foot (sf) mixed-use property consisting of retail and office components in Denver. Larimer Square is a protected historic district and comprises 26 buildings, including a parking garage on 12 separate real estate tax parcels. Two of the buildings are subject to ground leases.

The four-year loan paid interest-only (IO) through September 2024, at which point the loan began to amortize after failing to achieve certain performance thresholds. The loan has an initial maturity in July 2025, with two 12-month extension options available. The first extension option requires an occupancy rate of 75.0%, a NOI debt yield of 9.0% on trailing three-month basis, and an LTV requirement of 60.0% based on a new appraisal, while the second extension is based on the lender's sole discretion. As of September 2024, the property reported an occupancy of 61.7% and an NOI debt yield of 2.5% on a trailing-12 months basis, as leasing momentum has only recently gained meaningful traction. The collateral manager has indicated the borrower will not meet the extension requirements but is reportedly preparing a proposal to address the stipulations. Given the borrower's increased commitment and positive leasing momentum, Morningstar DBRS anticipates the loan extension will ultimately be approved.

The fully funded loan amount of $88.7 million consisted of an initial loan balance of $61.0 million and $27.7 million of future funding, which, along with future sponsor equity totaling $30.9 million, was to be used to execute the sponsor's business plan, which includes capital improvements in order to develop the property into a 24-hour destination for the local population, while catering to office and retail demands. The renovations were initially budgeted at $30.9 million and were to be completed in three phases. Phase I consists of repairs to the roof and facades on the majority of the 26 buildings at a cost of $2.3 million. Phase II mainly consists of the redevelopment of several buildings to repurpose the space for large office tenant users at a total budgeted cost of $16.0 million. Phase III, which originally consisted of improvements to the streetscape and to the exteriors of the property, is no longer part of the scope of work.

According to the collateral manager, Phase I has been completed, with work on Phase II currently in process. Through February 2025, $12.8 million (45.0%) of the future funding has been advanced to the borrower, with $14.9 million remaining for capital expenditure and tenant leasing costs. The borrower's budget for this project has increased to $53.2 million, due to increased scope of work associated with improving access to the buildings. The borrower anticipates receiving $4.4 million in historic tax credits, reducing the net budget amount to $48.8 million, with additional costs to be funded entirely out of pocket. While these additional improvements may further delay the borrower's business plan, Morningstar DBRS credits this development as a positive consideration in its analysis as it strengthens the sponsor's commitment to the property.

While occupancy has remained depressed as the sponsor continues to implement its capital improvement program, leasing momentum has picked up during the last six months, with a number of long-term leases signed. According to the September 2024 rent rolls, the portfolio had an occupancy rate of 61.7%, an improvement from 50.3% in June 2023. Office tenants comprising 3.7% of NRA have signed recent leases at an average rental rate of $38.00 per square foot (psf) with tenant allowances of $150 psf. The most recent retail tenant, comprising 1.6% of NRA, signed a lease at a rental rate of $60.50 psf with tenant allowances of $60.00 psf. At issuance, Morningstar DBRS analyzed office space with a rental rate of $35.00 psf, with new and renewal leasing costs of $35.00 psf and $18.00 psf, respectively, and a rental rate of $50.00 psf for both retail and restaurant space with new and renewal leasing costs of $75.00 psf and $40.00 psf, respectively.

During the next 12 months, tenants representing 9.2% of the NRA have lease expirations scheduled. According to Reis, retail properties in the Midtown/Central Business District submarket of Denver had average asking rental rates of $23.36 psf, with a vacancy rate of 6.4% and a projected five-year vacancy rate of 7.9%, while office properties had average asking rental rates of $34.85 psf with a vacancy rate of 28.9% and a projected five-year vacancy rate of 26.1%. Morningstar DBRS analyzed the loan with a stabilized vacancy rate of approximately 10.0% for the entire portfolio, which is in line with the appraiser's estimate.

While net cash flow generated to date has yet to achieve a breakeven debt service coverage ratio, most recently reported at $1.7 million based on the trailing 12-month financials ended June 30, 2024, the recent leasing momentum is expected to continue as the borrower continues to execute the planned capital improvement program. As such, performance is expected to improve with updated reporting and as rental abatements burn off. For this review, Morningstar DBRS maintained its Stabilized Net Cash Flow (NCF) of $7.2 million, representing a variance of -21.1% from the sponsor's projected stabilized NCF of $9.2 million. Morningstar DBRS valued the collateral at a stabilized value of $96.4 million (fully funded LTV of 92.0%) based on the concluded NCF and a capitalization rate of 7.50%. Based on transitional nature of the property and the heavy lift required to stabilize it, Morningstar DBRS decreased its LTV thresholds by 7.5%.

Morningstar DBRS' credit rating 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' 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, or 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 (February 28, 2025).
https://dbrs.morningstar.com/research/448963/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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Toronto, ON M5H 3M7 Canada
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 (February 28, 2025), https://dbrs.morningstar.com/research/448962
-- 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
-- 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/417279.

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