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 has remained in line with DBRS Morningstar’s expectations since issuance. 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 transaction consisted of 20 floating-rate mortgages secured by 29 mostly transitional commercial real estate properties totaling 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 July 2023 remittance, the pool consists of 17 loans secured by 22 properties with a cumulative trust balance of $1.22 billion. Since the November 2022 review, five loans, with a former cumulative trust balance of $360.4 million, were successfully repaid from the pool. Over the same period, three loans, with a current cumulative trust balance of $275.0 million, were contributed to the trust. As of the July 2023 remittance, there was $80.0 million remaining in the Reinvestment Account.

In general, borrowers are progressing toward completion of the stated business plans. Of the current collateral pool, 10 of the 17 outstanding loans were structured with future funding components and, according to an update from the collateral manager, $172.1 million of loan future funding was advanced through June 2023 to 10 individual borrowers to aid in property stabilization efforts. The largest advance was made toward the Boston South End Life Science Campus loan ($107.3 million). That 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, including a conversion of one of the two collateral properties from a traditional office building to a lab space. An additional $37.3 million of unadvanced loan future funding allocated to nine individual borrowers remains outstanding with the largest portion ($13.2 million) allocated to the borrower of the aforementioned Boston South End Life Science Campus loan.

The transaction consists of six loans (totaling 40.9% of the current trust balance) secured by office properties, six loans (totaling 35.0% of the current trust balance) secured by multifamily properties, and three loans (totaling 14.8% of the current trust balance) secured by hotel properties. The remaining two loans (totaling 9.2% of the current trust balance) are secured by a student housing property and a mixed-use property. In comparison with the transaction composition at closing in July 2021, loans secured by office properties have increased by 23.4% of the trust balance from issuance, while loans secured by multifamily properties have decreased by 18.7% of the trust balance. Given the uncertainty related to the end-user demand and investor appetite for office properties, DBRS Morningstar anticipates upward pressure on vacancy rates in the broader office market, challenging landlords’ efforts to backfill vacant space, which could lead to delays to business plan progression and property stabilization. In certain instances, this pressure can contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. In the analysis for this review, DBRS Morningstar applied stressed loan-to-value (LTV) ratios to loans secured by office collateral to reflect the concerns to the office market. Following these adjustments, the expected losses for loans secured by office properties were among the highest in the pool, with a weighted average (WA) expected loss 45.0% greater than the WA pool expected loss.

In terms of geographical concentration, the collateral is most heavily concentrated in Texas and California, with loans representing 20.2% and 21.6% of the cumulative loan balance, respectively. Eight loans, representing 51.4% 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 nine loans, representing 48.6% 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 decreased as a percentage of the transaction from 55.9%, while suburban markets have increased as a percentage of the transaction from 44.1%.

As of July 2023 reporting, all loans remain current with one loan on the servicer’s watchlist representing 5.5% of the pool balance. The Boathouse Apartments loan (Prospectus ID#8; 5.5% of the pool) was added to the servicer’s watchlist in April 2023; however, no watchlist comment has been provided to date. According to the Q1 2023 collateral report provided by the collateral manager, the property experienced a minor decline in occupancy to 84.0% at Q1 2023 from 88.4% at YE2022. The property’s tenant mix primarily consists of students, suggesting that cash flow volatility may be elevated as students are likely to move out following the completion of the school year. The property is well located in Washington, D.C., and is close to both Georgetown University and George Washington University. The loan reported a YE2022 NCF of $3.9 million, representing a DSCR of 1.00x and a debt yield of 5.9%. There have been 12 loans, representing 71.7% of the pool balance, that have reported loan modifications. All 12 loan modifications were related to loan maturity extensions and/or the conversion from LIBOR to SOFR interest rates.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

All credit ratings are subject to surveillance, which could result in credit 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 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.

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 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://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

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 (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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