Morningstar DBRS Confirms K-Star’s Commercial Mortgage Special Servicer Ranking; Changes Trend to Positive

DBRS, Inc. (Morningstar DBRS) confirmed its MOR CS3 commercial mortgage special servicer ranking for K-Star Asset Management LLC (K-Star or the Company), an indirect subsidiary of KKR & Co. Inc. (together with its affiliates, KKR). Morningstar DBRS also changed the ranking trend to Positive from Stable.

K-Star launched in April 2022 to serve as the special servicer for commercial mortgage-backed securities (CMBS) and collateralized loan obligation (CLO) transactions in which KKR has controlling positions. The Company received its first assets in April 2023 as the successor special servicer on 57 CMBS and two CLO transactions. K-Star also provides due diligence support for KKR’s securitized investments and provides asset management support for KKR’s direct lending real estate portfolio.

The confirmed ranking considers K-Star’s short operating history and still limited asset resolution record. However, the Company has a highly experienced management team, solid professional depth, and a soundly designed organizational structure. The employee roster includes a number of people hired from other special servicers who collectively have strong backgrounds in asset workouts and CMBS pooling and servicing agreement requirements. The Company continues to expand its ranks and plans to add specialists this year for borrower consents and real estate owned (REO) assets. K-Star should be well positioned with the requisite personnel and scalability to address its current and projected work volume.

K-Star’s other operational strengths include its technology capabilities, asset management practices, audit and compliance regimen, and commitment to employee training and career development.
-- For its core data management and reporting, K-Star uses RealINSIGHT® (RI), a well-recognized application geared to CMBS requirements. Through KKR, K-Star has sound practices for data backup, security, and associated testing.
-- K-Star’s well-detailed CMBS-centric policies denote a controlled and proactive approach for all core functions. For REO assets, K-Star plans to engage accounting firms to conduct quarterly property manager audits and cash management compliance assessments. RI’s tracking mechanisms further support the Company’s ability to execute its duties with diligence and accuracy.
-- K-Star’s compliance team oversees a multifaceted audit and quality control regimen that consists of monthly process reviews, self-administered quarterly audits, and annual Regulation AB examinations (the recently issued initial Regulation AB attestation had no exceptions). Additionally, K-Star has completed a System and Organizational Controls (SOC 1) readiness assessment and expects to complete a SOC 1 Type II examination in May 2025. KKR’s internal audit group also will conduct a review of K-Star’s platform this month.
-- K-Star has a formal training function with an expanding curriculum; it plans to launch an analyst training program this year as well.

Morningstar DBRS believes that K-Star’s operating position is on a favorable trajectory as the Company continues to build momentum and establish a performance record. K-Star possesses all of the requisite qualifications to serve as an increasingly effective special servicer for CMBS and other commercial real estate structured transactions.

As of December 31, 2023, K-Star was the named special servicer for 1,908 loans with an aggregate unpaid principal balance (UPB) of $45.7 billion involving 57 CMBS transactions (1,874 loans) and two CLO transactions (34 loans). All of the transactions were issued between 2017 and 2023. As of December 31, 2023, the active special servicing portfolio, all from these CMBS transactions, contained 31 loans ($650.8 million UPB) and four REO assets ($35.2 million UPB), with an aggregate UPB of approximately $686 million.

All rankings are subject to surveillance, which could result in rankings being raised, lowered, placed under review, confirmed, or discontinued by Morningstar DBRS.

Morningstar DBRS North American commercial mortgage servicer rankings are not credit ratings. Instead, they are designed to evaluate the quality of the parties that service commercial mortgage loans. Although the servicer’s financial condition contributes to the applicable ranking, its relative importance is such that a servicer’s ranking should never be considered as a proxy of its creditworthiness.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592).

For more information on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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