Morningstar DBRS Upgrades Credit Ratings on Three Classes of HGI CRE CLO 2021-FL1, LTD.

DBRS, Inc. (Morningstar DBRS) upgraded its credit ratings on three classes of notes issued by HGI CRE CLO 2021-FL1, LTD. as follows:

-- Class B to AA (high) (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A at AAA (sf)
-- Class A-S at AAA (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 upgrades reflect the increased credit support to the bonds as there has been collateral reduction of 47.9% since issuance as a result of successful loan repayment, with an additional 12.1% realized since the previous Morningstar DBRS credit rating action in April 2024. Additionally, the trust continues to be solely secured by multifamily collateral, which has historically exhibited lower default rates and retained values in times of market downturns compared with other property types. While one loan, representing 8.3% of the current trust balance, remains in special servicing and is real estate owned (REO), the liquidated losses concluded by Morningstar DBRS in its current analysis are contained to the unrated $48.8 million equity bond. Additionally, while there are a number of borrowers behind in the respective business plans, the current credit ratings mitigate the increased execution and credit risk. As of February 2025, the below-investment-grade rated bonds, Class F and Class G, have balances of $33.5 million and $20.2 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.

The initial collateral included 23 mortgage loans or senior notes secured by multifamily properties with an initial cut-off date balance totaling $498.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values for the underlying assets. The transaction was formerly a managed vehicle with an 18-month reinvestment period, which expired with the January 2023 Payment Date. As of the February 2025 remittance, the pool comprises 20 loans secured by 25 properties with a cumulative trust balance of $291.0 million. Since April 2024, seven loans with a former cumulative trust balance of $67.6 million have been repaid in full.

The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 68.0% as of the February 2025 reporting, with a current WA stabilized LTV of 67.0%. In comparison, these figures were 73.9% and 62.7%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and 2022 and may not reflect the current interest rate or capitalization rate (cap rate) environments. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments for 14 loans, representing 85.2% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

The Lofts at Twenty25 (Prospectus ID# 34; 8.3% of the current trust balance) is the only loan in special servicing. The loan, which is secured by a redeveloped 623-unit, high-rise multifamily property in Atlanta, transferred to special servicing in June 2024 for maturity default with foreclosure occurring in August 2024. The REO property was built it in 1951 as an office building and was completely gut renovated and redeveloped into its current use in 2021. The sponsor's business plan never materialized following its redevelopment as a result of weak demand combined with tenant delinquency. While the occupancy rate improved to 49.4% as of December 2024 rent roll from a prior low of 29.4% as of February 2024, occupancy remains below the 57.6% rate at closing. The senior loan debt exposure of $97.6 million is pari passu with two other Morningstar DBRS-rated transactions including HGI 2021-FL2 and HGI 2022-FL3. The property was reappraised in July 2024 at a value of $74.4 million, down from $149.9 million at closing. According to the collateral manager's Q4 2024 update, the workout strategy is to stabilize the asset over a two- to four-year period. In its current liquidation analysis, Morningstar DBRS applied a haircut to the current appraisal and included additional forward-looking expenses, resulting in a loan loss severity of nearly 60.0%.

As of the February 2025 remittance, 11 loans, representing 37.4% of the current trust balance, are on the servicer's watchlist for a variety of reasons, including upcoming loan maturity as well as low debt service coverage ratios and occupancy rates. All borrowers have outstanding maturity date extension options on the respective loans. At issuance, Morningstar DBRS expected temporary declines in property performance in some cases as borrowers worked toward completing the respective business plans; however, select borrowers may face additional challenges because of specific property type and current economic challenges. The largest loan on the servicer's watchlist, Marbella Apartment Homes (Prospectus ID# 34; 8.3% of the current trust balance), is secured by a 783-unit Class B multifamily property in Corpus Christi, Texas. The loan was modified in June 2024 to allow the borrower to extend the loan maturity by two years to June 2026. The pay rate on the loan was also reduced to 5.0% fixed from a floating rate spread of 3.8% plus one-month Secured Overnight Financing Rate. The difference will be deferred and due at maturity. In exchange, borrower paid the loan down by $2.6 million and deposited $2.0 million into the capex reserve.

The property was 65.1% occupied as of the November 2024 rent roll with an average rental rate of $836 per unit compared with 57.3% and $922 per unit, respectively, as of December 2023. Despite the improvement, the property is not generating positive cash flow. In its current analysis, Morningstar DBRS applied upward as-is and as-stabilized LTV adjustments of approximately 100.0% and 85.0%, respectively, to reflect the increased credit risk of the loan. The loan expected loss is in excess of the expected loss for the pool.

Through January 2025, the lender had advanced $54.1 million in loan future funding to 17 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, $10.6 million, has been made to the borrower of the aforementioned Marbella Apartments loan. Funds were advanced to fund the borrower's capital improvement plan across the property. Of the $10.6 million advanced to date, $4.5 million was allocated toward unit renovations while $6.1 million was used for exterior renovations and the correction of deferred maintenance.

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, 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), 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 (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, E, and F 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 deviation to Class C Note 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 E and F Notes is sustainability of loan performance trends not demonstrated as a number of loans in the transaction have yet to stabilize.

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.
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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), https://dbrs.morningstar.com/research/444616
-- North American CMBS Insight Model Version 1.2.0.0 (December 13, 2024), 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
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781
-- 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 http://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.