DBRS Morningstar Confirms All Ratings on A10 Bridge Asset Financing 2021-D, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by A10 Bridge Asset Financing 2021-D, LLC:

-- Class A-1 FL at AAA (sf)
-- Class A-1 FX at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 26.9% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as five loans are secured by office properties (32.5% of the current trust balance). Because of complications initially arising from the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. While all loans remain current, given the declining demand for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

The initial collateral consisted of 26 loans secured by 31 mostly transitional properties with an initial balance of $304.4 million. As of the May 2023 remittance, the trust reported an outstanding balance of $229.8 million with 18 loans remaining in the trust. Since the previous DBRS Morningstar rating action in November 2022, two loans totaling $40.7 million have paid in full. The remaining loans in the transaction beyond the office concentration noted above include five loans secured by multifamily properties (29.1% of the current trust balance) and two loans secured by student housing properties (11.6% of the current trust balance). The transaction’s property type concentration has remained relatively stable since issuance, when 30.3% of the trust balance was secured by office, 27.8% of the trust balance was secured by multifamily collateral, and 17.0% of the trust balance was secured by student housing properties.

The remaining loans are primarily secured by properties in urban and suburban markets. Ten loans, representing 48.6% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 4 or 5, which denotes a suburban market. Three loans, representing 21.6% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 5, 6, or 7. In comparison with the pool composition at issuance, properties in suburban markets represented 55.1% of the collateral, and properties in urban markets represented 14.9% of the collateral.

In total, the lender has advanced $32.5 million in loan future funding to 13 of the remaining individual borrowers to aid in property stabilization efforts. The largest advance, $15.5 million, was made to the borrower of the 1450 Infinite Drive loan, which is secured by a 161,655-square-foot (sf) office property in Louisville, Colorado. The funds are being used to reposition the property into a life sciences property, complete with research and development and laboratory space, and fund leasing costs. Occupancy decreased to 54.9% from 63.4% at closing as two former tenants vacated upon their respective lease expirations. Since then, the property’s second-largest tenant, KBI Bio Pharma, Inc., renewed its lease for an additional 11 years beyond its January 2024 lease expiration and expanded its footprint by additional 3,812 sf, which will increase occupancy to 57.5%. The lease, which will commence in February 2024, includes a rental rate of $45.00 per sf (psf) triple net with 2.0% annual rent increases. The tenant will also receive 12 months of free rent and tenant improvements of $150 psf on the existing space and $185 psf on the expansion space. DBRS Morningstar analyzed this loan with an elevated probability of default (POD), resulting in an expected loss in excess of 150.0% higher than the pool’s weighted-average (WA) expected loss.

An additional $47.2 million of unadvanced loan future funding allocated to 15 individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $8.4 million, is allocated to the borrower of the 99 Rhode Island–Exeter loan. The loan, which represents the largest remaining loan in the pool at 10.0% of the current cumulative trust loan balance, is secured by a Class B office building in the South of Market office submarket of San Francisco. While the loan is not on the servicer’s watchlist, DBRS Morningstar is highlighting the loan given the property’s prolonged vacancy. The subject has been vacant since December 2019; however, between projected future borrower equity and loan future funding, there is $100.00 psf of potential leasing dollars to execute new leases, which should be sufficient provided the borrower can secure tenants. The changing market conditions and overall desirability for office product in San Francisco, however, are expected to continue to be challenges for the borrower. DBRS Morningstar analyzed this loan with an elevated POD resulting in an expected loss of nearly 150.0% higher than the pool’s WA expected loss.

While there are no loans on the servicer’s watchlist, one loan, representing 1.3% of the current cumulative trust loan balance, is in special servicing. The Colonial Landing loan, which is secured by a 92-unit multifamily property in Hampton, Virginia, transferred to special servicing in October 2022 for imminent maturity default, ahead of the loan’s pending November 2022 maturity date. The loan was structured with two 12-month extension options; however, the lender and borrower are not likely to come to an extension agreement as the collateral manager stated the borrower was notified in March 2023 the lender would initiate foreclosure proceedings. As of March 2023, the occupancy rate was reported at 45.0%, a significant decline from the 97.8% physical occupancy rate at loan closing. The lender is dual tracking the foreclosure process and selling the note at auction, which is expected to occur in three months once at all agreements are singed. The property was valued at $6.3 million at issuance, above the current outstanding loan balance of $3.9 million and current cumulative advances outstanding of $0.4 million. Given the decline in performance with minimal operating cash flow and the current the financing environment, the current market value of the property may have declined, though multifamily property demand has remained relatively stable. DBRS Morningstar analyzed this loan with an elevated POD resulting in an expected loss of nearly 300% higher than the pool’s WA expected loss.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0
https://www.dbrsmorningstar.com/research/410913

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.