DBRS Morningstar Confirms Credit Ratings on AREIT 2022-CRE7 LLC

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of notes issued by AREIT 2022-CRE7 LLC (the Issuer) as follows:

-- Class 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)

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 the majority of loans are secured by multifamily collateral and individual borrowers are generally progressing through the stated business plans. 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 October 2023 remittance, the pool consists of 38 floating-rate mortgages secured by 50 properties with an aggregate balance of $955.6 million. Most loans are in a period of transition with plans to stabilize and improve asset values. The transaction is static with a replenishment period whereby the Issuer can use principal proceeds to acquire fully funded future funding participations into the trust during the Permitted Funded Companion Participation Acquisition Period (Acquisition Period). The Acquisition Period is scheduled to end with the December 2024 Payment Date. While all original 38 loans remain in the trust as of the October 2023 remittance, the Permitted Funded Companion Participation Acquisition Account reported a balance of $7.5 million as the Balboa Retail Portfolio and Northside Portfolio loans have experienced partial principal repayments since closing.

As of the October 2023 remittance, no loans are in special servicing and 25 loans, representing 69.8% of the current trust balance, are on the servicer's watchlist. All 25 loans were flagged for performance-related issues with low debt service coverage ratios (DSCRs) or the placement of active cash management triggers; however, as individual borrowers continue to progress through the stated business plans to stabilize the assets, temporary cash flow declines were expected. Additionally, debt service payments have increased given the floating rate nature of all the loans in the pool amid the current interest rate environment. The largest loan on the servicer's watchlist, Noble on Newberry (Prospectus ID#1), 7.8% of the current trust balance), is secured by a 300-unit garden-style multifamily property in Gainesville, Florida. The loan was added to the servicer's watchlist in September 2023 following a decline in DSCR, which was attributed to increased debt service payments, which increased over 82.0% from June 2022.

In total, 31 loans, representing 79.7% of the current trust balance, are scheduled to mature by year-end 2024; however, all loans have remaining extension options available to the individual borrowers. While most extension options do not require performance tests to be achieved to qualify for the first year of extension, some collateral properties that do require performance tests currently do not meet the related thresholds. 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 82.9% of the current trust balance, followed by office properties, representing 6.4% of the current trust balance. The loans are primarily secured by properties in suburban markets with 33 loans, representing 84.2% of the current trust balance, in locations with DBRS Morningstar Market Ranks of 3, 4, and 5. The remaining five loans, representing 15.8% of the pool, are secured by properties in an urban location with a DBRS Morningstar Market Rank of 6, 7, or 8. In terms of leverage, the pool has a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 71.4% and a WA stabilized LTV ratio of 61.9%. By comparison, these figures were 71.1% and 62.4%, respectively, at issuance in June 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. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across 18 loans, representing 44.1% of the current trust balance.

Through October 2023, the collateral manager had advanced $41.9 million in loan future funding to 28 individual borrowers to aid in property stabilization efforts. The largest advance, $6.2 million, was made to the borrower of HIE Atlanta Airport (Prospectus ID#36, 1.2% of the current pool balance), which is secured by a limited-service hotel in College Park, Georgia. The borrower's business plan centers on the flag conversion of the hotel from a Clarion to a Holiday Inn Express. An additional $110.6 million of future funding allocated to 31 individual borrowers remains available. Of this amount, the largest future funding balance is allocated to the borrower of Balboa Retail Portfolio (Prospectus ID#5, 3.4% of the current pool balance) for its stabilization efforts. The loan is secured by a portfolio of four retail properties with the borrower’s business plan to utilize $30.9 million in future funding to finance renovation and leasing costs. According to the Q3 2023 collateral manager update, the consolidated occupancy rate across the subject portfolio was reported at 78.4% with the sponsor only executing shorter term one- to two-year tenant lease renewals to maintain long term flexibility and control of the spaces.

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 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].