Morningstar DBRS Confirms All Credit Ratings on FS Rialto 2022-FL6 Issuer, LLC; Changes Trend on Class G to Negative from Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by FS Rialto 2022-FL6 Issuer, LLC (FS RIAL 2022-FL6 or the Issuer) as follows:

-- Class A at AAA (sf)
-- Class A-CS at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D-1 at BBB (high) (sf)
-- Class D-2 at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

Morningstar DBRS changed the trend on Class G to Negative from Stable. The trends on all other classes are Stable.

The trend change for Class G reflects the increased credit risk to the transaction as a result of higher loan-level loss expectations for three loans that collectively represent 9.8% of the pool¿Huguenot (Prospectus ID#5; 6.5% of the pool); 3500 The Vine (Prospectus ID# 21; 2.3% of the pool); and Nob Hill (Prospectus ID# 23; 1.0% of the pool)¿which recently transferred to special servicing. The servicer has not obtained or has not reported updated appraisals for any of the collateral properties backing these loans. In the analysis for this review, Morningstar DBRS analyzed all three loans with a stressed probability of default (POD) and/or a stressed loan-to-value ratio (LTV) to increase the expected losses (ELs) at the loan level. The resulting ELs are between 7.0% and 70.0% above the pool's average EL.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains relatively in line with Morningstar DBRS' expectations. The transaction benefits from a high concentration of loans backed by multifamily collateral, which has historically proven to better retain property value and cash flow compared with other property types. Furthermore, the unrated first-loss Class H note of $59.1 million, as well as the substantial balance of $63.7 million held across Classes F and G, both of which have been assigned below investment grade credit ratings by Morningstar DBRS, provides significant cushion against realized losses for the top and middle of the capital stack. Outside the specially serviced loans, Morningstar DBRS analyzed 13 loans with increased LTVs and/or elevated PODs to increase the ELs, as applicable, reflecting the widening of capitalization rates and downward pressure on values since issuance.

Pending an update from the Issuer, Morningstar DBRS may publish a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans at a later date.

The subject transaction closed in August 2022 with a cut-off pool balance totaling $750.0 million, excluding approximately $175.4 million of future funding commitments and $1.3 billion of pari passu debt. At issuance, the pool consisted of 24 floating-rate mortgage loans secured by 58 mostly transitional properties. Two loans (NYC Multifamily Portfolio and NYC Midtown West Multifamily Portfolio) are cross-collateralized loans but are treated as a single loan in Morningstar DBRS' analysis, resulting in a modeled loan count of 23. All figures below reflect this modeled loan count. The transaction is now a static vehicle following the end of the initial 24-month reinvestment period, which expired with the August 2024 payment date.

As of the September 2024 remittance, the transaction had an outstanding balance of $745.5 million with 23 floating-rate loans remaining in the trust, representing nominal collateral reduction. Of the original loans, 21 remain in the trust, representing 92.5% of the current trust balance. Since Morningstar DBRS' previous credit rating action in October 2023, two loans totaling $56.0 million (7.5% of the current trust balance) have been contributed to the trust. Additionally, two loans with a former cumulative trust balance of $55.8 million have been repaid from the trust. As of the September 2024 reporting, 18 loans, representing 82.2% of the current trust balance, were secured by the greatest property type concentration in multifamily properties, followed by two industrial properties, two hotel properties, and one office property representing 9.3%, 6.9%, and 1.6% of the current trust balance, respectively.

In general, borrowers are making progress toward completing their stated business plans. Through September 2024, the collateral manager had advanced cumulative loan future funding of $115.6 million to 13 of the outstanding individual borrowers. The two loans with the largest future funding advances to date are the NYC Multifamily Portfolio loan ($22.5 million) and Amazon Middletown loan ($22.0 million). An additional $45.9 million of loan future funding allocated to 12 individual borrowers remains outstanding. The largest individual allocation of unadvanced future funding at $13.6 million is to the borrower of the Northtown loan, which is backed by a two-building industrial portfolio. At issuance, the borrower's business plan contemplated leasing a portion of the vacant space to a single tenant, increasing occupancy to a stabilized rate of 88.0% from 74.6%. As of September 2024, the property occupancy remains unchanged at 74.6%. The lone tenant in place recently requested to downsize its space and will ultimately execute an early termination option available ahead of the scheduled lease expiration in October 2028. The collateral manager noted that the borrower advised of strong industrial demand for the submarket; however, leasing traction has been challenged as there is relatively limited demand for large spaces over 100,000 square feet.

As of September 2024, each of the three specially serviced loans were reported to be more than 60 days delinquent. The largest of these, the 360 Huguenot loan, is secured by a high-rise apartment property in New Rochelle, New York, that transferred to special servicing in April 2024 for payment default, with the last debt service payment made in February 2024. As of Q2 2024, the property had an occupancy rate of 87.6%, down from about 91.0% at Q1 2024. The property has continued to face leasing challenges and difficulties reducing collection loss. The borrower has completed 57 evictions, including 13 evictions in 2024; however, there are currently 18 tenants remaining that are delinquent by at least one month, which has contributed to the declining net cash flow quarter over quarter.

There are two smaller specially serviced loans in Nob Hill and 3500 The Vine that are secured by garden apartment properties in Texas and Georgia, respectively. The Nob Hill loan transferred to special servicing in June 2024 for payment default, with the last debt service payment made in March 2024. As of Q2 2024, the property was 74.8% occupied, up slightly from the previous quarter but down from about 84% at YE2023. Prior to the transfer, the borrower had used $18.4 million of future funding to complete 300 unit renovations and exterior renovations, with renovated units reportedly achieving monthly rental rate premiums of between $100 and $125 per unit. There remains about $5.5 million of available future funding for renovations; however, the sponsor has halted renovations and shifted its focus to curing delinquencies by removing nonpaying tenants and renting vacant units as they become available. In addition, marketed rental rates have been lowered in an effort to increase occupancy.

The 3500 The Vine loan transferred to special servicing in May 2024 and is paid through June 2024. As of Q2 2024, the property was 70.7% occupied, down from 76.6% in the previous quarter and from 81.0% at YE2023. Prior to the transfer, the borrower had used about $3.0 million of loan future funding to complete 100 unit renovations and exterior repairs, with the renovated units reportedly achieving monthly rental rate premiums of $160 per unit. There are currently no units under renovation and the loan has been in a cash sweep period since August 2023. There remains about $700,000 of available future funding to the borrower; however, it appears no additional funds will be advanced given the pause on unit renovations and the status of the loan.

There are five loans, representing 26.6% of the current pool balance, on the servicer's watchlist largely because of upcoming maturity dates and/or low debt service coverage ratios, driven primarily by increases in debt service obligations on the floating-rate debt. Since Morningstar DBRS' last credit rating action, two loans¿LBJ Station (Prospectus ID#17; 3.8% of the pool) and Southwind Office Center (Prospectus ID#22; 1.6% of the pool)¿have been modified to extend their loan terms to 24 months and 12 months, respectively. Prior to Morningstar DBRS' last credit rating action, the 2704 CDMX Apartments loan was modified to allow the property to enter a Public Facility Corporation program, an economic tool designed to promote the development of mixed-income housing in Texas, and the Nob Hill and the La Mirada loans were modified to offer borrowers the ability to purchase shorter-term interest rate cap agreements.

There are 19 loans, accounting for more than 80% of the pool balance, with scheduled maturity dates in the next 12 months, the majority of which have extension options. In the event that property performance does not qualify to exercise the related options, Morningstar DBRS expects the borrowers and lenders to negotiate mutually beneficial loan modifications to extend the loans, some of which would likely include fresh sponsor equity to fund principal curtailments, fund carry reserves, or purchase new interest rate cap agreements.

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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS, Inc.
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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 and North American CMBS Insight Model v 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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.