DBRS Morningstar Finalizes Provisional Ratings on BDS 2021-FL10, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by BDS 2021-FL10, 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.

The initial collateral consists of 32 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $932.1 million secured by 35 properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $100.8 million. The holder of the future funding companion participations, which, on the closing date, will be the seller, BDS IV Loan Seller LLC, or affiliates of Bridge REIT, has full responsibility to fund the future funding companion participations. The ramp-up acquisition period will be used to increase the trust balance by $300.0 million to a total target collateral principal balance of $1.23 billion. DBRS Morningstar assessed the $300.0 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, among other things, has minimum debt service coverage ratio (DSCR), maximum loan-to-value (LTV) ratio, minimum Herfindahl score, and loan size limitations. This pertains to all loans in the pool. Further, the eligibility criteria stipulates Rating Agency Confirmation on ramp loans, reinvestment loans, and a $1.0 million threshold, thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impacts to the overall ratings. Finally, in respect to transaction structure, interest can be deferred for Class C, Class D, Class E, Class F, and Class G Notes, for so long as a note with a higher priority is outstanding, and such interest deferral will not result in an event of default. The transaction is a managed vehicle, which includes a 180-day ramp-up acquisition period and subsequent 24-month reinvestment period. The transaction will have a sequential-pay structure.

Of the 35 properties, 25 are multifamily assets (82.5% of the mortgage asset cutoff date balance). The remaining seven loans are secured by manufactured housing properties (two loans; 5.8% of the mortgage asset cutoff date balance), office properties (two loans; 4.1% of the mortgage asset cutoff date balance), one student housing property (3.1% of the mortgage asset cutoff date balance), one industrial property (2.4% of the mortgage asset cutoff date balance), and one full-service hotel (2.1% of the mortgage asset cutoff date balance). The loans are mostly secured by cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Six loans are whole loans, 25 are participations with companion participations that have remaining future funding commitments totaling $100.8 million, and one is a par-passu note. The future funding for each loan is generally to be used for capital expenditures to renovate the property or build out space for new tenants. All of the loans in the pool have floating interest rates initially indexed to Libor and are interest only (IO) through their initial terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor index, 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 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 the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The transaction is sponsored by Bridge IV REIT, Inc., a wholly owned subsidiary of Bridge Debt Strategies Fund IV LP and an affiliate of Bridge Investment Group Holdings Inc. (Bridge Investment Group). The Sponsor has strong origination practices and substantial experience in originating loans and managing commercial real estate properties. Bridge Investment Group is a leading privately held real estate investment and property management firm that manages in excess of $28.7 billion in assets as of November 2021. Bridge is an active commercial real estate collateralized loan obligation (CRE CLO) issuer, having completed four static CRE CLO transactions and six managed CRE CLO transactions as of the date of this report.

Twenty-five of the 32 loans, representing 76.1% of the mortgage asset cutoff date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. In addition, two loans, representing 8.8% of the pool, are recapitalizations and in each case the borrower made significant cash equity contributions in conjunction with the loan. 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 pool is composed mostly of multifamily assets (82.5% of the mortgage asset cutoff date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall commercial mortgage-backed securities (CMBS) universe.

As no loans in the pool were originated prior to the onset of the coronavirus pandemic, the WA remaining fully extended term is 57 months, which gives the Sponsor enough time to execute its business plans without risk of imminent maturity. In addition, the appraisal and financial data provided are reflective of conditions after the onset of the pandemic.

The transaction is managed and includes a ramp-up component and a reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. An affiliate of Bridge Investment Group, an indirect wholly owned subsidiary of the Sponsor (as retention holder), will acquire the Class F Notes, the Class G Notes, and the Preferred Shares (Retained Securities), representing the most subordinate 18.625% of the transaction by principal balance. The risk of negative migration is also partially offset by eligibility criteria that outline minimum DSCR, maximum LTV, minimum Herfindahl score, property type, property location, and loan size limitations for ramp and reinvestment assets. DBRS Morningstar has the ability to provide a no-downgrade confirmation for new ramp loans, companion participations over $1.0 million, and new reinvestment loans. These loans will be analyzed by DBRS Morningstar before they come into the pool and reviewed for potential ratings impact.

Transitional Properties: 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 Sponsor will not successfully execute its 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. The Sponsor’s failure to execute the business plans 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 76.1% of the pool cutoff date balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss severity given default based on the as-is credit metrics, assuming the loan is fully funded with no net cash flow or value upside. Future funding companion participations will be held by affiliates of Bridge REIT and have the obligation to make future advances. Bridge REIT agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Bridge REIT will be required to meet certain liquidity requirements on a quarterly basis. Eight loans, representing 21.2% of the pool balance, are structured with a debt service reserve to cover any interest shortfalls.

Thirteen loans, comprising 39.1% of the initial pool balance, are in DBRS Morningstar Metropolitan Statistical Area (MSA) Group 1. Historically, loans located in this MSA Group have demonstrated higher probabilities of default, resulting in the individual loan-level expected losses being greater than the WA pool expected loss. Furthermore, these loans are primarily not located in core markets and have a lower-than-average WA DBRS Morningstar Market Rank of 3.5. By CRE CLO standards, the pool has a high Herfindahl score of 26.2. These loans are located in three states. Two of the loans have a DBRS Morningstar Market Rank of 5.

All 32 loans have floating interest rates, are IO during the original term and through all extension options, and have original terms of 24 months to 60 months, creating interest rate risk. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five years. 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 32 floating-rate loans have purchased Libor rate caps with strike prices that range from 1.00% to 3.50% 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.

DBRS Morningstar conducted no management tours because of health and safety constraints associated with the ongoing coronavirus pandemic. As a result, DBRS Morningstar relied more heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned to each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos. DBRS Morningstar made conservative property quality adjustments with only two loans—Link Apartments Montford I and Oakley Apartments—representing 9.1% of the initial pool, being modeled with Average + property quality. Furthermore, no loans received Above Average or Excellent property quality distinctions.

The underlying mortgages for the transaction will pay the floating rate, which presents potential benchmark transition risks as the deadline approaches for the elimination of Libor. The transaction documents provide an alternative benchmark rate for the transition, 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#01 – The Wyatt (7.5% of the pool)
-- Prospectus ID#02 – Link Apartments Montford I (6.4% of the pool)
-- Prospectus ID#03 – Oasis Grand Tower II (5.9% of the pool)
-- Prospectus ID#04 – 4127 Arcadia (5.3% of the pool)
-- Prospectus ID#05 – Soleil Apartments (5.0% of the pool)
-- Prospectus ID#06 – Rosemont CityView (4.5% of the pool)
-- Prospectus ID#07 – Dawson Forest (4.2% of the pool)
-- Prospectus ID#08 – Mojave Flats (3.9% of the pool)
-- Prospectus ID#09 – The Champion at Bluegrass (3.2% of the pool)
-- Prospectus ID#10 – Legacy MHC Portfolio (3.1% of the pool)

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 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.

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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