DBRS Morningstar Assigns Special Servicer Ranking to K-Star Asset Management

DBRS, Inc. (DBRS Morningstar) assigned an MOR CS3 commercial mortgage special servicer ranking to K-Star Asset Management LLC (K-Star or the Company), an indirect subsidiary of KKR & Co. Inc. (together with its affiliates, KKR). The trend for the ranking is Stable.

K-Star launched in April 2022 to serve as the special servicer for commercial mortgage-backed securities (CMBS) and collateralized loan obligation (CLO) transactions in which KKR has controlling positions. K-Star also will provide due diligence and asset management support, some of which it has started, for KKR’s direct lending real estate portfolio. The assigned ranking reflects that K-Star, as a nascent operation, does not yet serve as a named special servicer and has not yet directly managed or resolved any securitized assets. However, K-Star demonstrates the requisite operational infrastructure, including strong parent company support, to serve as an effective special servicer.

The assigned ranking further reflects the following considerations:

-- K-Star’s highly experienced management team and soundly designed organizational structure in which it has filled all core positions to support CMBS/CLO special servicing. The employee roster largely consists of well-seasoned professionals, including some industry veterans, hired from other special servicers and collectively having a strong knowledge of CMBS pooling and servicing agreement (PSA) requirements. An
administrative services agreement with KKR provides corporate-level operational resources as well. The Company should be suitably positioned with enough staff, and possibly some excess capacity, to address its projected initial work volume.

-- K-Star demonstrates solid technology capabilities, which center on the RealINSIGHT (RI) application for data management and reporting. Leveraging KKR’s resources and mostly cloud-based technology platform, K-Star has sound practices for data backup, security, and associated testing.

-- The Company’s documented CMBS-centric policies and described practices denote a controlled and proactive approach for all aspects of special servicing and asset management, including investor reporting, portfolio surveillance, borrower consent requests, and vendor oversight. K-Star is drafting more detailed desktop-level procedures as well. Additionally, the Company stated that it will have all PSA-abstracted data points loaded into RI by year-end for all the transactions it plans to receive as the successor special servicer.

-- Administered by its chief operations and compliance officer, the Company has a well-conceived audit and quality control program that will consist of monthly process reviews and quarterly audits, developed through an annual risk assessment, along with annual Regulation AB examinations. To supplement, KKR’s internal audit department will conduct its own annual risk assessments and audits of K-Star. For real estate owned (REO) properties, K-Star plans to engage an accounting firm to conduct quarterly property manager audits and cash compliance assessments.

K-Star expects its initial work to emanate from becoming the successor special servicer on 59 CMBS (including 15 single-asset/single-borrower) transactions and two CLO transactions. As of August 31, 2022, the CMBS transactions were secured by 1,938 loans having an aggregate $40.34 billion unpaid principal balance (UPB) and the CLO transactions were secured by 36 loans having an aggregate $2.30 billion UPB. All of the transactions were issued between 2017 and 2022.

As of August 31, 2022, the active special servicing portfolio, all from these CMBS transactions, contained 41 loans, and no REO properties, with an aggregate $641.0 million UPB. Net of additional resolutions and new transfers, K-Star indicated that the active portfolio should contain fewer assets at year-end, but may include a couple of REO properties.

All rankings are subject to surveillance, which could result in rankings being raised, lowered, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar North American commercial mortgage servicer rankings are not credit ratings. Instead, they are designed to evaluate the quality of the parties that service commercial mortgage loans. Although the servicer’s financial condition contributes to the applicable ranking, its relative importance is such that a servicer’s ranking should never be considered as a proxy of its creditworthiness.

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

The principal methodology is North American Commercial Mortgage Servicer Rankings (September 8, 2022), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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

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