DBRS Morningstar Assigns Provisional Ratings to STWD Trust 2021-LIH

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-LIH (the Certificates) to be issued by STWD Trust 2021-LIH (STWD 2021-LIH):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The collateral for STWD Trust 2021-LIH (STWD 2021-LIH) includes the borrowers’ fee-simple interest in 12 affordable housing multifamily properties totaling 3,082 units located throughout five Florida markets including Orlando, Tampa, Daytona Beach, West Palm Beach, and Jacksonville. The transaction sponsor acquired the portfolio in 2016 for a total of $202.8 million ($65,808 per unit). The properties were built between 1995 and 2002, displaying a WA year built of 2000. Since acquiring the properties in 2016, the sponsor has invested approximately $15.6 million ($1.3 million per property) across the portfolio.

There are 2,983 affordable units (96.8% of total) across the portfolio, which DBRS Morningstar generally views as favorable because of the enhanced cash flow stability. The collateral had an average occupancy of 97.6% from YE2018 through YE2020, and occupancy is 98.6% per the portfolio’s August 2021 rent roll. The submarkets across the portfolio have experienced asking rent increases of 3.0% from YE2015 through 2020, per Reis. However, DBRS Morningstar recognizes that the properties have limited exposure to rent declines as a result of a heavy concentration of affordable units that already have below-market rents. Although rent increases are subject to LIHTC rent growth requirements, the portfolio has still exhibited an average annual growth rate of 3.1% between 2018 and 2020. Ultimately, DBRS Morningstar’s outlook on the stability of multifamily assets in and around the Florida affordable housing market has historically been positive.

All properties benefit from some sort of tax exemption, which poses moderate refinance risk as rises in future tax rates resulting from the loss of such benefits could diminish the value of the underlying collateral as derived through income capability. However, tax exemption benefits throughout the portfolio are generally correlated with the provision of affordable housing units. Such affordable units are generally considered to be leased at below-market rates to make them affordable to tenants at limited income levels. As a result, loss of tax exemption benefits might also result in the ability to lease such affordable units at market-rate rents, potentially offsetting reductions in NCF incurred from a loss of exemption benefits. The portfolio’s favorable locations and strong fundamentals of the surrounding multifamily markets, and the sponsor’s evidenced experience in the ownership of affordable housing in the U.S. reinforce DBRS Morningstar’s comfort in the portfolio’s ability to maintain cash flow stability.

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.

Class X-CP and Class X-NCP are interest-only (IO) certificates that reference 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 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 Single-Asset/Single-Borrower Ratings Methodology (March 2, 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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