DBRS Morningstar Finalizes Provisional Ratings on Morgan Stanley Capital I Trust 2021-ILP

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-ILP (the Certificates) issued by Morgan Stanley Capital I Trust 2021-ILP (MSC 2021-ILP):

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

All trends are Stable.

DBRS Morningstar discontinued and withdrew its ratings on the Class X-CP and X-NCP interest-only (IO) certificates initially contemplated in the offering documents, as they were removed from the transaction.

The MSC 2021-ILP single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 61 industrial properties totaling approximately 6.9 million square feet in urban areas across eight markets and five states. Approximately 69.0% of the portfolio’s net rentable area (NRA) is in Chicago, Phoenix, Dallas-Fort Worth, Philadelphia, Houston, and San Antonio, which are all in the Top 10 largest cities in the U.S. The loan is financing a $673.0 million recapitalization of the collateral and includes an additional $247.4 million of new cash equity injected into the transaction. DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the logistics and industrial 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 negative trends in the retail space continue to fuel positive trends in the industrial space. The portfolio benefits from favorable tenant granularity, strong sponsor strength, and strong leasing trends, all of which contribute to potential cash flow stability over time.

The transaction benefits from elevated cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 29.3 by allocated loan amount (ALA), which provides favorable diversification of cash flow when compared with a single-property securitization. No single property accounts for more than 8.0% of the portfolio’s NRA and no single tenant accounts for more than 2.2% of the in-place base rent.

The sponsorship group is contributing $247.4 million of cash equity, representing 33.7% of the $673.0 million purchase price, to facilitate the recapitalization. DBRS Morningstar generally views financings involving significant amounts of cash equity contribution from the transaction sponsors favorably, given the stronger alignment of economic incentives when compared with cash-out financings.

The sponsorship group includes Investcorp and GIC, both of which are considered to be institutional investment firms. Based in New York, London, and Bahrain, Investcorp has more than $35.0 billion in assets under management spread across commercial real estate, private equity, and credit management. Furthermore, Investcorp has acquired more than $21 billion in commercial real estate assets across the globe and its current North American commercial real estate portfolio is worth more than $7.5 billion. GIC is a Singapore-based investment firm with more than $100 billion in assets under management across various asset classes. GIC was founded by the Government of Singapore in order to manage the its foreign reserves.

The portfolio is well diversified across various states and markets, with no state making up more than 26.8% of the portfolio’s NRA and no single market accounting for more than 25.0% of the portfolio’s NRA. As a result, even if market fundamentals deteriorate in one market or state, portfolio-wide performance may hold up or not be affected as significantly compared with portfolios heavily concentrated in one market or state.

The portfolio’s tenant composition is granular, including more than 280 unique tenants, with no single tenant accounting for more than 2.5% of NRA. The portfolio’s tenant base spans a variety of industries based in various regions across the U.S.

The portfolio’s WA year built of 1983 is significantly older than the 1995 average year built of industrial portfolios DBRS Morningstar recently analyzed. While the portfolio’s WA clear height of 22 feet is reasonably lower than the 26.4 feet average clear height of industrial portfolios DBRS Morningstar recently analyzed, the lower clear height generally reflects the infill, flex industrial composition of the portfolio. DBRS Morningstar toured 17 assets, representing 27.1% of the pool by ALA, and the quality observed was generally Average.

The portfolio exhibits a relatively low WA remaining loan term of 3.3 years, which is considerably less than the fully extended loan term of five years. Furthermore, approximately the leases for 77.9% of the NRA will expire by the end of 2026, the final year of the fully extended loan term.

The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydown of the first 30% 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 penalized the senior classes of the transaction’s capital structure to account for the pro rata structure.

The borrowers can release individual properties with customary requirements. However, the prepayment premium for the release of individual assets is just 105% of the ALA for such property until the original principal balance has been reduced to 70% of the original loan balance and 110% of the ALA for such property thereafter. DBRS Morningstar considers the release premium to be weaker than the generally credit-neutral standard of 115%. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the weak property release premiums.
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.
Classes X-CP and 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction
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 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 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.

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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