Morningstar DBRS Confirms Credit Ratings on All Classes of BSPRT 2021-FL7, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by BSPRT 2021-FL7, Ltd. as follows:

-- 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 (high) (sf)
-- Class G at BB (low) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stability of the transaction as the majority of loan collateral, including 27 loans, representing 82.5% of the current trust balance, is secured by multifamily properties. Multifamily properties have historically proven to better retain property value and cash flow compared with other property types. In its analysis for the review, Morningstar DBRS determined the majority of individual borrowers are progressing with their business plans to increase property cash flow and property value; however, there are some borrowers whose business plans and loan exit strategies have lagged for a variety of reasons, including increased construction costs, slowed rent growth, and increased debt service costs, which have increased the execution risk. The unrated first-loss bond of $82.1 million provides significant cushion against realized losses should the increased risks for those loans ultimately result in defaults and dispositions. In conjunction with this press release, Morningstar DBRS 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-DBRS@morningstar.com.

As of the July 2024 remittance, the transaction had an outstanding balance of $826.5 million with 36 loans secured by 57 properties remaining in the trust. There has been a collateral reduction of 8.2% since the transaction became static in December 2023, following the post-closing, 24-month Reinvestment Period. Of the original 26 loans from the transaction closing in December 2021, 16 loans, representing 63.9% of the current pool balance, remain in the trust. Since the previous Morningstar DBRS credit rating action in August 2023, seven loans, representing 5.6% of the current pool balance, have been added to the trust while seven loans with a former cumulative trust balance of $108.4 million were successfully paid in full.

Beyond the multifamily concentration noted above, five loans, representing 9.4% of the current trust balance, are secured by hotel properties; one loan, representing 4.0% of the current trust balance, is secured by a student-housing property; two loans, representing 1.9% of the current trust balance, are secured by office properties; and one loan, representing 2.3% of the current trust balance, is secured by a portfolio of industrial properties. In comparison with the pool as of August 2023, multifamily collateral represented 82.0% of the trust balance while hotel collateral represented 9.9% of the trust balance.

The pool collateral is concentrated in properties located in suburban markets as 25 loans, representing 70.8% of the pool, are secured by properties in such markets, as defined by Morningstar DBRS, with Morningstar DBRS Market Ranks of 3, 4, or 5. An additional eight loans, representing 22.9% of the pool, are secured by properties with Morningstar DBRS Market Ranks of 1 and 2, denoting rural and tertiary markets, while the remaining three loans, representing 6.3% of the pool, are secured by properties with Morningstar DBRS Market Ranks of 6 or 7, denoting urban markets. Those proportions compare with the pool as of August 2023, when properties in suburban markets represented 75.3% of the collateral, properties in tertiary and rural markets represented 17.6% of the collateral, and properties in urban markets represented 7.0% of the collateral.

Leverage across the pool has remained similar since issuance as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 71.0% with the current WA stabilized LTV of 63.4%. In comparison, these figures were 70.8% and 64.4%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the individual property appraisals were completed in 2021 or 2022 and do not reflect the current higher interest rate or widening capitalization rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 16 loans, representing 71.8% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

As of July 2024, one loan, Cedar Grove Multifamily Portfolio (Prospectus ID#59; 1.5% of the current pool balance) is delinquent and specially serviced. The loan transferred to the special servicer in January 2024 for payment default. The sponsor, GVA Real Estate Group (GVA), has incurred stress across its commercial real estate portfolio as a result of slowed rental rate growth, rising construction costs, and increased debt service payments. The loan was originally secured by 15 properties across North Carolina, South Carolina, and Oklahoma with the majority of properties located throughout the Charlotte, North Carolina, metropolitan statistical area. The borrower's business plan was to complete unit interior and propertywide upgrades across the portfolio, financed by loan future funding of $26.2 million.

Prior to the loan becoming delinquent in October 2023, the lender had advanced future funding of $20.8 million to the borrower for property renovations. Given the loan delinquency and the ongoing foreclosure proceedings, the borrower has ceased the capital expenditure plan with cash flows being used to pay debt service. The loan is currently paid through June 2024. The borrower is now focused on stabilizing individual property operations in order to sell assets and pay down the loan balance. One property has been released to date, which resulted in a principal paydown of $16.8 million. As of July 2024, the A-note has a balance of $135.4 million with a $12.5 million piece held in the trust. According to the collateral manager, the borrower has stated it believes it will be able to successfully sell additional properties throughout the remainder of 2024 with several assets under contract or in various stages of negotiation. In its current analysis, Morningstar DBRS applied increased LTV and probability of default adjustments to the loan, which resulted in a loan expected loss in excess of the expected loss for the overall pool.

Six loans, representing 9.3% of the current trust balance, are on the servicer's watchlist as of the July 2024 reporting. The loans have generally been flagged for low debt service coverage ratios (DSCRs). The largest loan on the servicer's watchlist, August Flats (Prospectus ID48; 3.5% of the current trust balance), is secured by a 2021 vintage multifamily property in San Antonio, Texas. The borrower's business plan is to complete the initial lease-up phase and burn off concession loss, which has taken longer than initially anticipated. The loan matured in January 2024 and the borrower exercised the first of up to three 12-month extension options, purchasing a new interest rate cap agreement with a 3.0% strike price. According to Q1 2024 reporting provided by the collateral manager, the property was 85.1% occupied with an average rental rate of $1,670 per unit, which is $205 per unit below the issuer's stabilized projection. Net cash flow (NCF) of $1.7 million for the trailing 12 months (T-12) ended March 31, 2024, equated to a DSCR of 0.62x and is below the issuer's stabilized NCF of $2.8 million.

Throughout 2024, 18 loans, representing 55.0% of the current trust balance, have scheduled maturity dates. Fourteen of these loans, representing 50.5% of the current trust balance, have extension options and, if property performance does not qualify to exercise the related options, Morningstar DBRS expects the borrower and lender to negotiate mutually beneficial loan modifications to extend the loans, which would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase a new interest rate cap agreement.

Through June 2024, the lender had advanced $80.9 million in cumulative loan future funding to 22 of the outstanding individual borrowers to aid in property stabilization efforts, including $34.8 million since the previous Morningstar DBRS rating action in August 2023. The largest advance to a single borrower ($20.8 million) has been made to the previously mentioned Cedar Grove Multifamily Portfolio loan. The second-largest advance ($8.5 million) has been made to the borrower of the Lake Village North loan, which is secured by an 848-unit multifamily property in Garland, Texas. The borrower's business plan is to complete a significant $11.6 million capex program across the property. According to the Q1 2024 update from the collateral manager, the cost of the planned renovations increased to $14.1 million with the difference to be funded from additional sponsor equity. The borrower has completed the property exterior and common area upgrades as well as 385 unit upgrades. The renovated units have achieved a monthly premium of $120 over non-renovated units and as of March 2024, the property was 84.8% occupied with an overall average rental rate of $1,142 per unit. The loan remains current; however, according to the financials provided by the collateral manager for the T-12 ended March 31, 2024, property operations do not support debt service as the DSCR was 0.60x. While an additional $2.7 million of future funding remains available to the borrower for unit renovations, the pace of upgrades has stalled as only $0.2 million of future funding has been advanced to the borrower since August 2023.

An additional $30.3 million of loan future funding allocated to 18 individual borrowers remains available. The largest amount ($5.4 million) is available to the borrower of the Cedar Grove Multifamily Portfolio; however, given the status of the loan, Morningstar DBRS does not expect the lender to advance any remaining funds. An additional $5.1 million is allocated to the borrower of the Deerfield Corporate Center loan, which is secured by an office property in Alpharetta, Georgia. The available funds are for accretive leasing costs; however, the borrower has made little progress in its business plan since loan closing in December 2019 as the occupancy rate at the property was 28.3% as of February 2024. The loan exhibits increased credit risk with minimal cash flow and loan maturity in January 2025; however, there is minimal exposure to the trust as only $0.2 million of the $28.6 million loan is held in the trust. Morninstar DBRS analyzed the loan with increased LTV and probability of default adjustments with a loan expected loss in excess of the expected loss for the overall pool.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective private rating letters at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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, 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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 the 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.

DBRS, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/428797

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

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

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/410863.

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