DBRS Morningstar Confirms Credit Ratings on All Classes of RIAL 2022-FL8 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by RIAL 2022-FL8 Issuer, Ltd. (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 generally remained in line with DBRS Morningstar’s expectations since issuance. Additionally, the $84.6 million unrated first loss piece provides sufficient credit support to the rated bonds at this time as there is one specially serviced loan and two delinquent loans as of the September 2023 reporting. Both loans are highlighted in greater detail below. 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 specially serviced loan, 152 North 3rd Street (Prospectus ID#11; 4.0% of the pool), is secured by an office building in downtown San Jose, California. The loan transferred to special servicing in May 2023 for imminent default as the loan remains outstanding for the April 2023 debt service payment. According to the servicer, the resolution process is in the early stages but the servicer is preparing to file a motion to install a receiver and initiate judicial foreclosure. The borrower’s stated business plan at loan closing was to complete $3.5 million of capital expenditure (capex) work and to lease the property to stabilization. The loan was structured with $14.0 million of future funding allocated as $9.0 million for leasing costs and $5.0 million as a performance-based earn-out. Floors two through five were already built out as co-working space as the property was originally 100.0% leased to WeWork Inc., which terminated its lease in 2020. Floors six through nine were expected to be leased as either co-working space or traditional office space.

The August 2023 appraisal valued the property on an as-is basis at $55.0 million, a decline from $67.1 million in 2021. The appraiser also provided a prospective stabilized value of $77.5 million, a decline from the prospective stabilized valuation of $93.2 million provided in 2021. The appraiser assumed a market rental rate of $45.08 per square foot (psf) and expected a lease-up and stabilization period of 32 months. In its original analysis, DBRS Morningstar assumed total leasing costs of $9.7 million would be incurred to lease the property to a stabilized occupancy rate of 83.9%.

Given the status of the loan, it is unlikely any future funding proceeds will be advanced to the borrower and the loan balance will remain $31.0 million plus any outstanding servicing advances. Based on the current loan exposure of $32.0 million and the updated as-is value of $55.0 million, the loan-to-value ratio (LTV) is 58.3%; however, in its analysis, DBRS Morningstar stressed the value further considering the increased leasing costs and general lack of demand for office product in the submarket. The resulting LTV exceeds 80.0% and DBRS Morningstar also increased its probability of default assumption, with the expected loss for the loan approximately two times greater than the weighted average (WA) for the overall pool.

The other delinquent loan, Oakland Office Portfolio (Prospectus ID#3; 13.0% of the pool), is secured by an office portfolio in downtown Oakland, California. The borrower last paid debt service in June 2023; however, the lender and borrower have agreed to a loan modification and forbearance, whereby 3.5% of the scheduled interest payment between July 2023 and June 2024 will be deferred. As of June 2023, portfolio occupancy had declined to 30.3% from 64.1% at loan closing. The borrower’s business plan of using $11.9 million to fund building upgrades and leasing costs is significantly behind schedule, and as such, DBRS Morningstar increased the probability of default in its analysis for this review, resulting in a loan expected loss approximately one-and-a-half times greater than the WA pool expected loss.

The initial collateral consisted of 18 floating-rate mortgages secured by 24 mostly transitional properties with a cut-off date balance totaling $769.3 million. Most loans were in a period of transition with plans to stabilize performance and improve the values of the underlying assets. As of the September 2023 remittance, the pool comprised 16 loans secured by 22 properties with a cumulative trust balance of $769.3 million. Since issuance, two loans with a prior cumulative trust balance of $48.1 million have been successfully repaid in full. The transaction has a 24-month Replenishment Period, whereby the Issuer can purchase funded loan participations on existing loan collateral into the trust. The Replenishment Period is scheduled to end with the May 2024 Payment Date and as of September 2023, the Permitted Funded Companion Participation Acquisition Account had no balance.

The transaction is concentrated by property type as eight loans, representing 39.9% of the pool, are secured by hotel properties; four loans, representing 30.9% of the pool, are secured by multifamily properties; three loans, representing 16.3% of the pool, are secured by office properties; and one loan, representing 13.0% of the pool, is secured by a mixed-use property. In comparison with the pool at closing, hotel properties represented 41.2% of the collateral, multifamily properties represented 30.9% of the collateral, office properties represented 11.4% of the collateral, and mixed-use properties represented 12.9% of the collateral.

The pool is concentrated in loans secured by properties in suburban markets, with 11 loans, representing 61.8% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional three loans, representing 26.3% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6 or 7, denoting urban markets, while two loans, representing 12.0% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 1 or 2, denoting rural and tertiary markets, respectively. These concentrations are generally in line with the market representations at issuance.

Leverage across the pool was generally stable to slightly elevated from issuance as of the September 2023 reporting. The current WA as-is appraised value LTV is 64.5%, with a current WA stabilized LTV of 58.9%. In comparison, these figures were 63.4% and 58.9%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 or 2022 and may not reflect the current rising interest rate or widening capitalization rate environments. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across eight loans, representing 61.2% of the current trust balance.

Through September 2023, the lender had advanced cumulative loan future funding of $65.5 million to nine of the 16 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Warren Corporate Center ($19.7 million) and Paseo ($19.2 million) loans. The Warren Corporate Center loan is secured by an office property in Warren, New Jersey. The advanced funds have been provided to the borrower to complete its renovation and lease-up of the three-building property. According to the Q2 2023 collateral manager update, the borrower executed a 17-year lease with PTC Therapeutics (PTC) for two of the three buildings, totaling 70.2% of the net rentable area. PTC will pay a base rental rate of $22.50 psf commencing in September 2024. The tenant received a leasing package of $36.2 million ($100.00 psf), which was larger than originally expected, resulting in a loan amendment in August 2023 where the borrower funded $16.3 million in additional equity and the lender provided a $16.2 million mezzanine loan, co-terminous with the senior loan maturity in January 2026. As of September 2023, $36.3 million of senior loan future funding remained available.

The Paseo loan is secured by a mixed-use (office and retail) property in San Jose. The majority of the funds the lender has advanced to date have been for completion of the capex plan, which centered around the redevelopment of a former three-story movie theater into an office property with ground-floor retail. According to the Q2 2023 update, the capex program was 93.0% complete as the lender had advanced $17.3 million for renovation items and $0.8 million for leasing costs associated with retail tenant leases. The leased retail suite build-outs are in progress and the capex program was expected to be completed by the end of Q3 2023. In September 2023, the borrower and lender agreed to a loan modification, which allowed the waiver of the minimum debt yield requirement to exercise the first maturity extension option at loan maturity in September 2024 in exchange for the borrower depositing $1.6 million into an interest rate cap agreement reserve. The current interest rate cap agreement expires at loan maturity in September 2024. As of September 2023, $12.0 million of loan future funding remained available to the borrower, primarily for future leasing costs.

An additional $94.3 million of loan future funding allocated to 11 of the outstanding individual borrowers remains available. The largest portion, $36.3 million, is allocated to the borrower of the Warren Corporate Center loan, noted above. The second-largest portion, $14.0 million, is allocated to the borrower of the 152 North 3rd Street loan, which, as also noted above, DBRS Morningstar does not expect will be advanced to the borrower given the status of the loan.

As of the September 2023 remittance, there were eight loans on the servicer’s watchlist, representing 57.6% of the current trust balance. All loans have been highlighted for below-breakeven debt service coverage ratios. DBRS Morningstar expected most loans to have temporary cash flow declines at issuance given the planned capex projects across many of the assets, which was expected to negatively affect occupancy rates in the short to medium term. An additional three loans, Claradon Village (Prospectus ID#1; 9.7% of the pool), Fox Creek (Prospectus ID#2; 3.5% of the pool), and Nitya PHX (Prospectus ID#4; 11.0% of the pool), have also been flagged for upcoming loan maturity. Each loan has at least one outstanding 12-month maturity extension option, which DBRS Morningstar expects to be exercised if the individual borrowers are unable to execute loan exit strategies.

ENVIRONMENTAL, SOCIAL, AND 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].