DBRS Morningstar Confirms Credit Ratings on FS Rialto 2022-FL4 Issuer, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by FS Rialto 2022-FL4 Issuer, LLC (the Issuer) as follows:

-- Class A Notes at AAA (sf)
-- Class A-S Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance as the trust continues to be primarily secured by multifamily collateral. In conjunction with this press release, DBRS Morningstar has also published a Surveillance Performance Update 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].

The initial collateral consisted of 23 floating-rate mortgage loans and participation interests in mortgage loans secured by 36 mostly transitional properties with a cut-off balance totaling $1.1 billion. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the September 2023 remittance, the pool comprised 25 loans secured by 35 properties with a cumulative trust balance of $1.1 billion. Since issuance, two loans with a prior cumulative trust balance of $133.1 million have been successfully repaid in full from the pool. In addition, three loans totaling $102.0 million have been added into the pool since issuance.

The transaction is managed with a two-year Reinvestment Period, whereby the Issuer can purchase new loans and funded loan participations into the trust. The Reinvestment Period is scheduled to end with the April 2024 Payment Date. As of September 2023, the Reinvestment Account had a balance of $1.1 million.

The transaction is concentrated by property type as 17 loans, representing 72.8% of the current trust balance, are secured by multifamily properties; three loans, representing 13.9% of the current trust balance, are secured by hotel properties; and three loans, representing 8.3% of the current trust balance, are secured by office properties. The pool is primarily secured by properties in suburban markets, with 17 loans, representing 62.3% of the pool, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional seven loans, representing 33.6% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, 7, or 8, while one loan, representing 4.0% of the pool, is secured by a property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market. In comparison, at closing, properties in suburban markets represented 57.7% of the collateral, properties in urban markets represented 39.3% of the collateral, and properties in tertiary markets represented 3.0% of the collateral.

Leverage across the pool was generally stable as of the September 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 60.8%, with a current WA stabilized LTV of 61.5%. In comparison, these figures were 65.6% and 60.1%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current rising interest rate or widening capitalization rate environment. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across five loans, representing 13.1% of the current trust balance.

Through September 2023, the lender had advanced cumulative loan future funding of $70.8 million to 17 of the 19 outstanding individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the Nob Hill Apartments ($17.7 million) loan, which is secured by a 1,326-unit garden-style multifamily complex in Houston. The borrower’s business plan is to complete a significant capital expenditure (capex) project totaling $23.9 million, of which $9.1 million is being allocated toward unit renovations, $1.4 million is allocated toward deferred maintenance, and $10.7 million is allocated toward exterior renovations. The sponsor appears to be progressing with the capex plan as the project was 74.0% funded as of September 2023. According to the June 2023 rent roll, the property was 82.9% occupied with an average rental rate of $940 per unit. Since January 2023, the sponsor is achieving monthly rental premiums of $125 per unit on leases across the renovated units.

An additional $96.1 million of future loan funding allocated to 18 of the outstanding individual borrowers remains available. The largest portion of available funds ($15.2 million) is allocated to the borrower of the Buckhead Centre loan, which is secured by a Class B office building totaling 168,856 square feet (sf) in Atlanta. The sponsor’s business plan is to complete a $16.0 million capex plan to improve the property’s quality and convert the building into boutique Class A office product. The property’s occupancy rate slightly decreased to 64.8% as of June 2023 from 66.9% as of January 2023 after a ground-level restaurant totaling 8,283 sf vacated in May 2023.

As of the September 2023 remittance, one loan, representing 3.4% of the current trust balance, was in special servicing. The loan, Pacific Building, transferred to special servicing in July 2023 for payment default. The loan is secured by a 23-story, Class B office building in downtown Seattle. The sponsor’s business plan was to increase the property’s occupancy rate and rental rates to market levels by using loan future funding dollars to complete a $2.3 million capex plan throughout the property and using up to $7.4 million for leasing costs to offer competitive leasing packages to prospective tenants. According to the collateral manager, the loan’s $9.6 million future funding remains unfunded to date as the sponsor has paused any capex work while exploring a potential sale of the property. As of the March 2023 rent roll, the property was 41.9% occupied, down from 48.2% at issuance. At issuance, the property was appraised for $69.0 million on an as-is basis, resulting in an LTV of 52.9%. Given the outstanding default, DBRS Morningstar analyzed the loan with a stressed scenario, which resulted in an expected loss in excess of the pool average.

There are 10 loans on the servicer’s watchlist, representing 32.8% of the current trust balance. The loans have primarily been flagged for below-breakeven debt service coverage ratios, low occupancy rates, and deferred maintenance issues. All loans on the servicer’s watchlist remain current, with performance declines expected to be temporary as the majority of borrowers are in the midst of completing planned capex programs as part of the respective business plans.

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 the 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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 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

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