DBRS Morningstar Finalizes Provisional Ratings of FS Rialto 2022-FL4 Issuer, LLC

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by FS Rialto 2022-FL4 Issuer, LLC (FSRIA 2022-FL4):

-- 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 initial collateral consists 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, excluding $139.2 million of remaining future funding commitments and $360.8 million of pari passu debt. Seven loans (32.1% of the pool) are pari passu participations, and 16 loans (62.8% of the pool) have remaining future funding participations, which the Issuer may acquire in the future. Two loans (Goodfriend Westchester Portfolio and Goodfriend - Bronx) are cross-collateralized and are treated as a single loan in the DBRS Morningstar analysis, resulting in a modified loan count of 22. All figures below reflect this modified loan count.

The holder of the future funding companion participations will be FS CREIT Finance Holdings LLC (the Seller), a wholly owned subsidiary of FS Credit Real Estate Income Trust, Inc. (FS Credit REIT), or an affiliate of the Seller. The securitization sponsor, FS Credit REIT, is an experienced commercial real estate collateralized loan obligation (CRE CLO) issuer and collateral manager. FS Credit REIT is externally managed by FS Real Estate Advisor, LLC, an affiliate of Franklin Square Holdings, L.P. (FS Investments). Founded in 2007, FS Investments had $32 billion in total assets under management as of December 31, 2021. Rialto houses a vertically integrated operating platform and has $9.2 billion in total current assets under management. FS Rialto 2022-FL4 Holder, LLC, a subsidiary of the Seller, will acquire the Class F Notes, the Class G Notes, and the Class H Notes, representing the most subordinate 17.125% of the transaction by principal balance. Additionally, the seller is expected to retain 100% of the Companion Participations, totaling approximately $500.0 million.

The holder of each future funding participation has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is managed with a 24-month reinvestment period. During this period, the Collateral Manager will be permitted to acquire reinvestment collateral interests, which may include Funded Companion Participations, subject to the satisfaction of the Eligibility Criteria and the Acquisition Criteria. The Acquisition Criteria requires that, among other things, the Note Protection Tests are satisfied, no EOD is continuing, and Rialto Capital Management, LLC (Rialto) or one of its affiliates acts as the subadvisor to the Collateral Manager. The Eligibility Criteria includes minimum and maximum debt service coverage ratios (DSCRs) and loan-to-value ratios, Herfindahl scores of at least 18.0, and property type limitations, among other items. The transaction stipulates that any acquisition of any reinvestment collateral interests will need a rating agency confirmation regardless of balance size. The loans are mostly secured by cash flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. The transaction will have a sequential-pay structure.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the debt service payments were measured against the DBRS Morningstar As-Is net cash flow (NCF), 17 loans, comprising 66.1% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCR of only five loans, comprising 24.5% of the initial pool balance, was 1.00x or below, which is indicative of elevated refinance risk. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:
-- Prospectus ID#1 - Piazza & Liberties Walk (12.5% of the pool)
-- Prospectus ID#2 - The Beach Place Apartments (7.6% of the pool)
-- Prospectus ID#3 - Paradise Plaza (6.9% of the pool)
-- Prospectus ID#4 - Marriott Uptown Dallas (6.0% of the pool)
-- Prospectus ID#5 - Clutter NY4 Portfolio (5.4% of the pool)
-- Prospectus ID#6 - Fairmont Grand Del Mar (5.1% of the pool)
-- Prospectus ID#7 - Goodfriend Westchester Portfolio and Goodfriend - Bronx (4.9% of the pool)
-- Prospectus ID#9 - La Mirada (4.7% of the pool)
-- Prospectus ID#10 - The Hendrix Apartments (4.3% of the pool)
-- Prospectus ID#11 - Tower 101 (4.1% of the pool)
-- Prospectus ID#12 - North Arkansas Portfolio (4.0% of the pool)
-- Prospectus ID#15 - Pacific Building (3.4% of the pool)
-- Prospectus ID#17 - Belaire Tower Apartments (3.3% of the pool)
-- Prospectus ID#22 - AKA Brickell (2.5% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American CMBS Multi-Borrower Rating Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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