DBRS Morningstar Assigns Provisional Credit Ratings to H.I.G. RCP 2023-FL1 LLC

DBRS, Inc. (DBRS Morningstar) assigned provisional credit ratings to the following classes of notes (the Notes) to be issued by H.I.G. RCP 2023-FL1 LLC (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 pool consists of 16 floating-rate mortgage loans secured by 35 mostly transitional properties with a cut-off date balance of approximately $672.6 million. The loans have an approximate aggregate $645.6 million of funded companion participation, $80.8 million in future funding, and $30.9 million in junior participations. Of these junior participations, approximately $29.9 million has been funded with approximately $1.0 million in future funding.

The transaction will consist of a fully identified static pool of assets with no ability to add unidentified assets after the closing date other than the limited right to acquire related pari passu debt. The Issuer may use permitted proceeds to acquire Eligible Companion Participations, subject to the Eligible Companion Participation Acquisition Criteria being met, including a no-downgrade rating agency confirmation (RAC) by DBRS Morningstar for all funded companion participations. This can be done from the closing date up to the payment date in October 2025. The holder of the future funding companion participations, which will be an affiliate of H.I.G. Realty, has full responsibility to fund the future funding companion participations. The transaction will have a sequential-pay structure.

The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, nine loans, or 53.4% of the initial pool balance, have remaining future funding participations totaling approximately $80.8 million. All loans have closed with origination dates ranging from October 27, 2020 (Vancouver Tech Center) to August 25, 2023 (Kauai Beach Resort). There are seven loans, representing 41.8% of the initial pool balance, with maturity dates within the next 18 months. This includes two loans, or approximately 10.9% of the initial pool balance, that are less than a year away from their initial maturity dates.

Seven of the 16 loans in the pool, or 44.4%, are secured by multifamily properties. Generally, multifamily properties benefit from lower expense ratios and staggered lease rollover compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to recover when the market improves. The pool also benefits from good property quality scores and MSA Group designations. Two loans, comprising 14.5% of the initial pool balance, are secured by properties DBRS Morningstar deemed Above Average in quality; seven loans, representing 43.8% of the initial pool balance were deemed Average + in quality. The remaining loans were deemed Average quality. Eight loans, representing 54.3% of the pool balance, have collateral in the DBRS Morningstar MSA Group 3, which is the best-performing group in terms of historical CMBS default rates among the top 25 MSAs.

DBRS Morningstar analyzed the transitional loans to a stabilized cash flow that is, in most instances, above the in-place cash flow. It is possible that the sponsor will not successfully execute its business plan and that the higher stabilized cash flow will not materialize during the loan term. 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 all of the loans in the pool except for one, representing 95.2% of the initial pool balance. Additionally, DBRS Morningstar conducted site inspections for 10 of the 16 loans in the pool, representing 68.5% of the initial pool balance.

This transaction is H.I.G. Capital’s inaugural capital markets financing transaction and is expected to be the first in a series of floating Rate CRE CLO issuances for the sponsor. A majority-owned affiliate of H.I.G. Realty Credit Investments, LLC will retain the most subordinate Class F, Class G, and Class H notes, which represent 14.0% of the total principal balance. Affiliates of the seller will also retain on the closing date 100% of the junior Companion Participations, which have an aggregate cut-off date principal balance of $29.9 million and a maximum principal balance of approximately $30.9 million.

DBRS Morningstar’s credit rating on the Notes addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations (for example, Default Interest and Interest on Unpaid Interest).

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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

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

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 credit ratings referenced herein.

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.

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

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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

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

North American CMBS Insight Model v 1.1.0.0
(https://www.dbrsmorningstar.com/research/410913

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

Financial Obligations of the Issuer are listed as follows:
Class A Interest Distribution Amount
Class A Notes Principal Amount
Class A-S Interest Distribution Amount
Class A-S Notes Principal Amount
Class B Interest Distribution Amount
Class B Notes Principal Amount
Class C Interest Distribution Amount
Class C Notes Principal Amount
Class D Interest Distribution Amount
Class D Notes Principal Amount
Class E Interest Distribution Amount
Class E Notes Principal Amount
Class F Interest Distribution Amount
Class F Notes Deferred Interest
Class F Notes Principal Amount
Class G Interest Distribution Amount
Class G Notes Deferred Interest
Class G Notes Principal Amount