DBRS Morningstar Assigns Provisional Ratings to GPMT 2021-FL4, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by GPMT 2021-FL4, 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.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain 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.

DBRS Morningstar analyzed the pool to determine the provisional ratings, reflecting the long-term risk that the Issuer will default and fail to satisfy its financial obligations in accordance with the terms of the transaction. The initial collateral consists of 23 floating-rate mortgage loans secured by 31 mostly transitional real estate properties, with a cut-off pool balance totaling approximately $621.4 million, excluding approximately $86.3 million of future funding commitments. The initial pool is composed of two whole loans and 21 participations. There are no B-notes or mezzanine loans included in the initial pool. Most loans are in a period of transition with plans to stabilize and improve the asset value. The transaction is a managed vehicle with a 24-month reinvestment period. During the reinvestment period, so long as the note protection tests are satisfied and no event of default (EOD) has occurred and is continuing, the Issuer (as directed by the Collateral Manager) may acquire future funding commitments and additional eligible loans subject to the eligibility criteria, which, among other things, has a minimum debt service coverage ratio (DSCR) and loan-to-value ratio (LTV) for each respective property type, a 14.0 Herfindahl score, and loan size limitations. The eligibility criteria stipulates a No Downgrade Confirmation from DBRS Morningstar on reinvestment loans (except in the case of the acquisition of companion participations if a portion of the underlying loan is already included in the pool and less than $500,000). The No Downgrade Confirmation allows DBRS Morningstar the ability to review the new collateral interest and any potential impacts to the overall ratings. The transaction does not include a ramp-up period with unidentified loans; however, there are three delayed close assets, representing 10.5% of the cut-off balance ($65.5 million), which are expected to close prior to or within 90 days of the transaction closing date. The transaction will have a sequential-pay structure. For so long as any class of notes with a higher priority is outstanding, any interest due on the Class C, D, E, F, and G Notes can be deferred and interest deferral will not result in an EOD.

All of the loans in the pool have floating interest rates initially indexed to Libor and are interest only (IO) through their initial and extended terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor rate, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. The pool exhibited a relatively high weighted-average (WA) DBRS Morningstar Issuance LTV of 80.2%, though it is estimated to improve to 69.1% through stabilization. When the cut-off date balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 11 loans, representing 46% of the cut-off date pool balance, had a DBRS Morningstar As-Is DSCR below 1.00 times (x), a threshold indicative of high default risk. However, five loans, representing 22.2% of initial pool balance have DBRS Morningstar Stabilized DSCR of less than 1.25x, a threshold indicative of elevated refinance risk. The properties are often transitioned with potential upside in cash flow. However, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks of if other loan structural features are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The Sponsor for the transaction, Granite Point Mortgage Trust Inc. (GPMT), is an experienced commercial real estate collateralized loan obligation (CRE CLO) issuer and collateral manager. As of October 19, 2021, GPMT had a market capitalization of approximately $733.1 million. As of June 30, 2021, GPMT managed a commercial mortgage debt portfolio of approximately $4.1 billion. GPMT has completed three CRE CLO securitizations: GPMT 2018-FL1, GPMT 2019-FL2, and GPMT 2021-FL3. 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, and the Preferred Shares, which total 19.125% of the transaction total.

Fifteen loans, or 20 properties, representing 68.7% of the initial pool, are backed by multifamily properties. The multifamily property type has 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. Most of the multifamily properties in the initial pool are either garden style or midrise multifamily complexes. There are also two student housing loans, The Hive and 10 North & The Crest, representing 5.8% of the initial pool. While student housing properties often exhibit higher cash flow volatility than traditional multifamily properties, both portfolios are located in tight student housing markets with a vacancy rate of 3% and 6% for The Hive and 10 North & The Crest, respectively. Both properties demonstrated strong historical occupancy rates and preleasing rates, and are currently 100% occupied. In addition, the eligibility criteria for reinvestment stipulates a minimum 40% of multifamily property type with no maximum limitation during the reinvestment period, which DBRS Morningstar considered credit positive given the lower default risk and losses associated with this property type.

The DBRS Morningstar Business Plan Scores (BPS) for sampled loans ranged from 1.4 to 2.93, with an average of 1.99. On a scale of 1 to 5, a higher DBRS Morningstar BPS is indicative of more risk in the sponsor’s business plan. Consideration is given to the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity. Compared with similar transactions, the subject has a relatively low average DBRS Morningstar BPS, which is indicative of lower risk. In addition, the WA remaining fully extended term for the pool is 56 months, which allows the sponsors time to execute their business plans without risk of imminent maturity.

Seventeen loans, comprising 77.1% of the initial trust balance, represent acquisition financing wherein sponsors contributed cash equity as a source of funding in conjunction with the mortgage loan. The cash equity in the deal will incentivize the sponsors to perform on the loan and protect their equity.

The borrowers of all loans have purchased Libor rate caps with strike prices that range from 0.5% to 4.0% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

Twenty loans, representing 89.5% of the pool, were originated in 2021. Three loans, representing 10.5% of the pool, were originated in 2019. The loan files for all the loans including the financial statements, rent rolls, and appraisal reports, are all current and reflective of the impacts from the coronavirus pandemic.

The pool exhibits a DBRS Morningstar WA market rank of 3.5, which is considerably lower than the GPMT 2021-FL3 transaction (WA market rank of 5.9) and similar recent CRE CLO transactions rated by DBRS Morningstar. Approximately 66.1% of the properties in the pool are located in DBRS Morningstar Market Rank 3 and 4. 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 security (CMBS) conduit loan data shows that the 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 9.5% of the cut-off date loan balance in Market Rank 5 or 6, 5.7% in Market Rank 7, and 0% in Market Rank 8. In addition, this transaction only has 19.2% of the pool located in metropolitan statistical area (MSA) Group 3 compared with 44.1% in GPMT 2021-FL3. MSA Group 3 represents the best-performing group in terms of historical CMBS default rates among the top 25 MSAs. MSA Group 3 has a historical default rate of 17.2%, which is nearly 40.0% lower than the overall CMBS historical default rate of 28.0%. The initial pool consists of 29.1% of the cut-off date loan balance in MSA Group 1, which have historically shown higher PODs resulting in greater loan-level expected losses. The loans that are located in Market Rank 3 and 4 in the initial pool have a WA Stabilized LTV and DSCR of 66.2% and 1.30x respectively. The DBRS Morningstar model increases the likelihood of defaults and losses for properties located in the weaker markets as designated by the DBRS Morningstar Market and MSA Group.

Five loans, representing 21.5% of the initial pool, are backed by office properties, and one loan, representing 2.4% of the pool is backed by multifamily/retail mixed-used property. These property types have experienced considerable disruption as a result of the coronavirus pandemic with mandatory closures, working from home strategies, and consumer shifts to online purchasing. The office properties in this pool exhibit favorable WA DBRS Morningstar Stabilized DSCR and LTV of 1.42x and 67.9%, respectively. The multifamily/retail mixed-used property is located in DBRS Market Rank 7, which is generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress.

Based on the initial pool balances, the overall WA DBRS Morningstar As-Is LTV and DSCR is 80.2% and 1.00x, respectively, generally reflecting 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 for each loan 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 1.36x, suggesting that the properties are likely to have improved NCFs once the sponsors’ business plans have been implemented. Six loans representing 22.0% of the initial pool balance are structured with a debt service reserve account, carry shortfall reserve or excess cash flow sweep.

The transaction is managed and includes a reinvestment 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 partially offset by eligibility criteria (detailed in the transaction documents) that outline DSCR, LTV, Herfindahl score minimum, property type, and loan size limitations for reinvestment assets. New Reinvestment loans and companion participations of $500,000 or greater require a No Downgrade Confirmation from DBRS Morningstar. DBRS Morningstar will analyze these loans for potential impacts on ratings. Deal reporting also includes standard monthly CREFC reporting and quarterly updates. DBRS Morningstar will monitor this transaction on a regular basis.

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 74.6% of the pool cut-off date balance. Five physical site inspections, including the top four loans, were also performed, including management meetings. The transaction’s WA DBRS Morningstar BPS of 1.99 is generally in the range of recently rated CRE CLO transactions by DBRS Morningstar. 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 have been structured to provide the sponsor with sufficient funds to execute on the business plan. The 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.

The eligibility criteria allow for a maximum Stabilized LTV of 80.0% and a minimum DSCR of 1.15x. This is considerably more aggressive than the current pool’s Issuer Stabilized WA LTV of 67.9% and DSCR of 2.27x. The maximum Stabilized LTV of 80.0% and a minimum DSCR of 1.15x thresholds are only apply to the multifamily property type, which is relatively less risky compared with other property types. The eligibility criteria generally requires a stabilized LTV of 65% to 75% and a stabilized DSCR of 1.25x to 1.40x for the rest of the property types. Before the collateral manager can acquire new loans, the loans will be subject to a No Downgrade Confirmation by DBRS Morningstar.

All 23 loans have floating interest rates and have original terms of 36 months to 48 months, which creates interest rate risk. All loans are IO throughout the original term and through extension options. All loans are short-term loans, and, even with extension options, they have a fully extended maximum loan term of 60 to 61 months. 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 borrowers of all loans have purchased Libor rate caps with strike prices that range from 0.5% to 4.0% to protect against rising interest rates through the duration of the loan term.

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.

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 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.

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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