Morningstar DBRS Confirms Credit Ratings on All Classes of BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of the Commercial Pass-Through Certificates issued by BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class X-NCP at AA (low) (sf)
-- Class D at A (high) (sf)
-- Class E at BB (high) (sf)
-- Class F at B (high) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance of the underlying collateral, which generally remains in line with Morningstar DBRS' expectations since the previous credit rating action in April 2024, when the credit ratings for Classes E and F were downgraded by one notch each. The Morningstar DBRS value was updated to reflect a higher capitalization rate, as further described in the press release dated April 15, 2024, available on the Morningstar DBRS website. Although Morningstar DBRS believes the generally increased credit risks for office properties remains a consideration for this transaction, the collateral portfolio continues to benefit from its high proportion of medical tenants, which comprise 53.8% of the Morningstar DBRS base rent and had a weighted-average lease term of 16.3 years at issuance. In addition, the Morningstar DBRS net cash flow (NCF) gave long-term credit tenant benefit for investment-grade tenants whose leases extend at least three years beyond the loan term.

The transaction is collateralized by the leasehold interest in 16 cross-collateralized, suburban office buildings totaling approximately 2.0 million square feet (sf) on the North Shore of Long Island, New York. Sponsorship is provided through a joint venture between Angelo Gordon and the WE'RE Group. Angelo Gordon purchased a 95.5% leasehold interest in the portfolio from the WE'RE Group, which retained the remaining 4.5% leasehold interest and 100% of the leased fee interest. Loan proceeds of $350.0 million were primarily used to refinance $234.6 million of existing debt, return $98.1 million of borrower equity, and fund upfront reserves.

The $350.0 million interest-only (IO) floating-rate loan had an initial maturity date in June 2023; however, the borrower has exercised two of the three one-year extension options to date. The borrower's plans for the upcoming June 2025 maturity have not been communicated by the servicer, but Morningstar DBRS believes it is likely the remaining option will be exercised. According to the loan agreement, there are no performance triggers, financial covenants, or fees required for the borrower to exercise any of the extension options; however, the execution of each option is conditional upon, among other things, no events of default and the borrower's purchase of an interest rate cap agreement with a strike rate at 4.0%, which would result in a debt service coverage ratio (DSCR) equal to 1.10 times (x).

The loan was added to the servicer's watchlist in April 2024 because of a low DSCR. As of the most recent reporting, the financials for the trailing-nine-month period (T-9) ended September 30, 2024, reported a DSCR of 0.94x, compared with the year-end (YE) 2023 DSCR of 1.08x and the Morningstar DBRS DSCR of 2.86x derived at issuance. The low in-place DSCR is attributable to the loan's floating interest rate structure; however, Morningstar DBRS notes an interest rate cap is in place, with a 4.0% strike rate, as noted above. The net cash flow (NCF) in YE2023 was $30.4 million, in line with the Morningstar DBRS NCF of $30.0 million. More recently, however, the annualized NCF reported by the servicer for the trailing nine-month period ended September 30, 2024, had fallen below the Morningstar DBRS NCF figure to $27.7 million. The cash flow decline in 2024 is attributable to a combination of declined revenue and increased expenses.

According to the August 2024 rent roll, the portfolio reported a consolidated occupancy rate of 82.9%, compared with the consolidated occupancy rate of 86.8% at issuance. That rent roll showed that leases totaling 14.0% of the NRA have already expired or are scheduled to expire prior to the loan's fully extended maturity in June 2026. The largest tenant is ProHealth Medical Management, LLC (ProHealth; 17.4% of the NRA, leases expiring between August 2026 and August 2030). At issuance, ProHealth occupied 18.3% of the NRA, suggesting that the tenant vacated some space at its respective lease expiry dates over the past few years. As per Reis, office properties located in the portfolio's three submarkets reported slightly elevated average vacancy rates in Q4 2024: Northwest Nassau (13.6%), East Nassau (15.0%), and Western Suffolk (13.9%). However, the proximity of the collateral properties to major hospitals on Long Island's North Shore is a significant demand driver. Medical tenants tend to receive above-market allocations for tenant improvements but will often spend additional capital on the build-out of their spaces. This larger upfront investment substantially increases potential relocation costs upon lease expiration and increases probability of renewal. 

Individual properties are permitted to be released at 105% of the allocated loan amount (ALA) for the applicable property up to 10% of the original principal balance, 110% of the ALA for the applicable property up to 20%, and 115% thereafter. For individual assets located within the Lake Success Quadrangle, the release price shall equal 115% at any given time for seven properties, representing approximately 35.5% of the current pool balance, and 120% at any given time for four properties, representing approximately 19.1% of the current pool balance. Morningstar DBRS elected not to apply a penalty to the transaction's capital structure as 63.5% of the portfolio by ALA is subject to a release price of 115% or greater, which Morningstar DBRS considers to be credit neutral. The loan allows for pro rata paydowns associated with property releases for the first 20% of the unpaid principal balance, and Morningstar DBRS applied a penalty to the capital stack as the deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. As of the March 2025 remittance, no property releases have been reported.

Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 9.25% applied to the Morningstar DBRS net cash flow of $30.0 million. Morningstar DBRS also maintained positive qualitative adjustments to the loan-to-value ratio sizing benchmarks totaling 2.50% to reflect the portfolio's diversified tenant roster and long-term in-place tenancy of the investment-grade tenants. The Morningstar DBRS concluded value of $325.2 million represents a -29.3% variance from the issuance appraised value of $458.7 million.

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/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

Class X-NCP is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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. 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.

DBRS Limited
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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

-- 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.

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