DBRS Morningstar Finalizes Provisional Ratings on ELP Commercial Mortgage Trust 2021-ELP

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-ELP issued by ELP Commercial Mortgage Trust 2021-ELP:

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

All trends are Stable. Class J and Class K-RR are not rated by DBRS Morningstar. The Class A-1 certificates offered on the presale report were combined with the Class A certificates and were no longer being offered in the final structure.

The ELP Commercial Mortgage Trust 2021-ELP single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple and leasehold interests in a portfolio of 142 industrial properties totaling approximately 28.0 million square feet (sf) across 18 markets and 17 states. DBRS Morningstar continues to take a favorable view on the long-term growth stability of the warehouse and logistics sector, despite the uncertainties and risks that the Coronavirus Disease (COVID-19) pandemic has created across all commercial real estate asset classes. Increased consumer reliance on e-commerce and home delivery during the pandemic has only accelerated pre-pandemic consumer trends, and DBRS Morningstar believes that retail’s loss continues to be industrial’s gain. The subject portfolio benefits from both favorable geographic diversification and favorable tenant granularity, both of which contribute to potential cash flow stability over time. In addition, DBRS Morningstar has a positive view of the net cash flow (NCF) and believes the NCF is sustainable in the near term, given DBRS Morningstar’s weighted average (WA) in-place base rent of $4.57 per square foot (psf) triple net (NNN), which is approximately 17% below the submarket’s WA average rent of $5.51 psf NNN per the market data provided by the Issuer, therefore providing rent upside potential for the portfolio as a whole. When looking at the leases expiring between loan origination and December 2022, and considering the contractual rent steps through November 2022 and the straight-line average rent steps for the investment-grade (IG) tenants, the Issuer’s WA underwritten base rent is about 9.3% below market.

The transaction benefits from additional cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 68.3 by allocated loan amount (ALA), which is one of the highest compared with the average score of recent DBRS Morningstar-rated industrial portfolios of 28.5 and provides a favorable diversification of cash flow when compared with a single asset. No single property accounts for more than 3.8% of the portfolio’s net rentable area (NRA) or 3.3% of the Issuer UW portfolio net operating income (NOI). As a result, a temporary cash flow decline at one property would likely not result in a debt service shortfall.

The properties in the subject portfolio span 18 markets in 17 states, providing favorable geographic diversity evidenced by market and state Herfindahl scores of 9.7 and 11, respectively. No single market accounts for more than 19.6% of the Issuer UW portfolio NOI, and no single state accounts for more than 18.2% of the Issuer UW portfolio NOI.

The loan sponsors, EQT Exeter PF1 US Member, LCC (EQT Exeter) and EG Industrial Properties, LLC (G Investor), entered into a contract to recapitalize a larger platform of more than 300 industrial properties for approximately $6.9 billion in Q4 2020. G Investor is contributing approximately $2.7 billion in connection with the broader recapitalization, of which approximately $591.5 million is allocated to the portfolio. The loan proceeds, along with sponsor equity, were used to finance the acquisition by G Investor and its affiliates of an approximate 99.2% interest in the portfolio and to cover closing costs. DBRS Morningstar generally views acquisition financings involving significant amounts of cash equity contributions from the transaction sponsors favorably, given the stronger alignment of economic incentives when compared with cash-out financings.

The sponsors for this transactions are EQT Exeter and G Investor. EQT Exeter is one of the largest real estate investment managers in the world and operates from 38 regional offices worldwide. G Investor is an entity 100% owned by GIC Realty Private Limited (GIC). GIC is a global investment firm established in 1981 to manage Singapore’s foreign reserves. GIC boasts a team of investment professionals in 10 offices in key financial cities worldwide with headquarters in Singapore. GIC has investments across a wide range of asset classes, including equities, fixed income, private equity, infrastructure, and real estate, in more than 40 countries.

The portfolio generally benefits from its geographical position in strong industrial markets with more than half of the portfolio NOI derived from assets in the Midwest’s e-commerce corridor, including Memphis, Tennessee (19.6% of NOI); Indianapolis (16.0% of NOI); Louisville, Kentucky (11.1% of NOI); and St. Louis (9.6% of NOI).

The entire portfolio is classified as warehouse/distribution product, which was generally confirmed by DBRS Morningstar’s site tours of a sampling of the portfolio. DBRS Morningstar considered about 3.7% of the portfolio's square footage to be office/flex space, based on the percentage of office usage and rents on the properties, which is on the lower end of the range for recently analyzed industrial portfolios.

Approximately 15.8% of the DBRS Morningstar in-place base rent is attributable to IG tenants, which provide strong cash flow stability. IG tenants include Amazon.com Inc., Geodis, and Cummins Inc. (Cummins).

The DBRS Morningstar’s WA in-place base rent of $4.57 psf NNN is approximately 17% below the submarket’s WA average rent of $5.51 psf NNN, per the market data provided by the Issuer, providing rent upside potential for the portfolio as a whole. The DBRS Morningstar LTV on the trust loan is significant at 109.4%. The high leverage point, combined with the lack of amortization, reflects elevated refinance risk and could potentially result in elevated loss severities in the occurrence of an event of default.

Leases representing approximately 72.2% of the portfolio NRA and 74% of the DBRS Morningstar gross rent are scheduled to roll through the fully extended loan term in 2026. Lease rollover is especially concentrated in 2022 (18.3% of the portfolio NRA and 18.5% of the DBRS Morningstar gross rent) and 2023 (19.9% of the portfolio NRA and 38.3% of the DBRS Morningstar gross rent). As such, there is elevated refinance risk at the initial and final fully extended loan maturity dates in 2023 and 2026, respectively.

Forty-nine of the portfolio’s 142 properties are leased to single-tenant users, reducing the portfolio’s tenant diversity and granularity. The properties leased to single tenants collectively comprise 37.5% of the portfolio’s in-place base rent and 38.1% of the portfolio NRA.

The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydown of the first 25% of the unpaid principal balance. DBRS Morningstar generally considers this structure to be credit negative, particularly at the top of the capital structure. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace than a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments.

The borrower can also release individual properties subject to customary requirements. However, the prepayment premium for the release of individual assets is generally 105.0% of the ALA for the first 25.0% of the original principal balance of the mortgage loan and 110.0% thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115.0% and, as a result, applied a penalty to the transaction's capital structure to account for the weak deleveraging premium.

The liability of the carveout guarantor is capped at 15% of the then-outstanding loan amount for bankruptcy events and full recourse is triggered only by such bankruptcy events or if certain transfer provisions are violated. In addition, the guarantor under the mortgage loan is required to maintain a minimum net worth of at least $300 million; however, there is no liquidity requirement. DBRS Morningstar views these factors as credit negative and relatively weak in the context of the size of the mortgage.

The guarantor on this loan is Industrial JV REIT LLC, a Delaware LLC. This effectively limits the recourse to the sponsor for bad act carveouts. Bad boy guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, and other potential bad acts of the borrower or its sponsor.

Ategrity Specialty Insurance Company, rated “A-VIII” by AM Best, is a pre-approved insurer for a portion of the property on the deductible buy-down policy. This insurer is only replaced if downgraded and not upon policy renewal as has been the practice in other single-asset/single-borrower transactions rated by DBRS Morningstar.

The debt yield trigger for the cash flow sweep event is low at less than a 5.25% debt yield on the initial term. The low thresholds increase the term and balloon default risks.

The underlying mortgage loan for the transaction will pay a floating rate, which presents potential benchmark transition risk as the deadline approaches for the elimination of Libor. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be either Term Secured Overnight Financing Rate (SOFR) plus the applicable Alternative Rate Spread Adjustment or Compounded SOFR plus the Alternative Rate Spread Adjustment.

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 the 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.

The rated entity or its related entities did not 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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