DBRS Morningstar Confirms Provisional Ratings on GPMT 2021-FL3, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed the provisional ratings on the following classes of notes to be issued by GPMT 2021-FL3, Ltd. (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (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 Issuer elected to make certain updates to the structure of the transaction after DBRS Morningstar assigned provisional ratings on April 26, 2021. The Issuer made the following updates: changed the deal type to static from managed, removed the $101.3 million ramp component, and removed the DBRS Morningstar $5.0 million threshold rating agency confirmation (RAC) requirement for the acquisition of companion participations with principal repayment proceeds. DBRS Morningstar analyzed the updated structure in the model, which resulted in increased pool losses for the AAA (sf) and AA (low) (sf) rating levels and lower pool losses for the A (low) (sf), BBB (sf), and B (low) (sf) rating levels. These changes reflect the updated pool having a lower expected loss than the initial modeled pool but also a lower level of diversity. The Issuer has updated the class balances across the capital stack to reflect both the change in pool size and the change in credit enhancement levels. The provisional ratings DBRS Morningstar assigned to all classes remains unchanged. The Issuer has reannounced the transaction with the updated class balances and corresponding credit enhancement levels.

Coronavirus Overview
With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

The initial collateral consists of 27 floating-rate mortgages secured by 32 mostly transitional properties, with a cut-off balance totaling $823.7 million, excluding approximately $143.3 million of future funding commitments. The collateral comprises one combined loan, 23 participations in mortgage loans, two participations in combined loans, and one senior participation in a mortgage loan. Combined loans include a mortgage loan and related mezzanine loan and are treated as a single loan. Most loans are in a period of transition with plans to stabilize and improve the asset value. During the Companion Participation Acquisition Period, the Issuer may acquire future funding commitments subject to the Acquisition Criteria. The transaction does not include RAC for the acquisition of companion participations if there is already a participation of the underlying loan in the trust.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is net cash flow (NCF), 20 loans, comprising 73.1% of the initial pool, had a DBRS Morningstar As-Is debt service credit ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCRs for only four loans, comprising 17.1% of the initial pool balance, are below 1.00x. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels. The transaction will have a sequential-pay structure.

The transaction benefits from strong DBRS Morningstar Market Ranks with 66.5% of the properties in the pool are located in a DBRS Morningstar Market Rank 6, 7, or 8, which is considerably higher than recent commercial real estate collateralized loan obligation (CRE CLO) transactions rated by DBRS Morningstar. The DBRS Morningstar Market Rank range is 1 to 8, with 8 representing the highest-density markets with the greatest amount of liquidity and most origination activity. DBRS Morningstar recognizes market liquidity by giving credit to loans secured by properties in dense urban locations and penalizing loans in less populated areas and areas with lower economic activity. Also, the historical commercial mortgage-backed securities (CMBS) conduit loan data shows that probability of default (POD) increases in middle markets (Market Rank 3 or 4); moderates in tertiary and rural markets (Market Rank 1 or 2); and greatly improves in primary urban markets (Market Rank 6, 7, or 8). Historical loan data further supports the idea that loss given default (LGD) increases in tertiary and rural markets, and the lowest LGDs were noted in Market Rank 8. The initial pool consists of 28.8% of the cut-off date loan balance in Market Rank 6, 19.9% in Market Rank 7, and 17.8% in Market Rank 8.

The weighted-average (WA) DBRS Morningstar Stabilized loan-to-value ratio (LTV) and DSCR are 65.0% and 1.35x, respectively. These credit metrics compare favorably with recent CRE CLO transactions rated by DBRS Morningstar and, by comparison, result in lower loan level PODs and LGDs. Approximately 16 collateral interests (56.4% of the pool) have an As-Is DSCR below 1.00x (excluding loan debt service reserve/deal structure).

The Sponsor for the transaction, Granite Point Mortgage Trust (GPMT), is an experienced CRE CLO issuer and collateral manager. As of December 31, 2020, GPMT had an equity capitalization of more than $930 million and managed a commercial mortgage debt portfolio of approximately $4.4 billion. GPMT has completed two CRE CLO securitizations: GPMT 2018-FL1 and GPMT 2019-FL2. Additionally, GPMT CLO Holdings LLC, a wholly owned indirect subsidiary of GPMT will purchase and retain 100.0% of the Class F Notes, the Class G Notes, the Class H Notes, and the Preferred Shares, which total 16.75% of the transaction total.

The loans are generally secured by traditional property types (i.e., office, multifamily, and mixed-use), with only 4.2% of the pool secured by hotels. Additionally, only one of the multifamily loans (The Rowan, representing 0.8% of initial pool balance) in the pool is currently secured by student housing properties, which often exhibit higher cash flow volatility than traditional multifamily properties. The initial loan pool exhibits a Herfindahl score of 20.9 (27 collateral interests), which is favorable for a CRE CLO transaction and higher than most recent CRE CLO transactions rated by DBRS Morningstar.

All of the loans in the pool were originated before April 2020 and 16 collateral interest (56.4% of the pool) have an As-Is DSCR below 1.00x (without considering loan debt service reserves/deal structure). Low cash flows have directly affected many of the loans in the pool, with 12 loans receiving some form of loan modification since origination, and, as of the date of this report, four loans were in the process of being modified. The loan modifications vary, depending on the needs of the borrower but may include an increase in the loan amount, extension of the maturity date, reset of the forced funding date, and/or reduction in the Libor floor. DBRS Morningstar received coronavirus and business plan updates for all loans in the pool and incorporated these findings into the DBRS Morningstar NCF analysis and Business Plan Scores. Furthermore, all debt service payments have been received in full through March 2021. All of the properties were re-appraised in 2021 and the latest appraisals took into account recent property performance, market trends since the onset of the pandemic, and general property condition observations. The issuer provided DBRS Morningstar recent property financial statements and rent rolls, which are preferred for a more accurate view into underlying property cash flow performance. This information will continue to be shared with DBRS Morningstar throughout the transaction and be subject to periodic reviews.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar sampled a large portion of the loans, representing 73.4% of the pool cut-off date balance. Physical site inspections were also performed, including management meetings. Most site inspections were completed in early 2020, prior to the onset of the pandemic and closer to loan origination. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGD based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside. Future Funding companion participations will be held by affiliates of GPMT and have the obligation to make future advances. GPMT agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, GPMT will be required to meet certain liquidity requirements on a quarterly basis.

Four of the sampled loans, comprising 22.9% of the pool balance, were analyzed with Weak sponsorship strengths. Three of the loans—Times Square West, Mid Main, and SunTrust Center—are among the pool’s 10 largest loans. DBRS Morningstar applied a POD penalty to loans analyzed with Weak sponsorship strength.

All 27 loans have floating interest rates, and all loans are interest only during the original term and have original terms of 24 months to 37 months, creating interest rate risk. All loans are short-term loans, and, even with extension options, they have a fully extended maximum loan term of five to six years. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term.

The property condition assessments for all mortgaged properties are dated more than 12 months prior to the cut-off date. GPMT’s third-party asset manager coordinates site visits to each of the properties in the pool annually and has conducted site visits on all of the assets in the pool within the past 12 months (with the exception of Indico Nashville and Cornerstone Corporate, which were originated in 2020). In most cases, the business plan includes capital improvements to the property, which are expected to improve the overall property condition. Active construction sites are monitored by consultants that visit properties and evaluate the progress of renovation work.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Times Square West (8.4% of the pool)
-- Prospectus ID#2 – Mid Main (7.9% of the pool)
-- Prospectus ID#3 – Courtyards on the Park (7.9% of the pool)
-- Prospectus ID#4 – Quantico Corporate (6.1% of the pool
-- Prospectus ID#5 – 516-530 West 25th St (6.1% of the pool)
-- Prospectus ID#6 – 511 Barry (5.3% of the pool)
-- Prospectus ID#7 – SunTrust Center (4.5% of the pool)
-- Prospectus ID#8 – Indigo Nashville (4.2% of the pool)
-- Prospectus ID#9 – The Bryn (3.8% of the pool)
-- Prospectus ID#10 – 5250 Lankershim Plaza (3.8% of the pool)
-- Prospectus ID#16 – 15 Court Square (3.0% of the pool)
-- Prospectus ID#18 – Avant Gardner (2.6% of the pool)
-- Prospectus ID#21 – 425 East Colorado (2.2% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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