DBRS Morningstar Confirms Credit Ratings on STWD 2022-FL3, Ltd.

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by STWD 2022-FL3 Ltd. (the Issuer) as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations at issuance as leverage metrics have remained stable and the majority of the loans are secured by multifamily collateral. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update rating report with in-depth analysis and credit metrics for the transaction and 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].

As of the September 2023 remittance, the pool consists of 50 floating-rate mortgages secured by 105 properties with an aggregate trust balance of $998.8 million. Most loans are in a period of transition with plans to stabilize and improve asset values. The transaction is a managed collateralized loan obligation pool, which remains in its 24-month reinvestment period that is scheduled to end with the February 2024 Payment Date. The Reinvestment Account has a balance of $153,414.

As of the September 2023 reporting, four loans with a former cumulative trust balance of $81.0 million, have been repaid from the transaction since issuance. One of the loans, Arizona Center (Prospectus ID#44), totaling $979,492 was repurchased from the trust by the collateral manager at par. As of September 2023, there are no loans in special servicing; however, two loans, Harbor Sky (Prospectus ID#8, 4.8% of the pool) and Lakeshore Towers (Prospectus ID#13, 3.6% of the pool) are delinquent. In its analysis of both loans, DBRS Morningstar adjusted the respective loan probability of defaults, increasing the loan expected loss levels to reflect the increased credit risk. Additionally, 16 loans are on the servicer's watchlist, representing 53.0% of the current trust balance. Thirteen of these loans were flagged for performance issues with low occupancy rates and/or debt service coverage ratios (DSCRs); however, this was anticipated at individual loan closing as borrowers continue to progress through business plans to stabilize the assets. Additionally, debt service payments have increased given the floating rate nature of all of the loans in the pool in the current interest rate environment. The largest loan on the servicer’s watchlist, The Buchanan (Prospectus ID#1, 9.4% of the current pool balance), is secured by a high-rise, multifamily in Arlington, Virginia. The loan was added to the watchlist in August 2023 following a decline in DSCR, which was attributed to increased debt service payment as the interest rate increased over 70.0% from 2022.

Of the outstanding 50 loans, 25 loans, representing 76.7% of the current trust balance, are scheduled to mature by YE2024; however, the majority of these loans have remaining extension options available. While required performance tests may not be met across all collateral properties, DBRS Morningstar expects borrowers and lenders to agree to mutually beneficial modification terms, if necessary, to allow loan maturity dates to be extended.

The transaction benefits from a significant concentration of loans backed by multifamily properties, representing 68.8% of the current trust balance with office properties, representing 29.4% of the current trust balance, the second-largest property type concentration. The loans are primarily secured by properties in suburban markets with 33 loans, representing 58.1% of the current trust balance, in locations with DBRS Morningstar Market Ranks of 3, 4, and 5. An additional 13 loans, representing 40.9% of the pool, are secured by properties in an urban location with a DBRS Morningstar Market Rank of 6, 7, and 8, and four loans, representing 1.0% of the pool, are secured by properties in tertiary markets. In terms of leverage, the pool has a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 69.0% and a WA stabilized LTV ratio of 63.7%. By comparison, these figures were 68.6% and 63.4%, respectively, at issuance in February 2022. DBRS Morningstar recognizes the current market values of the collateralized properties may be inflated as the individual property appraisals were completed in 2021 and 2022 and do not reflect increased interest rate and widening capitalization rate environments.

Through September 2023, the collateral manager has advanced $288.4 million in loan future funding to 42 individual borrowers to aid in property stabilization efforts. The largest advance, $82.1 million, was made to the borrower of Anthem Row loan (Prospectus ID#12, 3.6% of the current pool balance), which is secured by two connected, 12-story office buildings in Washington D.C. The borrower's business plan centers on achieving stabilized occupancy levels and bridging the property through existing free rent periods. An additional $229.6 million of future funding allocated to 37 individual borrowers remains available. Of this outstanding amount, the largest future funding balance is allocated to the borrower of The Wheeler (Prospectus ID#29, 0.3% of the current pool balance) for its stabilization efforts. The loan is secured by a Class A office property in Brooklyn with the borrower’s business plan to utilize future funding to finance leasing costs. According to the Q2 2023 collateral manager update, the property was 41.3% leased to one tenant operating on a 30-year lease term.

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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].