DBRS Morningstar Confirms Credit Ratings on Shelter Growth CRE 2022-FL4 Issuer Ltd

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by Shelter Growth CRE 2022-FL4 Issuer Ltd (SGCP 2022-FL4), as follows:

-- Class A 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 credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance as the trust continues to be primarily secured by multifamily collateral. In conjunction with this press release, DBRS Morningstar has also published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction, and 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 23 floating-rate mortgages secured by 24 mostly transitional properties with a cut-off date balance totaling $400.7 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the September 2023 remittance, the pool comprised 21 loans secured by 22 properties with a cumulative trust balance of $388.4 million. Since issuance, two loans with a prior cumulative trust balance of $32.4 million have been successfully repaid in full from the pool.

The transaction is static with no reinvestment period; however, the Issuer has the right to use principal proceeds to acquire funded pari passu companion participations subject to stated Acquisition Criteria during the Permitted Funded Companion Participation Acquisition period, which ends on the payment date in December 2023. As of September 2023, the Replenishment Account has a balance of $12.3 million.

The transaction is concentrated by property type as 19 loans, representing 81.3% of the current trust balance, are secured by multifamily properties. The remaining two loans are secured by a student-housing property, representing 9.8% of the trust balance, and a mixed-use property, representing 8.9% of the trust balance The pool is primarily secured by properties in suburban markets, with 12 loans, representing 47.4% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4 or 5. An additional five loans, representing 28.2% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, while four loans, representing 24.4% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting rural and tertiary markets. In comparison, at closing, properties in suburban markets represented 50.7% of the collateral, properties in urban markets represented 27.1% of the collateral, and properties in tertiary markets represented 22.1% of the collateral.

Leverage across the pool was generally stable to slightly elevated as of the September 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 72.0%, with a current WA stabilized LTV of 64.9%. In comparison, these figures were 72.3% and 65.7%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current rising interest rate or widening capitalization rate environment. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across eight loans, representing 49.7% of the current trust balance.

Through September 2023, the lender had advanced cumulative loan future funding of $26.5 million to 14 of the 16 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Phoenix Huron Campus ($10.4 million) and Amalie Point & Greenbriar Apartments ($4.1 million) loans. The Phoenix Huron Campus loan is secured by a 3.1 million-sf, mixed-use property consisting of 34 rentable buildings across 130 acres in Endicott, New York. The collateral comprises 517,484 sf (17.0% of NRA) of office; 955,841 sf (31.0% of NRA) of industrial; and 1,582,532 sf (52.0% of NRA) of flex space, used for both manufacturing and warehousing. The borrower’s business plan is to complete a significant capital expenditure (capex) program to improve the operational efficiency and attractiveness of the property and to increase occupancy and rental rates to market. According to the July 2023 rent roll, the property was 71.7% occupied with an average base rental rate of $5.80 psf. Beyond the funds advanced to date, DBRS Morningstar received an update from the collateral manager noting the remaining $6.5 million of future loan funding was force-funded into an account controlled by the lender. The collateral manager expects the borrower to continue to request advances as capex work remains ongoing. The Amalie Point & Greenbriar Apartments loan is secured by a portfolio of two garden-style multifamily properties totaling 169 units in Nashville, Tennessee. The borrower’s business plan is to increase rental rates to market levels by completing unit renovations and exterior upgrades across both properties. According to the collateral manager, the collateral was 100.0% occupied as of June 2023 and the planned capex project was 88.4% complete.
An additional $22.3 million of future loan funding allocated to 16 of the outstanding individual borrowers remains available. The largest portion of available funds ($6.5 million) is allocated to the borrower of the aforementioned Phoenix Huron Campus loan. Additionally, the borrower of the pool’s largest loan, City Club Crossroads KC loan, has $3.9 million of outstanding future funding available. The loan is secured by the borrower’s leasehold interest in a 283-unit multifamily property in downtown Kansas City, Missouri. The unfunded future funding component is an earnout advance the borrower may draw upon once per quarter, subject to various performance tests. Through Q2 2023, there have been no advances. The borrower’s business plan is to lease up the property to stabilized levels, and to increase rental rates to market upon tenant renewals as concession loss burns off. According to the August 2023 rent roll, the property was 87.6% occupied and 90.5% leased.

As of the September 2023 remittance, there were no delinquent loans or loans in special servicing, and there were two loans on the servicer’s watchlist, representing 5.9% of the current trust balance. The loans are being monitored for upcoming maturity risk. The larger of the two loans, Canterbury Square, matures in December 2023 and the loan includes three 12-month extension options. The remaining loan, AEM Detroit Portfolio, also matures in December 2023 and DBRS Morningstar expects the loan to be repaid in full prior to maturity.

ENVIRONMENTAL, SOCIAL, 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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 the 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

The credit 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 22, 2023), https://www.dbrsmorningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023),
https://www.dbrsmorningstar.com/research/419592

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://www.dbrsmorningstar.com/research/415687

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

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