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

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on 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 rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. DBRS Morningstar did not publish a Surveillance Performance Update rating report with its review of the transaction but expects to with any subsequent rating actions.

The initial collateral consisted of 20 floating-rate mortgages secured by 26 transitional properties with a cut-off date balance totaling approximately $453.9 million, excluding approximately $32.3 million of future funding commitments. Most of the loans are in a period of transition with plans to stabilize performance and improve the asset value. 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.

As of the September 2022 remittance, the pool comprises 17 loans secured by 23 properties with a cumulative trust balance of $360.9 million. Since issuance, three loans with a former cumulative trust balance of $92.9 million have been successfully repaid from the pool resulting in a collateral reduction of 20.5%. In general, borrowers are progressing toward completion of the stated business plans.

The transaction is currently concentrated by multifamily properties as 14 loans, representing 87.5% of the current pool balance, are secured by multifamily properties. The remaining three loans are secured by a healthcare, industrial, and office property. Through August 2022 the collateral manager had advanced $1.8 million in loan future funding to one individual borrower to aid in property stabilization efforts. An additional $23.7 million of unadvanced loan future funding allocated to 12 individual borrowers remains outstanding.

As of September 2022, the Fulton & Ralph (Prospectus ID#2; 14.7% of the pool balance) loan represents the only loan on the servicer’s watchlist. The loan was flagged for maturity risk as the loan has an upcoming maturity in October 2022; however, the loan includes one 12-month extension option that would extend the loan through October 2023. The loan is backed by two Class A multifamily properties totaling 152 units in Brooklyn, New York. The borrower’s business plan is to complete construction of the two assets and lease up to market levels. According to the collateral manager, construction was completed in Q2 2021; however, leasing activity remains slow as the Fulton Street property was only 55% leased as of the April 2022 rent roll while leasing activity at the Ralph Avenue property has not commenced yet The borrower attributes the slow leasing progress to delays with the New York City Department of Housing Preservation and Development (HPD). According to the borrower, the HPD approval of the plans was received in April 2022 and anticipates that the 421a will be finalized by year-end 2022. The delay in leasing has also resulted in the depletion of the debt service reserve, which the borrower and lender are working to replenish over the short term.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

DBRS Morningstar materially deviated from its CMBS Insight Model when determining the rating assigned to Class H, as the quantitative results suggested higher ratings. These material deviations are warranted as sustainability of the loan performance trends have not been demonstrated as there are loans remaining that are secured by transitional properties with business plan interruptions, which are delaying stabilization.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2022-update.

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.

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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