DBRS Morningstar Confirms Credit Ratings on FS Rialto 2022-FL5 Issuer, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by FS Rialto 2022-FL5 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 52 mostly transitional properties with a cut-off balance totaling $600 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the October 2023 remittance, the pool comprised 25 loans secured by 54 properties with a cumulative trust balance of $690 million. Since issuance, two loans with a prior cumulative trust balance of $35.5 million have been successfully repaid in full from the pool. In addition, three loans, totaling $8.1 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 June 2024 Payment Date. As of Octoberr 2023, the Reinvestment Account has no available reinvestment funds.

The transaction is concentrated by property type as 14 loans, representing 56.5% of the current trust balance, are secured by multifamily properties; five loans, representing 18.8% of the current trust balance, are secured by office properties; and four loans, representing 18.0% of the current trust balance, are secured by hospitality properties. The pool is primarily secured by properties in suburban markets, with 19 loans, representing 70.2% of the pool, with a DBRS Morningstar Market Rank of 3, 4, or 5. The remaining six loans, representing 29.8% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6 or 8. The pool composition is relatively unchanged since issuance.

Leverage across the pool was generally stable as of the October 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 68.1%, with a current WA stabilized LTV of 61.5%. In comparison, these figures were 68.4% and 61.7%, 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 23.9% of the current trust balance.

Through September 2023, the collateral manager had advanced cumulative loan future funding of $82.8 million to 18 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, respectively. Both borrowers have used future funding advances to renovate unit interiors and tenant amenities as well as complete upgrades across the property exteriors.

An additional $129.5 million of future loan funding allocated to 19 of the outstanding individual borrowers remains available. The largest portion of available funds ($35.2 million) is allocated to the borrower of the Spectrum Center loan, which is secured by an office property in Addison, Texas. The sponsor’s business plan is to complete a $31.0 million capital expenditure (capex) plan to improve the property’s quality and convert the building into Class A office product. The future funding component also includes $18.2 million budgeted toward leasing costs. As of September 2023, the lender had advanced $4.1 million of future funding to the borrower for the completion of upgrades to amenity improvements and speculative suite build out.

As of the October 2023 reporting, there are no delinquent or specially serviced loans; however, seven loans, representing 37.6% of the current pool balance, are on the servicer’s watchlist. The loans have primarily been flagged for below-breakeven debt service coverage ratios, low occupancy rates, and deferred maintenance issues. While not on the servicer’s watchlist, DBRS Morningstar has highlighted the Lawrence Station loan, which is secured by a recently built, Class A office building in Santa Clara, California. The property has remained fully vacant nearly two years since construction was completed despite the borrower having $19.6 million available in future funding to finance leasing costs. The sponsor continues to contend with sluggish market conditions, as according to the Reis Q2 2023 market report, the San Jose office submarket reported an elevated vacancy rate of 24.9%. As such, DBRS Morningstar analyzed the loan with a stressed scenario, which resulted in an expected loss in excess of the pool average.

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.
22 West Washington Street
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].