DBRS Morningstar Confirms Credit Ratings on All Classes of FS Rialto 2022-FL6 Issuer, LLC

DBRS Limited (DBRS Morningstar) confirmed the credit ratings on all classes of notes issued by FS Rialto 2022-FL6 Issuer, LLC (FS RIAL 2022-FL6) as follows:

-- Class A at AAA (sf)
-- Class A-CS at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D-1 at BBB (high) (sf)
-- Class D-2 at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G 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 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].

The transaction closed in August 2022 with a cut-off pool balance totalling $750.0 million, excluding approximately $175.4 million of future funding commitments and $1.3 billion of pari passu debt. At issuance, the pool consisted of 24 floating-rate mortgage loans secured by 58 mostly transitional properties. Two loans (NYC Multifamily Portfolio and NYC Midtown West Multifamily Portfolio) are cross-collateralized loans but are treated as a single loan in DBRS Morningstar’s analysis, resulting in a modified loan count of 23. All figures noted below reflect this modified loan count. As of September 2023, the pool’s composition remains unchanged. No loans have been fully repaid, nor have any been added to the trust since issuance.

The transaction is a managed vehicle, structured with a 24-month reinvestment period, that is scheduled to end with the August 2024 payment date. During this period, the issuer may acquire reinvestment collateral interests, which may include funded companion participations, subject to the eligibility criteria and acquisition criteria as defined at closing. As of the September 2023 remittance, there are no funds in the reinvestment account. The loans are mostly secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve underlying asset value.

In general, borrowers are making progress toward completing their stated business plans at loan closing. Through September 2023, the collateral manager had advanced cumulative loan future funding of $64.4 million to 14 of the outstanding individual borrowers. The two loans with the largest future funding advances to date are the NYC Multifamily Portfolio loan ($17.2 million) and Nob Hill Apartments loan ($17.7 million). These loans are secured by multifamily properties in New York and Houston, with the borrowers using future funding advances to renovate and upgrade unit interiors and tenant amenities as well as upgrade exterior items across the respective properties. An additional $119.3 million of loan future funding allocated to 16 individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding, $25.7 million, is to the borrower of the Ashcroft Portfolio loan. The Ashcroft Portfolio consists of five multifamily properties totalling 1,688 units throughout Georgia and Texas. At issuance, the borrower’s business plan contemplated a $30.9 million capital improvement plan to renovate 100.0% of unit interiors and exteriors to achieve both average renovation premiums above current market rents and a stabilized occupancy rate of 95.0%. As of September 2023, 604 units have been renovated with another 71 units currently undergoing renovations. The borrower noted that completed units are achieving average rent premiums that are relatively in-line with expectations.

The pool is concentrated by multifamily properties as 18 loans, representing 82.4% of the current trust balance, are secured by traditional multifamily assets. The remaining property type concentrations are relatively granular with two loans, representing 9.3% of the current pool balance secured by industrial assets; one loan, representing 4.5% of the current pool balance secured by a lodging property; and the remaining two loans, representing 3.8% of the current pool balance, secured by office assets. The pool is composed of properties located primarily in suburban markets, i.e., those identified with a DBRS Morningstar Market Rank of 3, 4, and 5. As of September 2023, these includes 18 loans, representing 68.9% of the current trust balance. The transaction is also concentrated by loan size, as the 10 largest loans represent 56.1% of the pool. According to the September 2023 reporting, the weighted-average (WA) as-is appraised loan-to-value ratio (LTV) was 69.89% and the WA stabilized appraised LTV was 63.3%. This compares with 69.7% and 63.0%, respectively, at closing.

As of the September 2023 reporting, there are no delinquent or specially serviced loans; however, nine loans, representing 40.3% of the current pool balance, are on the servicer’s watchlist. The majority of these loans were added to the servicer’s watchlist between June and August 2023 as a result of declining debt service coverage ratios, primarily related to increases in debt service obligations on the floating-rate loans. Three loans have been modified, the largest of which, 2704 CDMX Apartments, was modified to allow the property to enter a Public Facility Corporation program, an economic tool designed to promote the development of mixed-income housing in Texas. The two other loans, Nob Hill and La Mirada, were modified to allow the borrowers the ability to purchase shorter term interest-rate cap agreements. To date, there have not been any payment-related loan modifications.

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/416784 (July 4, 2023).

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 version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

DBRS Morningstar North American Commercial Real Estate Property Analysis (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].