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)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s 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 $408.0 million whole loan comprises of $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 10-year, fixed-rate loan is interest-only (IO) and is structured with an Anticipated Repayment Date of August 2031 and a final maturity date of November 2034. The sponsor is KKR Real Estate Select Trust Inc., a private real-estate investment trust for individual investors sponsored by KKR & Co. Inc. and at issuance, contributed $136.3 million of equity to facilitate the acquisition of the subject at a purchase price of $535.0 million.

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 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.

As per a recent news article by Boise Dev published in February 2023, Micron plans to lay off about 7,200 employees worldwide, which is approximately 15.0% of the workforce. It was noted that the demand for semiconductor chips has been decreasing, which lowered company earnings and subsequently led to cost cutting efforts and potential layoffs that are expected to carry through the end of the fiscal year 2023. DBRS Morningstar inquired whether these layoffs are expected to reflect at the subject but no updates were available at the time of this review. According to Reis, office properties in the Airport/Milpitas submarket reported a Q1 2023 vacancy rate of 27.8%, with an asking rent of $35.61 per sf (psf), compared with the Q1 2022 vacancy rate of 24.6% and asking rent of $35.61 psf, which is relatively lower than Micron’s rental rate of $42.62 psf for 2023.

Based on the most recent financials, the loan reported a trailing nine months ended September 30, 2022, debt service coverage ratio (DSCR) of 2.09 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.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].