Morningstar DBRS Upgrades Credit Ratings on Two Classes of HGI CRE CLO 2021-FL2, Ltd.

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on two classes of notes issued by HGI CRE CLO 2021-FL2, Ltd. as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the following classes of notes:

-- Class A at AAA (sf)
-- Class D at BBB (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 provided to the bonds as a result of successful loan repayments, which has resulted in a collateral reduction of 11.1% since Morningstar DBRS' prior review in June 2024, with a total collateral reduction of 33.7% since issuance. The transaction benefits from all loans being backed by multifamily property types, which have historically exhibited lower default rates and are generally better positioned to retain value during market downturns, as compared with other property types. While one loan, representing 9.6% of the current trust balance, remains in special servicing and is real estate owned (REO), Morningstar DBRS expects liquidated losses will be contained to the nonrated $54.3 million preferred certificate. The largest loan in the pool, The Astor LIC (Prospectus ID#1; 12.9% of the pool balance), returned from special servicing in February after a loan modification was executed (additional details of which are outlined below). In addition, Morningstar DBRS notes that the below-investment-grade rated Classes F and G, and the Preferred Class have a cumulative balance of $116.6 million, providing cushion against potential loss for the middle and top of the capital stack.

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 transaction closed in September 2021 with a cut-off pool balance totaling approximately $514.5 million and a maximum funded balance of $579.5 million. At issuance, the pool consisted of 20 floating-rate mortgage loans secured by 22 properties. The transaction was a managed vehicle with a 24-month reinvestment period that expired with the September 2023 payment date. As of the February 2025 reporting, the pool comprises 20 loans secured by 25 properties with a cumulative trust balance of $384.0 million. Seventeen loans with a former cumulative trust balance of $279.6 million have successfully repaid from the pool since issuance, including six loans with a former cumulative trust balance of $36.8 million since Morningstar DBRS' prior credit rating action in June 2024.

The loans are concentrated by properties in suburban locations, which Morningstar DBRS defines as markets with a Morningstar DBRS Market Rank of 3, 4, or 5. As of February 2025, 15 loans, representing 63.7% of the current trust balance, were secured by properties in suburban markets. Three loans, representing 24.5% of the current trust balance, were secured by properties in urban markets, defined as markets with a Morningstar DBRS Market Rank of 6, 7, or 8. An additional two loans, representing 11.9% of the current trust balance, were secured by properties in tertiary markets, defined as markets with a Morningstar DBRS Market Rank of 2.

Leverage across the pool has remained relatively static from closing, with a current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) of 73.2% (compared with 74.2% at closing) and a WA stabilized LTV of 67.5% (compared with 67.0% at closing). 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 and widening capitalization rate (cap rate) environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 16 loans representing approximately 75.0% of the trust balance. As of the February 2025 remittance, 12 loans, representing 62.8% of the current trust balance, are on the servicer's watchlist primarily for upcoming loan maturity and/or low debt service coverage ratios. At issuance, Morningstar DBRS expected temporary declines in property performance could be observed in some cases as borrowers worked toward completing their respective business plans.

The only loan in special servicing, The Lofts at Twenty25 (Prospectus ID# 28; 9.6% of the current pool balance) is secured by a redeveloped 623-unit, high-rise multifamily property in Atlanta. The loan transferred to special servicing in June 2024 for maturity default with foreclosure occurring in August 2024; the asset is now REO. The property was built in 1951 as an office building and was completely gut-renovated and redeveloped into its current use in 2021. The execution of the sponsor's business plan suffered from weak demand and tenant delinquencies. While occupancy improved to approximately 50.0% as of the December 2024 rent roll from a low of 29.4% in February 2024, it remains below the 57.6% occupancy 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-FL1 and HGI 2022-FL3. The property was reappraised in July 2024 at a value of $74.4 million, down from the as-is appraised value of $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. Given the REO status and long-term nature of the special servicer's workout strategy, a liquidation scenario was considered for the loan in the analysis for this review. Morningstar DBRS applied a 20.0% haircut to the July 2024 appraisal, resulting in an expected loss approaching $20.0 million when accounting for expected liquidation fees and expenses.

The largest loan on the servicer's watchlist, The Astor LIC, is secured by the sponsor's leased-fee interest in a Class A, mid-rise 143-unit multifamily apartment building in Queens, New York. The collateral was constructed in 2021 and includes 12,000 square feet of retail space. The loan transferred to special servicing in December 2023 for payment default; however, as of the February 2025 remittance, has transferred back to the master servicer as a corrected mortgage loan. The loan was modified with an extension of the maturity date from December 2024 to December 2025, a principal curtailment in the amount of $3.0 million, a revision in the loan's interest rate and repayment of past due interest. The borrower continues work toward leasing-up the property and stabilizing operations. According to the January 2025 rent roll, the residential component was 93.8% occupied and the commercial component has been leased to Lexus of Queens. Cash flows remain below issuance expectations, however, and an updated appraisal dated June 2024 showed a decline in the property's as-is value to $60.8 million, below the issuance as-is appraised value of $78.6 million. Given the value decline, the loan was stressed in the analysis for this review, with an expected loss that was 55 basis points greater than the pool average.

Through January 2025, the collateral manager had advanced cumulative loan future funding of $52.9 million allocated to 17 of the remaining individual borrowers to aid in property stabilization efforts. There is no future funding available to any remaining borrowers as access to any formerly remaining funds has expired. The largest advance, $10.6 million, has been made to the borrower of the Marbella Apartments loan, which is secured by a multifamily property in Corpus Christi, Texas. Funds were advanced to the borrower to complete its capital improvement project across the property, of which $4.5 million was allocated toward unit renovations, while $6.1 million was used for exterior renovations and deferred maintenance items.

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 credit 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 at (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 (February 28, 2025): https://dbrs.morningstar.com/research/448963.

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 CMBS Multi-Borrower Rating Methodology (December 13, 2024)/North American CMBS Insight Model v 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

-- Legal Criteria for U.S. Structured Finance (December 3, 2024): https://dbrs.morningstar.com/research/444064

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024): https://dbrs.morningstar.com/research/428623

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024): https://dbrs.morningstar.com/research/438283

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 (July 17, 2023).

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