DBRS Morningstar Upgrades its Credit Rating on Remaining Class of KKR Industrial Portfolio Trust 2021-KDIP

DBRS Limited (DBRS Morningstar) upgraded its credit rating on the following class of Commercial Mortgage Pass-Through Certificates, Series 2021-KDIP issued by KKR Industrial Portfolio Trust 2021-KDIP:

-- Class G to A (sf) from B (low) (sf)

The trend is Stable.

The credit rating upgrade reflects the increased credit support to the Class as a result of significant repayment since issuance because of property releases and prepayments within the collateral portfolio. At issuance, the underlying interest-only loan was secured by the fee-simple interest in a portfolio of 96 industrial/distribution properties totaling approximately 10.9 million square feet across nine U.S. states. As of the November 2023 reporting, 93 properties have been released in total, resulting in a 93.7% collateral reduction since issuance. The transaction has paid sequentially since Q4 2021. A majority of the property releases (48) have taken place since DBRS Morningstar’s last review of the transaction in December 2022 and the Class G certificate is now the most senior remaining in the transaction, with a remaining balance of $17.7 million, down from $50.3 million at issuance.

The whole loan of $740.0 million consisted of $695.0 million of senior debt held in the trust and $45.0 million of mezzanine debt held outside of the trust. The sponsor, KKR Real Estate Partners Americas II L.P., is an affiliate of KKR & Co. Inc., a global investment firm with more than $496 billion in assets under management as of Q3 2022. Whole-loan proceeds along with approximately $300.4 million of cash equity facilitated the acquisition of the portfolio at a purchase price of $989.5 million, funded upfront reserves of $36.8 million, and covered closing costs. The loan was structured with an initial term of one year, with three one-year extension options. An extension was exercised in 2022 to bring the maturity to December 2023. As a result of the near-term maturity, the loan is on the servicer’s watchlist. According to the servicer’s commentary, the borrower has submitted a request to exercise the second extension to December 2024. The transaction was structured with weak release premiums and a pro rata prepayment structure for the first 25% of the initial loan balance. The release provisions allow the borrower to release one or more preapproved release parcels at a release price equal to 100% of the allocated loan amount (ALA; aggregate releases not to exceed 10% of the original principal balance). Otherwise, the prepayment premium to release individual assets is 105% of the ALA (aggregate releases not to exceed 15% of the original principal balance).

The remaining collateral consists of three industrial properties located in Everett, Washington; Grapevine, Texas; and Dallas. As of Q2 2023, the portfolio was 85.0% occupied. The portfolio has considerable lease rollover risk with 37.5% of the total net rentable area (NRA) set to expire in 2024. The 607 Riverside Road property in Everett has Amazon in place for approximately half of the NRA and the lease expires in September 2024. The remainder of the scheduled rollover is in the 1201 Big Town Boulevard property in Dallas, where two tenants combining for almost 70% of the NRA are scheduled to roll in May and July 2024. The loan was structured with an upfront leasing reserve; as of the November 2023 reporting, the reserve balance was $269,093.

In the analysis for this review, the DBRS Morningstar net cash flow (NCF) was adjusted to exclude the 93 released properties, resulting in an updated figure of $5.6 million. The cap rate of 7.0% applied at issuance was maintained, resulting in a DBRS Morningstar value of $79.6 million, a variance of -43.2% from the issuance appraised value of $140.2 million for the remaining three properties in the portfolio. The DBRS Morningstar value implies a loan-to-value ratio (LTV) of 55.2% compared with the LTV of 31.4% on the issuance appraised value for the remaining collateral and the DBRS Morningstar LTV at issuance of 99.1%. DBRS Morningstar removed the positive qualitative adjustments to the final LTV-sizing benchmarks that were assumed at issuance to account for cash flow volatility, property quality, and market fundamentals.

To evaluate the potential for credit rating upgrades given the significant paydown in the past year, DBRS Morningstar further considered a haircut to the DBRS Morningstar NCF that generally represents a peak-to-trough NCF decline. Based on the resulting LTV-sizing benchmarks, the upgrade to Class G with this review was warranted. Additionally, DBRS Morningstar notes that the appraisers at issuance provided land values for the remaining three properties in the portfolio, with an aggregate value of $18.4 million; this figure compares with the November 2023 balance for Class G of $17.7 million. Finally, the appraised values at issuance for those three properties could withstand an 80% haircut before a loss would be incurred for Class G.

The DBRS Morningstar credit rating assigned to Class G is lower than the results implied by the LTV-sizing benchmarks. This variance is warranted given the increased risk of adverse selection following the significant amount of property releases in the past year as well as the presence of significant rollover risk for two of the remaining three properties in 2024.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

-- 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].