Morningstar DBRS Assigns Provisional Credit Ratings to KIND Commercial Mortgage Trust 2024-1

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-1 (the Certificates) to be issued by KIND Commercial Mortgage Trust 2024-1 (the Trust):

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)

All trends are Stable.

The Trust is collateralized by the borrower's fee-simple interests in a portfolio of 42 industrial properties and one office property totaling 6.7 million square feet. The portfolio is spread across 17 states and two Canadian provinces, with 29 unique markets. The properties themselves are a mix of manufacturing, distribution, and office properties. The properties that comprise the portfolio are generally located near major population centers and strong infrastructure, with convenient access to local and regional highways, railways, and airports. Overall, the subject markets have solid fundamentals with positive annual growth in rents while absorbing new supply. Morningstar DBRS continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector.

The sponsor for this transaction is KKR Real Estate Partners Americas III AIV I L.P., an affiliate of KKR & Co. Inc. (KKR), a global investment firm with more than $251 billion in assets under management (AUM) as of December 2023. KKR acquired the Portfolio through its Strategic Lease Partners (SLP) platform, which was created in 2021. SLP engages the capabilities and resources of KKR's real estate, credit, and capital markets teams to acquire triple-net properties and deliver sale leaseback solutions to corporate tenants. The sponsor contributed $43.5 million of cash equity to this refinance transaction, which represents 7.8% of the sources for the transaction. Based on the portfolio appraised value of $844.4 million, the sponsor had $327.4 million of implied equity in the transaction.

The portfolio is 100.0% occupied by 10 unique tenants; the top three tenants by net rental area (NRA) are BlueTriton (59.4% of NRA and 54.4% of Morningstar DBRS base rent), which master-leases 20 properties across seven states; Dessert Holdings (8.3% of NRA and 7.8% of Morningstar DBRS base rent), which master-leases four properties across two states and two Canadian provinces; and Cadrex Manufacturing (7.8% of NRA and 12.0% of Morningstar DBRS base rent), which master-leases nine properties across five states. The portfolio has a weighted-average remaining lease term of 14.4 years.

Over half of the Morningstar DBRS gross rent is derived from a single tenant, BlueTriton, a bottled water distributor. While the tenant has invested over $600.0 million into the properties within the subject portfolio and has a lease expiration date in December 2036, the loan would likely default if BlueTriton were to go bankrupt or fail to make its lease payments during the loan term. BlueTriton formerly operated as the North American business unit of Nestle Waters (a subsidiary of Nestle S.A.). In 2021, One Rock Capital Partners and Metropoulos & Co. acquired Nestle Waters North America for $4.3 billion and rebranded it as BlueTriton. Since the acquisition, BlueTriton's net revenue grew to $4.7 billion during the T-12 period ended March 31, 2024, from $3.9 billion in 2021. On June 17, 2024, BlueTriton announced its entry into a definitive agreement to merge with Primo Water Corporation in an all-stock transaction. The merger is expected to close in the first half of 2025. The merged company would have combined net revenue of $6.5 billion and adjusted EBITDA of $1.5 billion, inclusive of $200 million in estimated cost synergies, for the T-12 period ended March 31, 2024.

The Morningstar DBRS loan-to-value ratio (LTV) on the full debt load of $517.0 million is high at 96.5%. To account for the high leverage, Morningstar DBRS programmatically reduced its LTV benchmark targets for the transaction by 1.5% across the capital structure. The high leverage point, combined with a lack of scheduled amortization, could result in elevated refinance risk at loan maturity. Furthermore, the Morningstar DBRS net cash flow of $38.4 million results in a debt service coverage ratio of 0.93x, indicating that the overall portfolio is at risk of not being able to service its debt payments as they come due. Morningstar DBRS took a conservative approach in its cash flow analysis, which includes no rental rate appreciation over the course of the loan term, elevated economic vacancy conclusions, and elevated operating expenses when compared against the Issuer's cash flow figure.

Morningstar DBRS' credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Amounts and/or Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations (e.g., Yield Maintenance Premiums).

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors

The following Environmental factor had a relevant effect on the credit analysis: The loan does not have upfront reserves to cover the estimated costs associated with the remediation of environmental issues at three of the properties within the portfolio. Morningstar DBRS views the inclusion of the guarantor on the Environmental Indemnity agreement as standard but views the guaranty for remediation costs in lieu of environmental reserves as credit negative. Morningstar DBRS deducted the maximum cost estimate for remediation of $265,000, which is low relative to the loan amount and guarantor net worth, from its Morningstar DBRS concluded value.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:

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

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (July 11, 2024) https://dbrs.morningstar.com/research/436004.

Other methodologies referenced in this transaction are listed at the end of this press release.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.

Morningstar DBRS 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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://dbrs.morningstar.com/about/methodologies.

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

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