Morningstar DBRS Confirms All Credit Ratings on SREIT Trust 2021-FLWR

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-FLWR issued by SREIT Trust 2021-FLWR (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable to improving performance of the transaction, which has remained in line with Morningstar DBRS' expectations since issuance as evidenced by the steady occupancy rate of 95% and consistent net cash flow (NCF) growth since issuance. These factors have served as mitigants to the credit risks around the low in-place debt service coverage ratio (DSCR), which declined to 1.10 times (x) as of September 2023, and Morningstar DBRS' concerns around insurance and other expenses recently increasing at a rate that outpaces income growth for multifamily properties in the Florida and Texas markets, where the portfolio is heavily concentrated.

The transaction is collateralized by a portfolio of 16 Class A multifamily assets totaling 5,260 units, spread across 11 metropolitan statistical areas within six states. The borrower used whole loan proceeds of $796.5 million, alongside $385.0 million of sponsor equity, to facilitate the acquisition of the portfolio for approximately $1.09 billion ($216,300 per unit). The loan benefits from experienced sponsorship by Starwood, which owns nearly 350 multifamily properties totaling approximately 88,000 units in the United States.

The loan has a two-year initial term, with three one-year extension options and pays interest only through the fully extended maturity date of July 2026. To hedge exposure to Libor, at issuance, the borrower entered into an interest rate cap agreement with a strike price of 1.00% and a five-year term, consistent with the fully extended loan maturity. The borrower exercised its first one-year loan extension option along with a new capitalization rate (cap rate) agreement that has a conversion from Libor to the Secured Overnight Financing Rate. The loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns across the capital structure for the first 20% of the unpaid principal balance. The borrower can release individual properties subject to customary debt yield and loan-to-value ratio (LTV) tests. The prepayment premium for the release of individual assets is 105.0% of the allocated loan amount (ALA) on the first 15.0% of the original principal balance, and 110.0% of the ALA for the release of individual assets thereafter, which Morningstar DBRS considers to be weaker than a generally credit-neutral standard of 115.0%.

The underlying properties were constructed between 2006 and 2017, and generally exhibit high-quality finishes and comprehensive amenities. The properties are in generally strong, high-growth markets, with geographic concentrations in Texas and Florida representing 78.2% of the total units and 76.8% of the total purchase price.

As of the September 2023 reporting, the portfolio had a weighted-average (WA) occupancy rate of 95.2%, generally in line with the occupancy rate of 95.0% at YE2022, 95.3% at YE2021, and 96.2% at issuance. The annualized trailing nine-month NCF of $57.5 million, as of September 2023, reflects an increase of 8.8% from $52.9 million as of September 2022, a 27.2% increase from the YE2021 NCF of $45.2 million, a 28.3% increase from the Issuer's NCF of $44.8 million, and an increase of 39.2% from the Morningstar DBRS NCF of $41.3 million at issuance. As previously mentioned, based on Q3 2023 reporting, despite the increases to NCF, the loan had a WA DSCR of 1.10x, down significantly from 2.11x at YE2022, 3.49x at YE2021, and 3.17x at issuance because of an increased interest rate.

Given the improvement in NCF, Morningstar DBRS derived an updated value of $676.9 million based on a cap rate of 6.25% and a 20% haircut to the YE2022 NCF, representing an upgrade stress scenario, which supports the confirmations and Stable trends. Because of the strong rental growth, recent construction and comprehensive amenity packages, and the properties' locations in high-growth markets, Morningstar DBRS maintained the increased LTV thresholds for cash flow volatility, property quality, and market fundamentals of 2.0%, 2.0%, and 2.5%, respectively. Morningstar DBRS also applied a penalty to the transaction's capital structure to account for the pro rata nature of certain voluntary prepayments and weak release premiums.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024),
https://dbrs.morningstar.com/research/428799
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.