Morningstar DBRS Confirms Credit Ratings on FS Rialto 2022-FL4 Issuer, LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by FS Rialto 2022-FL4 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 increased credit enhancement to the bonds as a result of successful loan repayment as there has been a collateral reduction of 15.2% since issuance. Additionally, the transaction benefits from a favorable collateral composition as the trust continues to be primarily secured by multifamily collateral (18 loans, representing 70.1% of the current trust balance). Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction as well as business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 23 floating-rate mortgage loans and participation interests in mortgage loans secured by 36 mostly transitional properties with a cut-off balance totaling $1.1 billion. Most loans were in a period of transition with plans to stabilize performances and improve values of the underlying assets. The transaction was structured with a Replenishment Period that expired with the April 2024 Payment Date. 

As of the September 2024 remittance, the pool comprised 26 loans secured by 30 properties with a cumulative trust balance of $917.5 million. Since issuance, six loans with a prior cumulative trust balance of $376.3 million have been successfully repaid in full from the pool. Additionally, four loans totaling $44.9 million have been added to the pool since the previous Morningstar DBRS credit rating action in October 2023.

Beyond the multifamily concentration noted above, four loans, representing 17.7% of the current trust balance, are secured by hotel properties; two loans, representing 6.5% of the current trust balance, are secured by office properties; and two loans, representing 5.8% of the current trust balance, are secured by self-storage properties. In comparison with the pool as of October 2023, multifamily collateral represented 72.8% of the trust balance, hotel collateral represented 13.9%, office collateral represented 8.3%, and self- storage represented 4.9%.

Leverage across the pool has remained similar since issuance as the current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 69.2% with the current WA stabilized LTV of 61.9%. In comparison, these figures were 65.6% and 60.1%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the individual property appraisals were completed in 2021 or 2022 and do not reflect the current higher interest-rate or widening capitalization-rate environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 11 loans, representing 58.0% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

As of September 2024, one loan, Nob Hill (Prospectus ID#18; 5.0% of the current pool balance) is delinquent and specially serviced. The loan, which is secured by a garden-style multifamily property totaling 1,326 units in Houston, transferred to special servicing in June 2024 for delinquency. As of the December 2023 rent roll, the property was 83.9% occupied and generated net cash flow (NCF) of $3.6 million, which equated to a debt service coverage ratio (DSCR) of 0.51 times (x) and debt yield of 4.1%. According to the Q2 2024 collateral manager report, the sponsor has paused its business plan of completing unit renovations and is now focused on evicting delinquent tenants. In its current analysis, Morningstar DBRS applied a probability of default adjustment to the loan, which resulted in a loan expected loss in excess of the WA expected loss for the overall pool.

Thirteen loans, representing 52.6% of the current trust balance, are on the servicer's watchlist as of the September 2024 reporting. The loans have primarily been flagged for below-breakeven DSCRs and upcoming loan maturities, The largest loan on the servicer's watchlist, Marriott Uptown Dallas (Prospectus ID#4; 7.1% of the current pool balance), is secured by a 255-key full-service hotel in Dallas. The loan is being monitored for upcoming maturity risk; however, according to the Q2 2024 collateral manager's report, the borrower is likely to exercise its first 12-month extension option, extending loan maturity to January 2026. The property has maintained strong performance since issuance as NCF has exceeded both the Morningstar DBRS and Issuer stabilized cash flow projections. As of the trailing 12-months ended June 30, 2024, the loan reported a debt yield of 13.4% and DSCR of 1.37x.

Through September 2024, the lender had advanced cumulative loan future funding of $213.6 million to 20 of the 21 outstanding individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the Ashcroft Portfolio ($21.4 million) loan, which is secured by a portfolio of five garden-style multifamily properties totaling 1,688 units located throughout Georgia and Texas. The advanced funds have been used by the borrower to fund the significant capital expenditure (capex) project of $28.9 million to complete unit and property renovations across the portfolio. According to the Q2 2024 update from the collateral manager, the unit renovations are 71% complete with renovated units achieving an average rental premium of $138 per unit. As of the August 2024 individual property rent rolls, the portfolio was 93.0% occupied.

An additional $51.2 million of future loan funding allocated to 17 of the outstanding individual borrowers remains available. The largest portion of available funds ($15.2 million) is allocated to the borrower of the Buckhead Centre loan, which is secured by a Class B office building totaling 168,856 square feet in Atlanta. The sponsor's business plan is to complete a $16.0 million capex plan to improve the property's quality and convert the building into a boutique Class A office product. The property's performance has been declining in recent years as the occupancy rate decreased to 51.6% as of the August 2024 rent roll from 64.8% as of June 2023 and 66.9% as of January 2023. Based on the YE2023 financials, the loan reported a DSCR of 0.21x and debt yield of 1.3%. In its current analysis, Morningstar DBRS increased the LTV, resulting in a loan expected loss in excess of the WA expected loss for the overall pool.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 
There were no Environmental/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 Factors in Credit Ratings (August 13, 2024), at https://dbrs.morningstar.com/research/437781.

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 CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

Morningstar DBRS Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.