DBRS Morningstar Confirms Credit Ratings on All Classes of Morgan Stanley Capital I Trust 2021-ILP

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of the Comercial Mortgage Pass-Through Certificates, Series 2021-ILP issued by Morgan Stanley Capital I Trust 2021-ILP as follows:

-- 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.

The credit rating confirmations reflect the overall stable performance of the transaction. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in November 2021, the loan continues to exhibit healthy credit metrics, with the servicer-reported financials for YE2022 and the trailing six (T-6) month period ended June 30, 2023, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with DBRS Morningstar’s expectations.

At issuance, the transaction was collateralized by the borrower’s fee-simple interest in a portfolio of 61 industrial properties totalling approximately 6.9 million square feet (sf). The portfolio is primarily composed of urban logistics facilities located near major interstate highways, airports, railway hubs, and ports in eight distinct markets, across 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. The average size of the properties in the portfolio is 113,596 sf with a weighted-average (WA) year built of 1983. At issuance, there were more than 280 unique tenants across the portfolio with no single tenant representing more than 2.5% of the NRA and 2.1% of the total in-place base rent. The proportion of office space across the portfolio totals 19.2%. In general, portfolios with greater percentages of flex industrial/office space tend to be less desirable because of higher tenant-improvement costs and because office tenants at these properties tend to be more transient.

The subject finanacing was part of a larger $673.0 million recapitalization of the collateral. The sponsorship group, which includes Investcorp and GIC, contributed $247.4 million of cash equity to facilitate the recapitalization. DBRS Morningstar generally views financings involving significant amounts of cash equity contributions from the transaction sponsors favorably given the stronger alignment of economic incentives when compared with cash-out financings. Based in New York, London, and Bahrain, Investcorp has more than $50 billion in assets under management spread across multiple asset classes including commercial real estate, private equity, and credit management. GIC is a Singapore-based investment firm with more than $750 billion in assets under management across various asset classes. GIC was founded by the government of Singapore in order to manage the government’s foreign reserves.

The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan was originally scheduled to mature on November 9, 2023; however, the borrower has excerised its first extension option, pushing the loan’s maturity date to November 9th, 2024. Execution of each extension option is conditional upon, among other things, no events of default and the borrower’s purchase of an interest rate cap agreement for each extension term. The borrower will be required to maintain a debt yield above 6.0% throughout the loan term or cash management provisions will be triggered.

The transaction features a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the original principal balance, where individual properties may be released from the trust at a price of 105.0% of the allocated loan amount (ALA). Proceeds are applied sequentially for the remaining 70.0% of the pool balance with the release price increasing to 110.0% of the ALA. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premium. The release provisions require the pool to maintain a minimum debt yield of 8.8% after each property release. According to the October 2023 remittance, the outstanding trust balance has been reduced nominally by $1.5 million because of a prepayment related to the release of one small property totalling 0.3% of the ALA at issuance.

Historically, the portfolio has demonstrated strong occupancy trends, with a WA occupancy rate of 94.8% at issuance. According to the financial reporting for the T-6 month period ended June 30, 2023, the portfolio was 97.0% occupied and generated annualized NCF of $39.3 million (a debt service coverage ratio (DSCR) of 1.40 times (x)), above the YE2022 figure of $33.8 million (a DSCR of 2.43x) and the DBRS Morningstar NCF of $32.9 million (a DSCR of 4.46x) derived at issuance. While EGI has increased by 7.8% when compared with the DBRS Morningstar’s NCF, primarily as a result of rent growth, operating expenses have increased by only 3.5%. The decline in the DSCR was primarily driven by a significant increase in debt service obligations, given the loan’s floating-rate structure.

DBRS Morningstar ratings are based on a value analysis completed at issuance, which considered a capitalization rate of 7.25%, resulting in a DBRS Morningstar value of $453.6 million and a loan-to-value ratio (LTV) of 98.3%. The DBRS Morningstar value represents a 39.3% haircut to the appraiser’s value of $748.2 million. As part of this review, DBRS Morningstar adjusted its analysis to exclude the one released property, resulting in a nominal difference to the aforementioned credit metrics. To account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 1.5% across the capital structure. DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 4.0%, to account for cash flow volatility, property quality, and market fundamentals.

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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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