DBRS Morningstar Confirms Ratings on All Classes of KREST Commercial Mortgage Securities Trust 2021-CHIP

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of KREST Commercial Mortgage Securities Trust 2021-CHIP, Series 2021-CHIP, as follows:

-- Class A at AAA (sf)
-- Class X-A at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

The rating confirmations reflect the recent vintage and overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations at issuance. The transaction is collateralized by the fee-simple interest in HQ @ First, a 603,666 square-foot (sf), LEED Gold Certified office campus in San Jose, California. The property was designed and constructed in 2010 as a built-to-suit for network equipment producer, Brocade Communications Systems, which occupied the campus until its acquisition by Broadcom, Inc. in 2017. In 2019, investment-grade tenant, Micron Technology, Inc. (Micron) executed a 16-year lease for 100% of the property to serve as its Silicon Valley headquarters. The 10-year loan is interest-only (IO) and is structured with an Anticipated Repayment Date beginning in August 2031 and a final maturity date in November 2034.

The $408.0 million whole loan comprises $230 million in senior debt and $178.0 million in junior debt. The subject transaction of $267.0 million consists of $89.0 million of senior debt and the entire junior debt.

The property benefits from long-term, institutional-quality tenancy which results in a stable, long-term cash flow stream with 3% annual contractual rent increases. Micron’s lease expires on December 31, 2034, and has two five-year extension options at fair market rate as long as the tenant is not in default under the lease. Micron leased the entire property with the intention of growing into the space over time but has subleased approximately 20.0% of the net rentable area to Zscaler until September 2026, which uses the space as its headquarters. Zscaler’s sublease is structured with contractual expansion options in October 2022 and October 2025. According to Reis, the Airport/Milpitas submarket reported a Q1 2022 vacancy rate of 24.6%, with an asking rent of $35.61 per sf (psf), compared with the Q1 2021 vacancy rate of 28.2% and asking rent of $34.77 psf, which is relatively lower than Micron’s rental rate of $41.83 psf for 2022.

Based on the most recent financials, the loan reported a trailing six month ended December 31, 2021, debt service coverage ratio (DSCR) of 1.39 times (x), compared with the DBRS Morningstar DSCR of 2.16x at issuance. The DBRS Morningstar net cash flow analysis includes straight-lining of Micron’s rent over the loan term given its consideration as a long-term credit tenant. The transaction sponsor is KKR Real Estate Select Trust, a private REIT for individual investors sponsored by KKR & Co. Inc.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
There were no environmental, social, and 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.

Class X-A is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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. 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.

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/384482.

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 [email protected].

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577