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

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings to the following classes of notes issued by Shelter Growth CRE 2021-FL3 Issuer 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 (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 collateral pool consists of 20 short-term, floating-rate mortgage assets with an aggregate cutoff date balance of $453.9 million secured by 26 properties. The aggregate unfunded future funding commitment of the future funding participations as of the cutoff date is approximately $32.3 million. The holder of the future funding companion participations, Shelter Growth Master Term Fund B III LP, has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is static with no ramp-up period or reinvestment period. However, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations, subject to stated criteria, during the Permitted Funded Companion Participation Acquisition period, which ends on the payment date in September 2023. Acquisition of future funding participations of $1.0 million or greater will require rating agency confirmation (RAC).

Of the 26 properties, 24 are predominantly multifamily assets (94.7% of the mortgage asset cutoff date balance). One of the remaining loans (Russell Commerce Center) is secured by an industrial asset (3.1% of the mortgage asset cutoff date balance) and the other remaining loan (31-75 23rd Street) is secured by an office asset (2.2% of the mortgage asset cutoff date balance).

The loans are mostly secured by cash-flowing assets, most of which are in a period of transition with plans to stabilize and improve the assets’ values. Five loans are whole loans (32.4% of the mortgage asset cutoff date balance), while the other 14 loans (67.6% of the mortgage asset cutoff date balance) are participations with companion participations that have remaining future funding commitments totaling $32.3 million. The future funding for each loan is generally to be used for capital expenditures to renovate the property or build out space for new tenants.

All of the loans in the pool have floating interest rates initially indexed to Libor. All 20 loans are interest only (IO) through their initial terms; 17 loans are IO through all extension options (88.6% of the mortgage asset cutoff date balance) while the remaining three loans (11.4% of the mortgage asset cutoff date balance) exhibit some form of amortization during an extension option. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used the one-month Libor index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The pool is mostly composed of multifamily assets (94.7% of the mortgage asset cutoff date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall commercial mortgage-back security (CMBS) universe.

Only one loan in the pool (Cantebria Crossing; Prospectus ID#20) was originated prior to the onset of the coronavirus pandemic, resulting in the pool’s weighted average (WA) remaining fully extended term of 49 months, which gives the sponsors enough time to execute their respective business plans without risk of imminent maturity. In addition, the appraisal and financial data provided are reflective of conditions after the onset of the pandemic.

The pool exhibits a relatively high WA DBRS Morningstar Market Rank of 4.8. Additionally, 55.77% of the mortgage asset cutoff date balance is in a DBRS Morningstar Market Rank between 5 and 8, which are generally indicative of a lower probability of default (POD) and loss severity given default (LGD).

Five loans, comprising approximately 39.2% of the mortgage asset cutoff date balance, are in DBRS Morningstar metropolitan statistical area (MSA) Group 3. Additionally, only three loans, comprising approximately 9.1% of the mortgage asset cutoff date balance, are in DBRS Morningstar MSA Group 1, which is the most punitive group, exhibiting the highest POD and LGD of all the DBRS Morningstar MSA Groups.

Nine properties, comprising 54.9% of the mortgage asset cutoff date balance, were built after 2016 and five properties, comprising 36.3% of the mortgage asset cutoff date balance, were built in 2021. Because many of the loans are backed by recently built collateral, approximately 46.9% of the pool received a property quality score of either Above Average or Average +.

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 a related loan sponsor will not successfully execute its business plan 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. The loan 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 sampled a large portion of the loans, representing 82.4% of the mortgage asset cutoff date balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to substantially implement such plans. In addition, DBRS Morningstar analyzes LGD based on the as-is credit metrics, assuming the loan is fully funded with no net cash flow or value upside. Future funding companion participations will be held by affiliates of Shelter Growth Master Term Fund B III LP and have the obligation to make future advances. Shelter Growth Master Term Fund B III LP agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Shelter Growth Master Term Fund B III LP will be required to meet certain liquidity requirements on a quarterly basis.

The top 10 largest loans in the pool make up a significant portion of the entire pool at approximately 71.6% of the mortgage asset. Additionally, the loan has a relatively low Herfindahl score of 13.9. The two largest loans in the pool, 45-57 Davis Street and Fulton & Ralph, make up approximately 27.1% of the mortgage asset cutoff date balance and exhibit two of the lowest expected loss levels in the pool. Additionally, the properties securing both loans are in New York City and exhibit DBRS Morningstar Market Ranks of 6 and 7, respectively.

All 20 loans have floating interest rates, and all loans are IO during the original term with remaining initial terms ranging from 14 months to 47 months. All loans are short-term loans and, even with extension options, they have a fully extended maximum loan term of five 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 borrowers of all 20 floating-rate loans have purchased Libor rate caps that result in mortgage rate caps ranging from 4.30% to 8.75% to protect against rising interest rates through the duration of the loan term. In addition to the fulfillment of certain minimum performance requirements, exercise of any extension options would also require the repurchase of interest rate cap protection through the duration of the respectively exercised option.

DBRS Morningstar conducted minimal management tours because of health and safety constraints associated with the ongoing coronavirus pandemic. As a result, DBRS Morningstar relied heavily on third-party reports, online data sources, and information provided by the Issuer to determine the overall DBRS Morningstar property quality assigned to each loan. Recent third-party reports were provided for all loans and contained property quality commentary and photos. DBRS Morningstar did conduct site inspections on several loans in the broader New York City and Philadelphia markets, totaling 39.8% of the mortgage asset cutoff date balance.

ESG CONSIDERATIONS
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.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#1 – 45-57 Davis Street (15.4% of the pool)
-- Prospectus ID#2 – Fulton & Ralph (11.7% of the pool)
-- Prospectus ID#3 – Mountainview Gardens (7.4% of the pool)
-- Prospectus ID#4 – Vesta OKC Portfolio (7.4% of the pool)
-- Prospectus ID#5 – Bay One Apartments (5.6% of the pool)
-- Prospectus ID#6 – Center Place Apartments (5.3% of the pool)
-- Prospectus ID#7 – Breakwater Apartments (5.0% of the pool)
-- Prospectus ID#8 – Dior (4.9% of the pool)
-- Prospectus ID#9 – Skye Luxury (4.5% of the pool)
-- Prospectus ID#10 – Pico Apartments (4.3% of the pool)
-- Prospectus ID#12 – University City Portfolio (3.6% of the pool)
-- Prospectus ID#13 – Monica Apartments (3.5% of the pool)

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.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 [email protected].

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