Morningstar DBRS Confirms Credit Ratings on All Classes of Shelter Growth CRE 2022-FL4 Issuer Limited

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by Shelter Growth CRE 2022-FL4 Issuer Limited (SGCP 2022-FL4), as follows:

-- Class A 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.

The credit rating confirmations reflect the overall strength of the transaction's credit profile, which benefits from the majority of the underlying loans being backed by multifamily collateral, which is facing some challenges in the current economic environment but is generally well positioned to weather the downcycle as compared with other property types such as office. There are some signs of increased risk, however, for select loans. Morningstar DBRS has concerns regarding the largest loan in the pool, City Club Crossroads KC, which transferred to special servicing in January 2024 for maturity default (details below). In addition to the unrated equity piece balance of $36.6 million, the transaction also benefits from the Class F and Class G Notes, which have below-investment-grade credit ratings assigned by Morningstar DBRS and combine for another $44.2 million in cushion against loss for the Notes with investment-grade credit ratings. In addition, since Morningstar DBRS' previous credit rating action, four loans, with a total cumulative balance of $71.8 million have successfully repaid in full. In its analysis for this review, Morningstar DBRS determined most individual borrowers are progressing with their business plans to increase property cash flow and value; however, select borrowers have encountered setbacks with contributing factors including increased construction costs, slowed rent growth, and increased debt service costs. These factors have led to generally higher execution and refinance risks for those loans. Where appropriate, Morningstar DBRS' analysis considered a stressed scenario to reflect the higher risks and increase the expected losses in the model. 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. To access this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 23 floating-rate mortgages secured by 24 mostly transitional properties with a cut-off date balance totaling $400.7 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the September 2024 remittance, the pool comprised 17 loans secured by 18 properties with a cumulative trust balance of $327.0 million. Since issuance, six loans with a prior cumulative trust balance of $104.2 million have been successfully repaid in full from the pool. The transaction is static with no reinvestment period; however, the Issuer has the right to use principal proceeds to acquire funded pari passu companion participations subject to stated Acquisition Criteria during the Permitted Funded Companion Participation Acquisition period, which ended with the December 2023 payment date.

The transaction is concentrated by property type as 16 loans, representing 87.5% of the current trust balance, are secured by multifamily properties, with one loan secured by a mixed-use property. The pool is primarily secured by properties in suburban markets, with 11 loans, representing 53.2% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional four loans, representing 30.8% of the pool, are secured by properties in urban markets with a Morningstar DBRS Market Rank of 6, while two loans, representing 16.0% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting rural and tertiary markets. The concentration of collateral in urban and suburban markets is generally in line with the concentration levels at issuance.

Leverage across the pool was generally stable to slightly elevated as of the September 2024 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 71.6%, with a current WA stabilized LTV of 57.1%. In comparison, these figures were 72.3% and 65.7%, respectively, at issuance. Given the age of some of the appraisals, some of the appraiser's cap rates were considered to be low as compared with the cap rate trends observed in the past few years following the interest rate increases that began in the first half of 2022. As such, in the analysis for this review, Morningstar DBRS applied upward LTV adjustments in the analysis for nine loans, representing 61.5% of the current trust balance.

Through September 2024, the lender had advanced cumulative loan future funding of $36.3 million to 12 of the 18 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Phoenix Huron Campus ($16.9 million) and Amalie Point & Greenbriar Apartments ($4.3 million) loans. The Phoenix Huron Campus loan is secured by a 3.1 million-sf mixed-use property consisting of 34 rentable buildings across 130 acres in Endicott, New York. The collateral comprises 517,484 sf (17.0% of NRA) of office; 955,841 sf (31.0% of NRA) of industrial; and 1,582,532 sf (52.0% of NRA) of flex space used for both manufacturing and warehousing. The borrower's business plan is to complete a significant capital expenditure (capex) program to improve the operational efficiency and attractiveness of the property and to increase occupancy and rental rates to market. According to the June 2024 rent roll, the property was 68.0% occupied, a slight decline from 71.6% as of the July 2023 rent roll. Beyond the funds advanced to date, Morningstar DBRS received an update from the collateral manager noting that the capital improvement plan has been completed and the borrower was now working to lease vacant space using available future funds for leasing costs. The Amalie Point & Greenbriar Apartments loan is secured by a portfolio of two garden-style multifamily properties totaling 169 units in Nashville, Tennessee. The borrower's business plan is to increase rental rates to market levels by completing unit renovations and exterior upgrades across both properties. According to the collateral manager, the collateral was 90.0% occupied as of June 2024 and the planned capex project was nearing completion with just one unit left to be renovated.

An additional $9.5 million of future loan funding allocated to 13 of the outstanding individual borrowers remains available. The largest portion of available funds ($3.9 million) is allocated to the borrower of the largest loan, City Club Crossroads KC, which has transferred to special servicing for imminent default with the January 2024 reporting. The loan is secured by the borrower's leasehold interest in a 283-unit multifamily property in downtown Kansas City, Missouri. The unfunded future funding component is an earnout advance the borrower may draw upon once per quarter, subject to various performance tests. Through September 2024, there have been no advances. The borrower's business plan is to lease up the property to stabilized levels, and to increase rental rates to market upon tenant renewals as concession loss burns off. According to the June 2024 rent roll, the multifamily component was 56.0% occupied while the commercial/retail component was 45.0% occupied.

As of the September 2024 remittance, the City Club Crossroads KC loan was delinquent and due for the June 2024 loan payment and there were four loans on the servicer's watchlist, representing 28.7% of the current trust balance, all of which are being monitored for upcoming maturity risk. The largest of the four loans, Phoenix Huron Campus, has an upcoming maturity date in October 2024 with two 12-month extension options remaining. The second largest loan, Residence at Lake Highlands, matures in November 2024 with two 12-month extension options remaining.

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 press releases 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

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.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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 v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

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

Morningstar DBRS Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702)

North American Commercial Mortgage Servicer Rankings (August 23, 2024; https://dbrs.morningstar.com/research/438283)

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/417279.

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