Morningstar DBRS Confirms Credit Ratings on All Classes of AREIT 2022-CRE7 LLC

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by AREIT 2022-CRE7 LLC (the Issuer) as follows:

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance of the underlying loans, which remains in line with Morningstar DBRS' expectations at issuance. Supported by the fact that the majority of loans, representing 83.4% of the pool are secured by multifamily property types, and individual borrowers are generally progressing through the stated business plans to increase property cash flows. In addition, the transaction benefits from a notable nonrated, first-loss piece of $86.0 million as well as two below investment-grade bonds, Classes F and G, totaling $88.4 million with no losses incurred to date. There are some loans in the transaction for which the borrower's respective business plans have stalled or there have been other signs of increased credit risks since issuance. Where applicable, Morningstar DBRS considered stressed scenarios for those loans to increase the loan-level expected losses (ELs) and, while this approach resulted in an increased pool EL, the overall analysis supported the credit rating confirmations.

In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update rating report with in-depth analysis and credit metrics for the transaction and 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@dbrsmorningstar.com.

As of the October 2024 remittance, the pool consists of 35 floating-rate mortgages secured by 44 properties with an aggregate balance of $955.5 million. Most loans are in a period of transition with plans to stabilize and improve asset values. The transaction is static with a replenishment period whereby the Issuer can use principal proceeds to acquire fully funded future funding participations into the trust during the Permitted Funded Companion Participation Acquisition Period (Acquisition Period). The Acquisition Period is scheduled to end with the December 2024 Payment Date. Since the last review in October 2023, three loans, Northside Portfolio (Prospectus ID#14 2.1% of the current pool balance), Domain at Northgate (Prospectus ID#17, 2.7% of the current pool balance), and HIE Atlanta Airport (Prospectus ID#36, 1.2% of the current pool balance) have been repaid with funds placed in a Permitted Funded Companion Participation Acquisition Account, which as of October 2024 has a balance of $26.1 million.

As of the October 2024 remittance two loans, L&C Complex (Prospectus ID#4, 4.0% of the current pool balance) and Park at Aventino (Prospectus ID#9, 3.5% of the current pool balance) are in special servicing for maturity default after failing to extend their respective loans. There are 24 loans, representing 67.8% of the current trust balance that are on the servicer's watchlist. All 24 loans were flagged for performance-related issues with low debt service coverage ratios (DSCRs) or the placement of active cash management triggers; however, as individual borrowers continue to progress through the stated business plans to stabilize the assets, temporary cash flow declines are expected. Additionally, debt service payments have increased given the floating rate nature of all the loans in the pool amid the current interest rate environment. The largest loan on the servicer's watchlist, Noble on Newberry (Prospectus ID#1 7.9% of the current pool balance), is secured by a 300-unit garden-style multifamily property in Gainesville, Florida. The loan was added to the servicer's watchlist in September 2023 following a decline in DSCR, which was attributed to increased debt service payments, which increased over 100.0% from issuance.

In total, all 35 loans in the pool are scheduled to mature by YE2025 and all but one of the loans have remaining extension options available to the individual borrowers. While most extension options do not require performance tests to be achieved to qualify for the first year of extension, some loans that do require property performance tests currently do not meet the related thresholds. Morningstar DBRS expects borrowers and lenders to agree to mutually beneficial modification terms, if necessary, to allow loan maturity dates to be extended. To date, 13 loans have been modified primarily to assist with loan extensions including the modification of the terms of required interest rate caps for extension, waiving of extension tests, and actual extensions.

The transaction benefits from a significant concentration of loans backed by multifamily properties, representing 83.4% of the current trust balance, followed by office properties, representing 6.5% of the current trust balance. The loans are primarily secured by properties in suburban markets with 32 loans, representing 89.4% of the current trust balance, in locations with Morningstar DBRS Market Ranks of 3, 4, and 5. The remaining three loans, representing 10.6% of the pool, are secured by properties in an urban location with a Morningstar DBRS Market Rank of 6, 7, or 8. In terms of leverage, the pool has a current Morningstar DBRS Weighted-Average (WA) Appraised Loan-to-Value Ratio (LTV) of 70.9% and a Morningstar DBRS WA Stabilized LTV Ratio of 62.2%. By comparison, these figures were 71.4% and 61.9%, respectively, at the time of last review in October 2023. The majority of the individual property appraisals were completed in 2021 and 2022 and as such, the appraisers' cap rates may not reflect the rise in interest rates (and corresponding widening of cap rates) that began later that year. Morningstar DBRS evaluated the appraised values and the implied cap rates on the issuer's cash flows and, where applicable, made upward adjustments to reflect the current valuation and lending environments. This analysis affected 14 loans, representing 54.4% of the current trust balance.

Through October 2024, the collateral manager had advanced a cumulative $78.2 million in loan future funding to 28 individual borrowers to aid in property stabilization efforts. The largest advance, $7.1 million, was made to the borrower of Trails of Ashford Apartments (Prospectus ID#10, 3.3% of the current pool balance), which is secured by a 514-unit multifamily complex in Houston. The borrower's business plan centers on using funding for significant unit renovations. An additional $64.5 million of future funding allocated to eight individual borrowers remains available. Of this amount, the largest future funding balance is allocated to the borrower of Balboa Retail Portfolio (Prospectus ID#5, 3.3% of the current pool balance) for its stabilization efforts. The loan is secured by a portfolio of four retail properties with the borrower's business plan to utilize $30.9 million in future funding to finance renovation and leasing costs. According to the Q3 2024 collateral manager update, the consolidated occupancy rate across the subject portfolio was reported at 83.0% with the sponsor only executing shorter term one- to two-year tenant lease renewals to maintain long-term flexibility and control of the spaces.

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, or 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), 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 Multi-Borrower Rating Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428797.

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 North American 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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

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