Morningstar DBRS Finalizes Provisional Credit Ratings on KRE Commercial Mortgage Trust 2025-AIP4

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2025-AIP4 (the Certificates) issued by KRE Commercial Mortgage Trust 2025-AIP4 (the Trust) as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)

All trends are Stable.

The trust transaction is collateralized by the borrower's fee-simple interests (or in the case of one property in the portfolio, expected fee-simple interest) in a portfolio of 29 industrial properties totaling 7.5 million square feet (sf). The portfolio is spread across six states and eight unique markets. The properties themselves are distribution warehouse properties with clear heights ranging from 20 feet to 36 feet, with a portfolio average of 30.5 feet. 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 $79.0 billion in assets under management as of December 2024. Alpha Industrial Properties (AIP), a KKR portfolio company, is a leading owner and operator of industrial, logistics, and warehouse/distribution properties in select core markets throughout the United States. AIP currently owns and operates more than 50 million sf of industrial assets across 20 markets throughout the United States. The Company targets a balanced portfolio mix of newly developed, Class A distribution and logistics facilities and multi-tenant Class A/B assets in urban infill locations. The leadership team has more than 40 years of combined real estate experience, operating through multiple real estate cycles.

The 29-property portfolio is spread across eight unique markets in six different states: Atlanta (10 properties; 32.7% of net rentable area (NRA)); Denver (six properties; 15.3% of NRA); Dallas-Fort Worth (two properties, 20.4% of NRA); Phoenix (four properties, 12.7% of NRA); Orlando (two properties, 8.9% of NRA); San Diego (three properties, 6.5% of NRA); Tampa (one property, 2.4% of NRA); and Orange County, California (one property, 1.0% of NRA). 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.

The Morningstar DBRS loan-to-value (LTV) ratio on the full debt load of $840.0 million is high at 123.0%. To account for the high leverage, Morningstar DBRS programmatically reduced its LTV benchmark targets for the transaction by 2.75% 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 $44.1 million results in a trust debt service coverage ratio (DSCR) of 1.04 times (x) and a whole loan DSCR of 0.86x, 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, and elevated economic vacancy conclusions when compared against the Issuer's cash flow figure.

Over the term of the fully extended loan, ending in 2030, 80.3% of the Morningstar DBRS base rent and 75.5% of the NRA will expire. Should tenants elect to vacate, the sponsor may face volatility in cash flows and higher-than-anticipated re-leasing costs. Additionally, there is no upfront reserves to mitigate any rollover volatility. There are no performance requirements or hurdles in order for the sponsor to execute an extension option, other than no ongoing event of default. As a result, portfolio performance could be deteriorating at the same time the sponsor is attempting to execute an extension option on the mortgage. This rollover risk is partially mitigated by the strong leasing velocity in 2024 and strong releasing spreads.

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

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings do not address 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  
There were no Environmental/Social/Governance factor(s) 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 Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025): https://dbrs.morningstar.com/research/448962.

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.

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, 2024), https://dbrs.morningstar.com/research/438283
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

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