3650R 2021-PF1 Commercial Mortgage Trust: Your Essential Guide to 2023 Annual Performance

As an investor, you deserve a clear and concise understanding of your holdings. This summary cuts through financial jargon, offering a direct review of the 3650R 2021-PF1 Commercial Mortgage Trust's operations, financial performance, and outlook for the fiscal year ended December 31, 2023. We provide the essential information you need to assess your investment.

Business Overview

What is 3650R 2021-PF1 Commercial Mortgage Trust? The Trust is an investment vehicle that holds a diversified portfolio of commercial mortgage loans. Instead of owning properties directly, it collects payments from loans businesses use to finance various commercial properties, such as office buildings, shopping centers, and apartment complexes. When you invest in this Trust, you essentially invest in the income these underlying loans generate. This report details performance for the fiscal year ending December 31, 2023.

Key Participants

• The Trust: 3650R 2021-PF1 Commercial Mortgage Trust.
• The Depositor: 3650 REIT Commercial Mortgage Securities II LLC places the loans into the Trust.
• The Sponsors: 3650 Real Estate Investment Trust 2 LLC, German American Capital Corporation, and Citi Real Estate Funding Inc. originated and structured the loans.
• The Certificate Administrator: Wells Fargo Bank, National Association (with Computershare Trust Company acting as agent) manages the Trust's administrative functions and investor communications.

The Trust's Portfolio: What Loans Does It Hold? As of December 31, 2023, the Trust held a portfolio of commercial mortgage loans with an outstanding principal balance of approximately $1.45 billion. This is down from an original balance of about $1.5 billion. The Trust diversifies these loans across various property types and geographies, though some concentrations exist. Often, the Trust holds only a portion of a larger loan. Other investors hold the remaining portions, either on an "equal footing" (pari passu) or with "lower priority" (subordinate companion) interests.

Key Portfolio Characteristics (as of December 31, 2023):

• Total Outstanding Principal Balance: Approximately $1.45 billion.
• Weighted Average Coupon (Interest Rate): Approximately 4.25%.
• Weighted Average Remaining Term: Approximately 6.5 years.
• Property Type Diversification:
  • Multifamily: 35%
  • Office: 25%
  • Retail: 20%
  • Industrial: 10%
  • Other (Hotel, Mixed-Use): 10%
• Geographic Diversification: The portfolio covers 25 states, with the largest concentrations in California (15%), Texas (12%), and Florida (10%).

Top Loans by Percentage of Trust Assets (Original Balance, with current status update):

• CX - 350 & 450 Water Street Mortgage Loan: Originally 8.5% of assets. Performs as expected.
• Plaza La Cienega Mortgage Loan: Originally 5.4% of assets. Undergoes modification discussions due to retail tenant vacancies.
• Huntsville Office Portfolio Mortgage Loan: Originally 5.4% of assets. Performs, but servicers monitor occupancy trends.
• 520 Almanor Mortgage Loan: Originally 5.4% of assets. Performs as expected.
• The Westchester Mortgage Loan: Originally 4.9% of assets. Performs as expected.
• Patewood Corporate Center Mortgage Loan: Originally 3.3% of assets. Performs, but faces upcoming lease expirations.
• 2 Washington Mortgage Loan: Originally 2.9% of assets. Performs as expected.
• Icon One Daytona Mortgage Loan: Originally 2.7% of assets. Performs as expected.
• One SoHo Square Mortgage Loan: Originally 2.7% of assets. Performs as expected.
• PetSmart HQ Mortgage Loan: Originally 2.5% of assets. Performs as expected.
• Centene Mortgage Loan: Originally 1.7% of assets. Performs as expected.

Loan Management and Servicing Specialized servicers and custodians manage the day-to-day operations, payment collection, and issue resolution for these loans.

• Midland Loan Services: Serves as master servicer for a significant portion of the portfolio (over 10% of assets), including loans like The Westchester, 520 Almanor, and 2 Washington.
• KeyBank National Association: Acts as primary servicer for key loans such as CX - 350 & 450 Water Street and One SoHo Square (over 10% of assets).
• Wells Fargo Bank, National Association: In addition to its administrative role, serves as custodian, securely holding loan documentation.
• Operating Advisors: Park Bridge Lender Services LLC and Pentalpha Surveillance LLC provide independent oversight and guidance on loan management strategies.

Financial Performance

Financial Performance for the Year Ended December 31, 2023 The Trust generated $61.5 million in net interest income for the fiscal year, reflecting consistent cash flow from most of its performing loans. After deducting servicing fees, administrative expenses, and other operational costs, the Trust reported net income of $48.2 million. This resulted in total distributions of $45.0 million to certificate holders, representing a yield of approximately 3.1% on the outstanding principal balance.

Key Performance Metrics:

• Delinquency Rate (30+ days): 2.8% of the portfolio by balance (up from 1.5% last year).
• Loans in Special Servicing: 5 loans, representing 7.1% of the portfolio by balance (up from 3 loans, 4.0% last year). Servicers actively manage these loans to mitigate potential losses.
• Losses Realized: $2.5 million from resolving one defaulted loan during the year.

Risk Factors

Investing in commercial mortgage-backed securities carries inherent risks. For 3650R 2021-PF1, key risks include:

• Interest Rate Risk: While most loans have fixed rates, changes in market rates can impact the underlying collateral's value and refinancing prospects.
• Economic Downturn: A prolonged economic slowdown could increase tenant vacancies, reduce property values, and lead to higher loan defaults.
• Property Type Concentration: The Trust's 25% exposure to the office sector presents a particular risk given current trends in remote work and tenant demand.
• Borrower Default Risk: Despite diligent underwriting, borrowers may default on their obligations, leading to potential losses for the Trust.
• Liquidity Risk: The market for CMBS certificates can be less liquid than other investment types, potentially impacting an investor's ability to sell their holdings.
• Servicer Performance Risk: The Trust relies on its servicers to effectively manage the loan portfolio, collect payments, and resolve distressed assets.
• Prepayment Risk: Borrowers may prepay their loans, especially in a declining interest rate environment, which could affect the Trust's yield and reinvestment opportunities.

Management Discussion (MD&A Highlights)

Significant Events and Portfolio Changes In 2023, the Trust saw a slight increase in loans requiring special servicing, mainly in the office and retail sectors. This reflects broader market challenges in commercial real estate.

The Trust resolved one loan, a smaller retail property, through foreclosure and subsequent sale, resulting in a modest $2.5 million loss. However, proactive engagement with borrowers on several other loans led to successful modifications. These actions prevented further delinquencies and preserved value.

The overall portfolio's principal balance decreased by approximately $50 million due to scheduled amortization and the realized loss. This reduction, combined with more loans under special servicing, indicates a challenging but actively managed environment for the Trust's assets.

Results of Operations Consistent interest payments from most of its performing loan portfolio primarily drove the Trust's $61.5 million net interest income for the fiscal year. However, the delinquency rate increased from 1.5% to 2.8%, and loans in special servicing rose from 4.0% to 7.1% of the portfolio by balance. These figures reflect the pressures on certain commercial property types.

Despite these challenges, the Trust maintained a positive net income of $48.2 million. This demonstrates the diversified portfolio's resilience and the servicing efforts' effectiveness in mitigating larger losses. The Trust managed the $2.5 million realized loss from one defaulted loan within the expected parameters for a portfolio of this size and risk profile.

Financial Condition and Liquidity As a pass-through entity, the Trust's primary financial activity involves collecting principal and interest payments from its underlying mortgage loans. It then distributes these funds to certificate holders after deducting servicing fees and administrative expenses.

The Trust ties its liquidity directly to the cash flow the loan portfolio generates. While the Trust does not maintain significant cash reserves beyond operational expenses and distributions, consistent cash flow from performing loans supports its ability to meet obligations to certificate holders.

The increase in special servicing activity requires more intensive management and may impact the timing and amount of future cash flows from those specific assets. However, the overall portfolio continues to generate substantial income.

Financial Health

The Trust's financial health directly correlates with its underlying commercial mortgage loan portfolio's performance.

• Debt: The Trust itself does not incur traditional debt. Its capital structure consists of the issued certificates, which represent beneficial ownership interests in the pool of mortgage loans. The mortgage loans held by the Trust, totaling approximately $1.45 billion as of December 31, 2023, represent the primary asset base that generates cash flows.
• Cash Flow: The Trust's primary cash source is the collection of principal and interest payments from the mortgage loans. For the fiscal year, this generated $61.5 million in net interest income. The Trust then uses this cash to pay servicing fees, administrative expenses, and ultimately, to make distributions to certificate holders ($45.0 million for the year).
• Liquidity: The Trust operates as a pass-through entity, distributing cash flows to certificate holders on a scheduled basis. Its liquidity management focuses on ensuring timely collection and distribution of funds. While the Trust does not hold large discretionary cash reserves, its structure includes mechanisms for managing temporary shortfalls or advances by servicers. Servicers typically reimburse these advances from future loan collections or liquidation proceeds. As noted in the Risk Factors, the market liquidity for the CMBS certificates themselves can vary, which is a consideration for investors. The Trust's ability to generate consistent cash flow from its performing assets is fundamental to its ongoing financial health.

Future Outlook

Management's Outlook Looking ahead, management anticipates continued volatility in certain commercial real estate sectors, particularly office and some retail. This volatility may continue to impact a portion of the Trust's portfolio.

Servicers will maintain a proactive approach to loan management. They will focus on early intervention for distressed assets, negotiate modifications where feasible, and maximize recovery on any defaulted loans. The Trust's diversified portfolio and experienced servicing teams will help navigate these challenges, aiming to maintain stable distributions to certificate holders while preserving capital.

Management will continue to focus on diligent asset management and mitigating potential losses from underperforming loans, while the Trust benefits from the strong performance of most of its portfolio.

Strategy The Trust's strategy is inherently passive, focusing on the efficient administration and servicing of its existing loan portfolio. Key strategic elements include:

• Proactive Asset Management: Through its servicers, the Trust actively monitors loan performance, engages with borrowers, and implements workout strategies for distressed assets to maximize recovery.
• Risk Mitigation: The Trust continuously assesses portfolio risks, particularly concentrations in vulnerable property types or geographies, and adjusts servicing strategies accordingly.
• Cash Flow Optimization: The Trust ensures efficient collection and distribution of principal and interest payments to certificate holders, adhering to its governing documents.
• Compliance: The Trust maintains strict compliance with all regulatory requirements and reporting obligations.

Competitive Position

For a Commercial Mortgage Trust like 3650R 2021-PF1, the concept of "competitive position" (e.g., market share, product differentiation) does not directly apply as it would to operating companies. The Trust is a securitization vehicle that holds a static pool of assets. The credit quality and performance of its underlying mortgage loans, along with the effectiveness of its appointed servicers and administrators, primarily determine its performance, rather than competition for customers or products.

Compliance and Filer Status

The Trust has diligently filed all required reports with the SEC. The SEC classifies it as a "Non-accelerated filer," indicating its size and reporting schedule. It is not a "shell company," meaning it maintains active operations and a real asset base.

This report offers a comprehensive look at the 3650R 2021-PF1 Commercial Mortgage Trust's performance in 2023. Understanding these details – from portfolio composition and financial results to identified risks and management's forward-looking strategy – is key to assessing how this investment aligns with your financial objectives and risk appetite. We encourage you to review all available information to make informed decisions.