DBRS Morningstar Finalizes Provisional Ratings on BRSP 2021-FL1, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes to be issued by BRSP 2021-FL1, Ltd. (the Issuer):

-- 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 (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

Coronavirus Overview
With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remains highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis. For example, DBRS Morningstar may front-load default expectations and/or assess the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

For more information regarding rating methodologies and the coronavirus, please see the following DBRS Morningstar press releases: https://www.dbrsmorningstar.com/research/357883 and https://www.dbrsmorningstar.com/research/358308.

The initial collateral consists of 31 floating-rate mortgages secured by 41 mostly transitional properties, with a cut-off balance totaling $800.0 million, excluding approximately $58.1 million of future funding commitments. The trust comprises one combined loan and 30 participations in mortgage loans. The combined loan, 360 Wythe (Prospectus #13), includes a mortgage loan and related mezzanine loan that DBRS Morningstar treated as a single loan. There is one delayed close loan, BELA Apartments (Prospectus #4), that is expected to close on or prior to the closing date or within six months after the closing date. If the loan does not close during this period, the funds may be used to acquire additional collateral subject to the eligibility criteria as detailed in the offering memorandum. Most loans are in a period of transition with plans to stabilize operations and improve the asset value. The transaction stipulates a $1.0 million threshold on companion participation acquisitions before a rating agency confirmation (RAC) is required if there is already a participation of the underlying loan in the trust.

As of the date of the Rating Report, the BELA Apartments loan (Prospectus ID# 4) officially closed following the publishing of the presale report, and all references to delayed close collateral interests and subsequent ramp up period in the Rating Report and closing press release are no longer applicable.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 21 loans, totaling 76.2% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCR for only six loans, representing 23.5% of the initial pool balance, are below 1.00x. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the sponsor’s stabilization plan if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

Five loans were originated prior to the onset of the Coronavirus Disease (COVID-19) pandemic. Those loans are backed by collateral in markets where shutdowns were more pronounced and may have some uncertainty in their near-term recovery. In addition, because they were originated prior to 2020, there may be less time for the respective borrowers to realize their business plan. DBRS Morningstar believes that the transaction may be exposed to losses beyond the base case pool loss captured within the CMBS Insight Model described in the “North American CMBS Multi-Borrower Methodology.” DBRS Morningstar materially deviated from its “CMBS Insight Model” when determining the ratings assigned to Class B, which deviated from the higher ratings implied by the quantitative results. The material deviation is also driven in part by the Issuer’s proposed capital structure representing a more conservative pool composition than the current assets contributed to the trust. Such capital structure would allow for negative drift in concentration as allowed by the Eligibility Criteria. The Eligibility Criteria also require receipt of a No Downgrade Confirmation to be provided by DBRS Morningstar in connection with the trust’s acquisition of a Ramp-Up Collateral Interest or Reinvestment Collateral Interest, which would also provide a barrier to negative concentration drift, if needed. DBRS Morningstar considers a material deviation from a model to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the ratings.

The transaction will have a sequential-pay structure.

The loans are generally secured by traditional property types (e.g., multifamily, office, and industrial), with no hotel loans in the pool. There is a 72.1% multifamily concentration in the pool, which is considerably higher than recent commercial real estate collateralized loan obligation (CRE CLO) transactions rated by DBRS Morningstar that are not exclusively limited to one property type. The largest loan in the pool, Clutter NYC Portfolio, is secured by four self-storage properties, the highest performing property type DBRS Morningstar observed.

The initial pool exhibits a Herfindahl score of 24.4, given the 31 collateral interests, which is favorable for a CRE CLO and higher than most recent CRE CLO transactions rated by DBRS Morningstar.

The weighted-average (WA) DBRS Morningstar Stabilized Loan-to-Value is 67.0%. This credit metric compares favorably with recent CRE CLO transactions rated by DBRS Morningstar, resulting in lower loan level probability of defaults (PODs) and loss severity given defaults (LGDs).

The pool exhibits a WA DBRS Morningstar Business Plan Score of 1.99, which is considerably lower than recent CRE CLO transactions rated by DBRS Morningstar. The low Business Plan Score indicates that borrowers have the necessary funds to achieve their business plans, proper loan structures, and adequate upside cash flow potential. The score also reflects that many loans in the pool have achieved the proposed stabilized operations.

The sponsor for this transaction, BrightSpire, is an experienced CRE CLO issuer and collateral manager. BrightSpire was previously managed externally by Colony Capital Inc., before completing an internalization of management in April 2021. The sponsor had a $1.3 billion market capitalization and $4.1 billion in total assets as of March 31, 2021. BrightSpire, under Colony Capital Inc.’s management, has completed one CRE CLO securitization, CLNC 2019-FL1, Ltd., which is rated by DBRS Morningstar. Additionally, BRSP 2021-FL1 DRE, LLC (BRSP), a wholly owned subsidiary of BrightSpire, will purchase and retain 100.0% of the Class F Notes, Class G Notes, and Preferred Shares, which represent 16.25% of the transaction total.

Five loans in the pool were originated before April 2020 at the onset of the coronavirus pandemic in the U.S., including the largest loan in the pool. The ongoing coronavirus pandemic continues to pose challenges and risks to the CRE sector, and the long-term effects on the general economy and consumer sentiment are still unclear. All properties were appraised or reappraised in late 2020 or early 2021, and the recent appraisals incorporated the current property performance and changes to market conditions as a result of the coronavirus pandemic. All loans in the pool are current on debt service payments as of the cut-off date and no loans in the pool requested any form of forbearance throughout the coronavirus pandemic.

The transaction is managed and includes a ramp-up component and reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The ramp-up period only goes into effect if the BELA Apartments loan does not close within six months of the transaction’s closing date. DBRS Morningstar believes this is unlikely, and if the loan does not close, there will be relatively minimal funding for the ramp-up period. Additionally, these funds will be subject to the eligibility criteria as stipulated in the offering memorandum. DBRS Morningstar has RAC for ramp loans, companion participations above $1.0 million, and new reinvestment loans. DBRS Morningstar will analyze these loans for potential ratings impacts.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the sponsors will not successfully execute their business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing coronavirus pandemic and its impact on the overall economy. A sponsor’s failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar determined a sample size that represents 74.8% of the pool cut-off date balance. While site inspections did not occur, DBRS Morningstar did a thorough analysis of all third-party documents and loan documents from the Issuer. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes LGDs based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside. Affiliates of BRSP will hold future funding companion participations and has the obligation to make future advances. BRSP agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, BRSP will be required to meet certain liquidity conditions on a quarterly basis.

All 31 loans have floating interest rates, and all loans are interest only during the original term, except for one loan with minimal amortization. Additionally, all loans have original terms ranging from 12 months to 36 months, creating interest rate risk. All loans are short-term loans, and even with extension options, they have a fully extended maximum loan term of five years to six years. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term.

The pool reflects a WA DBRS Morningstar Market Rank of 4.42, indicative of a higher concentration of suburban markets, which generally experience higher PODs and LGDs. There are 15 loans, representing 43.2% of the pool that fall in a DBRS Morningstar Market Rank of 3 or 4, which represents a higher POD. Conversely, only five loans, representing 13.0% of the pool, are secured by properties in DBRS Morningstar Market Ranks of 6, 7, and 8, which tend to be more urban in nature. The pool has a Herfindahl index of 24.4, which indicates a highly diversified pool. There are 41 properties in the pool, which is more than many of the recent CRE CLO transactions rated by DBRS Morningstar. There were several loans in the pool that received beneficial treatment because of their property quality. Three loans, representing 16.3% of the pool, received Above Average property quality scores, and seven loans, representing 28.2% of the pool, received Average + property quality scores. No loans in the pool received a property quality score that was below Average.

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.

Five loans were originated prior to the onset of the coronavirus pandemic. Those loans are backed by collateral in markets where shutdowns were more pronounced and may have some uncertainty in their near-term recovery. In addition, because they were originated prior to 2020, there may be less time for the respective borrowers to realize their business plan. DBRS Morningstar believes that the transaction may be exposed to losses beyond the base-case pool loss captured within the CMBS Insight Model described in the “North American CMBS Multi-Borrower Rating Methodology.” DBRS Morningstar materially deviated from its CMBS Insight Model when determining the ratings assigned to Class B, which deviated from the higher ratings implied by the quantitative results. The material deviation is also driven in part by the Issuer’s proposed capital structure representing a more conservative pool composition than the current assets contributed to the trust. Such capital structure would allow for negative drift in concentration as allowed by the Eligibility Criteria. The Eligibility Criteria also require receipt of a No Downgrade Confirmation to be provided by DBRS Morningstar in connection with the trust’s acquisition of a Ramp-Up Collateral Interest or Reinvestment Collateral Interest, which would also provide a barrier to negative concentration drift, if needed. DBRS Morningstar considers a material deviation from a model to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the ratings.

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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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 North American CMBS Multi-Borrower Rating Methodology (March 26, 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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