DBRS Morningstar Finalizes Provisional Ratings on BSPDF 2021-FL1 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by BSPDF 2021-FL1 Issuer, Ltd. (BSPDF 2021-FL1 or the Trust):

-- 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The initial collateral consists of 21 floating-rate mortgage loans and participation interest in mortgage loans secured by 49 mostly transitional properties with a cut-off balance totaling $621.8 million, excluding $67.9 million of remaining future funding commitments (inclusive of junior participations) and $88.7 million of pari passu debt. The transaction is a managed vehicle, which includes a 24-month reinvestment period. As part of the reinvestment period, the transaction includes a 180-day ramp-up acquisition period that will be used to increase the trust balance by $153.2 million to a total target collateral principal balance of $775.0 million. DBRS Morningstar assessed the $153.2 million ramp component using a conservative pool construct, and, as a result, the ramp loans have expected losses above the pool weighted-average (WA) loan expected loss. During the reinvestment period, so long as the note protection tests are satisfied and no event of default has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interest, including funded companion participations, meeting the eligibility criteria. The eligibility criteria have, among other things, debt service coverage ratio (DSCR), loan-to-value ratio (LTV), Herfindahl score, and property type limitations.

Of the 21 loans, one (Bradford Gwinnett Apartments & Townhomes (Prospectus ID#13), representing a total initial pool balance of 3.6%) is a delayed-close loan, unclosed as of October 15, 2021. The Issuer has 90 days after closing to acquire the delayed-close assets. If the Delayed Close Collateral Interest are not acquired within 90 days of the closing date, the Issuer can use the allocated balance of the delayed-close loan to acquire additional ramp loans. In addition, the transaction is structured with a Replenishment Period, where the collateral manager may acquire up to $70.0 million of funded companion participations. The transaction stipulates that any acquisition of any ramp-up collateral interests, reinvestment collateral interests or replenishment collateral interests will need a rating agency confirmation (RAC) regardless of balance size. The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value.

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 debt service payments were measured against the DBRS Morningstar As-Is NCF, 16 loans, comprising 67.3% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCR of only two loans, comprising 11.7% of the initial pool balance, was 1.00x or below, which is indicative of elevated refinance risk. 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 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 securitization sponsor, BSPDF Operating Partnership, is an affiliate of Benefit Street Partners Realty Trust, Inc. (BSPRT) and an experienced commercial real estate (CRE) collateralized loan obligation (CLO) issuer and collateral manager. As of June 30, 2021, BSPRT managed a commercial mortgage debt portfolio of approximately $3.1 billion and had issued seven CRE CLO transactions. Through August 31, 2021, BSPRT had not realized any losses on any of its CRE bridge loans. Additionally, BSPDF 2021-FL1 Holder, LLC, is an indirect wholly subsidiary of BSP Real Estate Opportunistic Debt Holdings L.L.C. and a direct wholly-owned subsidiary of BSPDF Operating Partnership, 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 $167.0 million, or 18.9% of the transaction total.

The majority of the pool comprises primarily multifamily (63.8%) and industrial (5.2%) properties. These property types have historically shown lower defaults and losses. Multifamily properties benefit from staggered lease rollover and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves. Additionally, all loans were originated in May 2021 or later, meaning the loan files are recent, including third-party reports that consider impacts from the Coronavirus Disease (COVID-19) pandemic.

Nineteen loans, comprising 89.9% of the initial trust balance, represent acquisition financing wherein sponsors contributed significant cash equity as a source of funding in conjunction with the mortgage loan, resulting in a moderately high sponsor cost basis in the underlying collateral. Cash equity infusions from a sponsor typically result in the lender and borrower having a greater alignment of interests, especially compared with a refinancing scenario where the sponsor may be withdrawing equity from the transaction. The sponsor for one of the two refinance loans, representing 2.8% of the initial transaction balance, contributed material cash equity in conjunction with the mortgage loan.

Three loans, representing 31.1% of the cut-off date pool balance, are secured by properties in areas with a DBRS Morningstar Market Rank of 6, 7, or 8, which are characterized as urbanized locations. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand. Such markets therefore tend to benefit from lower default frequencies than less dense suburban, tertiary, or rural markets. Areas with a DBRS Morningstar Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity. One loan, comprising 12.5% of the cut-off date pool balance, is secured by a property in such an area.

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 made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss given default (LGD) based on the DBRS Morningstar As-Is LTV, assuming the loan is fully funded. Given the nature of the assets, DBRS Morningstar determined an above-average sample size, representing 81.8% of the cut-off-date pool balance. While physical site inspections were generally not performed because of health and safety constraints associated with the ongoing coronavirus pandemic, DBRS Morningstar notes that, in the future, when DBRS Morningstar analysts visit the markets, they may actually visit properties more than once to follow the progress (or lack thereof) toward stabilization. The servicer is also in constant contact with the borrowers to track progress.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is DSCR of 0.73x and WA As-Is LTV of 78.6% generally reflect high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for. When measured against the DBRS Morningstar Stabilized NCF, the WA DBRS Morningstar DSCR is estimated to improve to 1.29x, suggesting that the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented.

Six loans, representing 31.0% of the initial pool comprise office (22.2%), retail (6.0%), and hospitality (2.8%) properties, which have experienced considerable disruption as a result of the coronavirus pandemic, with mandatory closures, stay-at-home orders, retail bankruptcies, and consumer shifts to online purchasing. Additionally, the two largest loans in the pool, 345 Seventh Avenue and 5 Post Oak Park, representing 22.2% of the initial pool, are office properties. The two largest loans, 345 Seventh Avenue and 5 Post Oak Park, are located in DBRS Morningstar Market Ranks of 8 and 6, respectively, which are generally characterized as dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Additionally, 345 Seventh Avenue is located in a DBRS Morningstar MSA Group 3, which is the best-performing group in terms of historic commercial mortgage-backed securities default rates among the top 25 metropolitan statistical areas.

As of the cut-off date, the pool contains 21 loans and is concentrated by CRE CLO standards with a lower Herfindahl score of 14.94. Furthermore, the top 10 loans represent 73.9% of the pool. The 21 loans are secured by 49 properties across 25 states, and the properties are primarily in core markets with the overall pool’s WA DBRS Morningstar Market Rank at 4.6. The cut-off date balance will increase from a Delayed Close loan and Ramp-Up loans, projected to occur over 180 days after closing. New loans will increase the loan count and add broader diversity to the pool, raising the Herfindahl score.

The transaction is managed and includes a delayed-close loan, a ramp-up component, a reinvestment period, and a replenishment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is also partially offset by eligibility criteria that outline minimum DSCR and Herfindahl score, maximum LTV, and property type and loan size limitations for ramp and reinvestment assets. DBRS Morningstar accounted for the uncertainty introduced by the 180-day ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria. As a result, the ramp component has a higher expected loss than the WA pre-ramp pool. A No Downgrade Confirmation is required from DBRS Morningstar for all ramp-up collateral interests, reinvestment collateral interests or replenishment collateral interests without regard to balance. Before loans are acquired and brought into the pool, DBRS Morningstar will analyze them for any potential ratings impact.

All loans have floating interest rates and 19 loans are interest only during the entire initial loan term, creating interest rate risk should interest rates increase. 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. Additionally, all loans have extension options, and, in order to qualify for these options, the loans must meet DSCR, debt yield, and/or LTV requirements. All loans are short-term and, even with extension options, have a maximum fully extended loan term of five years. The borrowers for all loans have purchased Libor rate caps that range between 1.00% and 3.00% to protect against rising interest rates over the term of the loan.

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 - 345 Seventh Avenue (12.5% of the pool)
-- Prospectus ID#2 - 5 Post Oak Park (9.7% of the pool)
-- Prospectus ID#3 - The Franklin (8.9% of the pool)
-- Prospectus ID#4 - The View at Middlesex (7.3% of the pool)
-- Prospectus ID#5 - Caledon Apartments (6.8% of the pool)
-- Prospectus ID#6 - Morgan & Wilcox Apartments (6.4% of the pool)
-- Prospectus ID#7 - Park Lane & Biltmore Apartments (6.3% of the pool)
-- Prospectus ID#8 - MRP Capital Retail Portfolio (6.0% of the pool)
-- Prospectus ID#9 - Meriwether Place Apartments (5.2% of the pool)
-- Prospectus ID#10 - Fields at Woodlake Square (4.7% of the pool)
-- Prospectus ID#11 - Academy Distribution Center (3.9% of the pool)
-- Prospectus ID#15 - The Drayton Hotel (2.8% of the pool)
-- Prospectus ID#20 - Taylor Industrial (1.3% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

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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