DBRS Morningstar Confirms Ratings on KREF 2021-FL2 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of notes issued by KREF 2021-FL2 Ltd. as follows:

-- 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 (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class F-E at BB (low) (sf)
-- Class F-X at BB (low) (sf)
-- Class G at B (low) (sf)
-- Class G-E at B (low) (sf)
-- Class G-X at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s issuance expectations. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

At issuance, the collateral consisted of 20 floating-rate mortgages secured by 29 mostly transitional commercial real estate properties totalling approximately $1.0 billion, excluding approximately $260.5 million of future funding commitments. The Issuer then added additional proceeds into the proposed structure to bring the total transaction structure from $1.0 billion to $1.3 billion. Most loans were in a period of transition with plans to stabilize and improve asset value. The transaction is structured with a Reinvestment Period through the August 2023 Payment Date, whereby the Issuer may acquire Funded Companion Participations and introduce new loan collateral into the trust subject to the Reinvestment Criteria as defined at issuance. The transaction will have a sequential-pay structure following the expiration of the Reinvestment Period.

As of the June 2022 remittance, the pool comprises 20 loans secured by 26 properties with a cumulative trust balance of $1.2 billion. Since issuance, seven loans with a former cumulative trust balance of $471.5 million have been successfully repaid from the pool. Over the same period, seven loans with a current cumulative trust balance of $359.5 million have been contributed to the trust. As of the June 2022 remittance, there was $85.0 million remaining in the Reinvestment Account.

In general, borrowers are progressing toward completion of the stated business plans. Of the current collateral pool, 13 of the 20 outstanding loans were structured with future funding components and, according to an update from the collateral manager, it had advanced $57.5 million in loan future funding through March 2022 to nine individual borrowers to aid in property stabilization efforts. The largest advance was made to the borrower of the Boston South End Life Science Campus loan ($36.8 million). The Boston South End Life Science Campus loan is secured by two office and laboratory (lab) properties in Boston. The borrower has used loan future funding for leasing costs as well as ongoing capital improvement projects at the property and, in addition, a portion of the future funding will be used to convert one of the two collateral properties from a traditional office building to lab space. An additional $201.6 million of unadvanced loan future funding allocated to 12 individual borrowers remains outstanding with the largest portion ($83.7 million) allocated to the borrower of the aforementioned Boston South End Life Science Campus loan.

The transaction consists of nine loans (totalling 47.7% of the current trust balance) secured by multifamily properties, six loans (totalling 27.1% of the current trust balance) secured by office properties, and three loans (totalling 14.0% of the current trust balance) secured by hotel properties. The remaining two loans (totalling 11.2% of the current trust balance) are secured by student housing properties. In comparison with the transaction composition at closing in July 2021, loans secured by hotel properties have increased by 10.1% of the trust balance from issuance, while loans secured by multifamily properties have decreased by 15.3% of the trust balance.

By geographical concentration, the collateral is most heavily concentrated in Texas and California, with loans representing 23.3% and 21.6% of the cumulative loan balance, respectively. Twelve loans, representing 59.3% of the cumulative trust balance, are in urban markets with DBRS Morningstar Market Ranks of 6, 7, and 8. These markets have historically shown greater liquidity and demand. The remaining eight loans, representing 40.7% of the cumulative loan balance, are secured by properties in markets with DBRS Morningstar Market Ranks of 3, 4, and 5, which are suburban in nature and have historically had higher probability of default levels when compared with properties in urban markets. In comparison with issuance, properties in urban markets have increased as a percent of the transaction from 55.9% while suburban markets have decreased as a percent of the transaction from 44.1%.

As of June 2022 reporting, all loans remain current with one loan on the servicer’s watchlist, representing 3.5% of the pool balance. The Lewis loan (Prospectus ID#17, 3.5% of the current trust balance) is being monitored for a pending loan maturity; however, according to the collateral manager, loan maturity has been extended to April 2023 as the borrower exercised an extension option. As such, DBRS Morningstar expects the loan to be removed from the servicer’s watchlist in the near term. There have been four loans, representing 12.7% of the pool balance, that have reported loan modifications, with all four loan modifications executed such that the individual borrowers could qualify for maturity date extensions. No borrowers have requested or were granted forbearances.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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/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