DBRS Morningstar Finalizes Provisional Ratings on RLGH Trust 2021-TROT

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by RLGH Trust 2021-TROT:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

All trends are Stable.

DBRS Morningstar discontinued and withdrew its ratings on the Class X-CP, X-FP, and X-NCP interest-only (IO) certificates initially contemplated in the offering documents, as they were removed from the transaction.

The Class A, Class A-Y, Class A-Z, and Class A-IO Certificates (the CAST Certificates) can be exchanged for other CAST Certificates and vice versa. Proportions are constant proportions of the original Certificate Balance or Notional Amount of the CAST Certificates being exchanged. Following the Closing Date, the Class A certificates will be exchangeable for the CAST Certificates in the Exchanged Proportions indicated in the applicable combinations indicated above (each a Combination) and vice versa (each such completed exchange, an Exchange). The CAST Certificates required under the applicable Combination to result in the issuance of the other CAST Certificates in amounts at least equal to the applicable minimum denomination for such other Class(es) are referred to as the Required Exchangeable Proportion, and the proportion so exchanged, the Exchanged Proportion.

DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the industrial warehouse and logistics sector, despite the uncertainty and risk that the Coronavirus Disease (COVID-19) pandemic has created across all commercial real estate asset classes. The reliance on e-commerce and home delivery during the pandemic has only accelerated prepandemic consumer trends, and DBRS Morningstar continues to believe that retail’s loss is largely industrial’s gain. The subject transaction consists of a portfolio of 53 properties (48 flex industrial properties, three research and development industrial properties, one 7.06-acre parcel of land, and one unanchored retail property) located across six business parks in the Raleigh-Durham market in North Carolina. The sponsor on the transaction is a joint venture (JV) between Equus Capital Partners (Equus) and AIG Global Real Estate Investment Corp. (AIG). The loan is being used to fund AIG's acquisition of 95% of the pool from Equus, which will retain the remaining 5%.

The borrower sponsors, a JV partnership between Equus and AIG, are contributing approximately $132.9 million in cash equity as a part of the transaction to acquire the portfolio for a purchase price of $422.3 million. DBRS Morningstar generally views acquisition loans with significant amounts of cash equity more favorably than cash-out financings, given the stronger alignment of economic incentives with certificateholders. The sponsor under the mortgage loan is a JV partnership between Equus and AIG. Equus is a private real estate investment firm focused on commercial real estate investments with assets under management of approximately $4.0 billion. AIG is the real estate investment arm of AIG Inc. and focuses real estate investments globally. The portfolio has a high in-place occupancy at 95.2% and long track record of stable occupancy. Since 2007, the portfolio has maintained a WA occupancy of 95.3% and performance has remained stable through the coronavirus pandemic. Month-end collections averaged 97.4% through the trailing 12 months ended March 31, 2021. The transaction benefits from additional cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 39.3 by allocated loan amount, which is above the average for recent DBRS Morningstar-rated industrial portfolios and provides favorable diversification of cash flow when compared with a single asset. Six of the portfolio's 53 properties are currently leased to single-tenant users which highlights the portfolio's tenant diversity and granularity. The properties collectively comprise approximately 12.1% of the DBRS Morningstar in-place base rent, which is significantly lower than other recently analyzed transactions.

While several of the previously analyzed industrial portfolios are located in various markets throughout the country, the subject portfolio is fully concentrated in the Raleigh-Durham market. Although the portfolio lacks geographic diversification and diversified economies, the market has performed well historically. The subject market shows a tight vacancy rate of 3.8% as of Q4 2020 per the appraisal, which is improved over the total 2020 vacancy of 4.0%. Additionally, net absorption was 1.3% in Q4 2020 and 3.1% over the entire year and has averaged a stable rate of 1.5% over the past 10 years. The recent trend absorption points to a strengthening market. As of March 2021, the portfolio has seen 43 tenants granted rent deferrals, totaling approximately 11.7% of the net rentable area (NRA). The largest tenant in the portfolio by NRA, World Overcomers, has been granted a rent deferral on its entire space composition in the portfolio which totals 101,805 sf, or 3.9% of the NRA. Despite the rent deferrals, the tenant has paid back a portion of their deferred rent (3.6%) and more importantly is also paying below market rents, per the appraiser. The tenant pays $8.26 psf compared with the appraiser's market rent estimation of $9.50 psf. Given the strong occupancy in the market and at the property, the ability to re-lease the space appears feasible. Lease Rollover – Leases representing 81.9% of the portfolio NRA and cumulative total rent, respectively, expire over the next five years. The loan has a hard lockbox with springing cash management provisions for retenanting reserves subject to a 6% debt yield trigger test using property net operating income for the prior two consecutive quarters. The DBRS Morningstar LTV on the mortgage loan is significant at 103.4%. The high leverage point, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

PARTIAL PRO RATA STRUCTURE
The mortgage loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the unpaid principal balance. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments. The WA release premium associated with the paydowns is 116.67% and compares favorably to recent industrial transactions rated by DBRS Morningstar.

The underlying mortgage loan for the transaction will pay floating-rate interest, which presents potential benchmark transition risk as the deadline approaches for the elimination of Libor. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be either Term Secured Overnight Financing Rate (SOFR) or Compounded SOFR plus the applicable Alternative Rate Spread Adjustment. Term SOFR does not currently exist and there is no assurance it will fully develop or be widely adopted. Compounded SOFR, which is expected to be a backward-looking rate generally calculated using actual rates during the applicable interest accrual period, is considered by some servicers to be less practical to implement. The servicer will have sole discretion over various aspects of a benchmark transition. Any uncertainty or delay in transitioning to a Libor alternative could lead to unforeseen issues for both the mortgage loan borrower and certificates. Additionally, in order to extend the loan, the borrower must also obtain a replacement interest rate cap agreement. If a replacement agreement is not commercially available, the borrower can propose an alternative hedging instrument that would provide substantially equivalent protection from increases in the interest rate. However, the servicer can reject proposal and impose its own hedging solution, if any.

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/373262.

Class A-IO is an interest-only (IO) certificate that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

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 ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021) which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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

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