DBRS Morningstar Confirms Ratings on Shelter Growth CRE 2021-FL3 Issuer Ltd

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by Shelter Growth CRE 2021-FL3 Issuer Ltd (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (sf)
-- Class C to at A (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has benefited from increased credit support to the bonds as a result of successful loan repayment as there has been a collateral reduction of 40.3% since issuance. While the borrowers of the majority of the remaining loans are generally progressing with their respective business plans, three loans, representing 31.0% of the pool balance, are in special servicing; two of which, including the largest loan in the pool, transferred in November 2023. The potential adverse selection risk is mitigated by the collateral reduction. 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 as well as 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 20 floating-rate mortgages secured by 26 transitional properties with a cut-off date balance totaling approximately $453.9 million. As of the November 2023 remittance, the pool comprised 13 loans secured by 18 properties with a cumulative trust balance of $271.2 million. Most of the loans are in a period of transition with plans to stabilize performance and improve the asset value. The collateral pool for the transaction is static with no reinvestment period, however, the Issuer had the right to use principal proceeds to acquire fully funded future funding participations during the Permitted Funded Companion Participation Acquisition period, which expired in September 2023. Since issuance, seven loans have been repaid from the pool, including four loans with a former cumulative trust balance of $102.9 million that repaid since the previous DBRS Morningstar rating action in December 2022.

The transaction is concentrated by multifamily properties as nine loans, representing 76.1% of the current pool balance, are secured by multifamily properties while the remaining four loans are each secured by one senior-housing, student-housing, industrial, and office property. The pool is primarily secured by properties in suburban markets, with six loans, representing 42.4% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional five loans, representing 40.7% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, 7, or 8. The remaining two loans, representing 16.9% of the pool, are backed by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting tertiary markets. In comparison, in December 2022, properties in suburban markets represented 57.6% of the collateral, properties in urban markets tertiary markets represented 30.4% of the collateral, and properties in tertiary markets represented 12.0% of the collateral.

Leverage across the pool has remained consistent as of the November 2023 reporting compared with issuance metrics as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 71.3%, with a current WA stabilized LTV of 66.6%. In comparison, these figures were 71.7% and 61.9%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 and may not fully reflect the effects of increased interest rates and/or widening capitalization rates in the current environment. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across three loans, representing 34.1% of the current trust balance.

Through October 2023, the lender had advanced cumulative loan future funding of $9.7 million to seven outstanding individual borrowers. The largest advance, $2.7 million, was made to the borrower of Skye Luxury loan (Prospectus ID#9; 8.5% of the current pool balance), which is secured by a 156-unit, independent-living property in Leander, Texas. The advanced funds were used to fund various capital expenditures throughout the property, which was 64.0% funded as of Q2 2023. As of the June 2023 rent roll, the property was 57.0% occupied, up from 45.6% at issuance. While occupancy and cash flow trail issuance expectations, the property has benefited from positive leasing momentum in recent months, having executed more than 20 new leases year-to-date as of the August 2023 reporting. The loan has an initial maturity date of April 2024 followed by two 12-month extension options.

An additional $11.2 million of loan future funding allocated to nine individual borrowers remains available. The largest individual loan allocation ($2.9 million) is to the borrower of the Vesta OKC Portfolio loan (Prospectus ID#4; 13.2% of the current pool balance). The loan is secured by a portfolio of four Class B multifamily properties in Oklahoma City. The sponsor’s business plan is to complete capital expenditures across the portfolio, including both unit-interior and exterior renovations. As of the Q2 2023 collateral manager’s report, the portfolio occupancy rate had declined to 74.0%, down from 86.5% at issuance. The drop in occupancy is the result of units being unavailable to lease while interior renovations are underway.

The largest loan in the pool, Fulton and Ralph (Prospectus ID#2; 19.5% of the current pool balance), transferred to special servicing for maturity default this month; however, according to an update from the collateral manager, a loan extension is expected to be granted to the borrower to provide additional time to complete its business plan and secure take-out financing. The loan is secured by two Class A multifamily properties totaling 152 units in Brooklyn, New York. The loan was previously on the servicer’s watchlist for the October 2023 maturity date, which has now passed. The borrower’s business plan is to complete the initial lease-up of the property to market levels and obtain a 421a property tax abatement. According to the Q2 2023 collateral manager’s report, the sponsor received a preliminary approval on the 421a real estate tax exemption; however, the borrower and the NYC Housing Preservation and Development continue to have discussions to determine the appropriate rental rates for the affordable units across the portfolio. The borrower anticipates final approval to be received by Q1 2024. The delay in the tax exemption, which was initially expected to be received by YE2022, continues to have a negative impact on the property’s performance as, according to the June 2023 rent roll, the portfolio was only 57.0% occupied. According to the June 2023 rent roll, the Fulton property was 65.9% occupied whereas leasing activity at the Ralph property had not yet commenced. Given the current risks, DBRS Morningstar increased the loan’s LTV by increasing the cap rate to market levels and additionally increased the loan’s probability of default. The adjustments resulted in a loan-level expected loss similar to the expected loss for the pool.

In addition, this month the Westwood Walnut loan (Prospectus ID#16; 5.5% of the current pool balance) transferred to special servicing. While no further comment was provided by the servicer regarding the reason for the transfer, the loan was reported less than 30 days delinquent. According to the Q2 2023 collateral manager’s report, a modification is likely to occur after the borrower noted it would need additional funds in order to complete the outstanding capital improvement work. As of October 2023, the loan’s future funding component was 88.5% funded with less than $200,000 remaining. The loan matures in December 2023 and DBRS Morningstar suspects the borrower may be facing issues regarding its ability to exit the loan.

The second-largest loan in special servicing, University City Portfolio (Prospectus ID#12; 6.0% of the current pool balance) is secured by a portfolio of two mid-rise student-housing properties in the University City submarket of Philadelphia. The loan transferred to special servicing in March 2023 ahead of the June 2023 maturity date as cash flow did not cover debt service. The property’s performance continued to trail issuance expectation as the portfolio was only 77.0% occupied as of the June 2023 rent roll. According to the collateral manager’s Q3 2023 update, the loan’s interest reserve has been depleted and, according to the November 2023 servicer reporting, the loan is more than 90 days delinquent with debt service last paid in July 2023. The lender and special servicer are reportedly working to bring the loan current by applying funds currently held in an additional reserve. If the loan is brought current, the lender and borrower are expected to exercise the loan’s first extension option, pushing maturity to June 2024. Given the credit risks, DBRS Morningstar increased the loan’s LTV by increasing the cap rate to market levels and additionally increased the loan’s probability of default. The adjustments resulted in a loan-level expected loss in excess of the expected loss for the pool.

Four loans, representing 36.9% of the current trust balance, are on the servicer’s watchlist. The loans have primarily been flagged for upcoming loan maturity, however, three of the loans are in special servicing.

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 credit ratings assigned to Class G materially deviate from the credit ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan level event risk due to concerns associated with loans in special servicing.

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 (November 3, 2023)/North American CMBS Insight Model Version 1.2.0.0, https://www.dbrsmorningstar.com/research/422859

-- 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.