DBRS Morningstar Confirms All Classes of KREF 2022-FL3 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by KREF 2022-FL3 Ltd. (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)
-- Class F-X at BB (low) (sf)
-- Class G-X at B (low) (sf)
-- Class F-E at BB (low) (sf)
-- Class G-E at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations as individual borrowers are generally progressing through their stated business plans. The pool composition remains relatively similar to issuance with multifamily properties representing the entirety of the pool. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction as well as 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.

The initial collateral consisted of 16 floating-rate mortgage loans secured by 18 mostly transitional properties with a cut-off balance totaling $1.0 billion. As of the September 2023 remittance, the trust reported an outstanding balance of $1.0 billion with 16 loans remaining in the trust. The transaction is a managed vehicle and was structured with a 24-month Reinvestment Period ending with the February 2024 Payment Date whereby the Issuer may acquire Companion Participations in either the form of a mortgage loan, a combination of a mortgage loan and a related mezzanine loan, or a fully funded pari passu participation. In addition, the transaction is structured with a Replenishment Period, which begins on the first day after the Reinvestment Period and ends on the earlier of the date the Issuer acquired 10% of the cut-off balance after the Reinvestment Period and the sixth payment date after the Reinvestment Period.

Since the previous DBRS Morningstar credit rating action in November 2022, one loan has successfully repaid from the trust and two loans have been added into the trust. All the remaining loans in the transaction are secured by multifamily properties; however, the Issuer has the ability to acquire student housing properties up to 15% of the pool balance. The remaining loans are secured primarily by properties in suburban markets. Thirteen loans, representing 79.0% of the pool, are secured by properties in suburban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 3, 4, or 5. Only two loans, representing 16.0% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6, 7, or 8, denoting an urban market. In comparison with the pool composition at issuance, properties in suburban markets represented 84.0% of the collateral and properties in urban markets represented 16.0% of the collateral.

Leverage across the pool has remained relatively unchanged since issuance as the current weighted-average (WA) as-is appraised value loan-to-value (LTV) ratio is 69.3% with a current WA stabilized LTV ratio of 66.0%. In comparison, these figures were 70.5% and 66.4%, respectively, at issuance. DBRS Morningstar recognizes these values may be inflated as the individual property appraisals were completed in 2021 and do not reflect the current rising interest rate or widening capitalization rate environments.

Through September 2023, the lender had advanced $35.1 million of loan future funding to eight of the outstanding individual borrowers to aid in property stabilization efforts. The largest loan advances included $15.5 million to the borrower of the Crystal Towers and Flats loan and $6.1 million to the borrower of the Berkeley Place loan. The future funding for both of these loans was used for capital improvement plans to improve the properties’ position in the submarket and increase revenues. The Berkeley Place loan also has potential future funding allocated as an Earnout Facility. An additional $55.0 million of loan future funding allocated to 10 individual borrowers remains available. The largest individual allocation, $12.6 million, is allocated to the borrower of the Crystal Towers and Flats loan.

As of the September 2023 reporting, no loans are delinquent or in special servicing and three loans, representing 20.0% of the current trust balance, are on the servicer’s watchlist. These loans were not flagged for performance issues, but rather for increased level of risk; however, servicer commentary did not provide further details. DBRS Morningstar has asked for further clarification on this classification. The borrower of only one of the flagged loans, Heights at Park Lane (Prospectus ID#14, 4.0% of the pool), had experienced delays in its business plan; however, the property remains positioned to complete the business plan as stated at issuance. To date, 12 loans have been modified; however, 11 of the loans were modified to allow the transition of the floating interest rate benchmark from Libor to Term Secured Overnight Financing Rate while the remaining loan, The Kendrick (Prospectus ID#12, 6.7% of the pool), received an extension to its initial maturity date.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors

At issuance, it was noted that The Kendrick had an open environmental issue, first identified after the loan’s origination, involving levels of trichloroethylene, a potentially carcinogenic substance, in indoor air and soil gas exceeding regulatory limits. The matter is subject to a mandated in-process (early-stage) regulatory order by the Massachusetts Department of Environmental Protection to investigate and remediate the identified contamination until fully resolved, potentially over an estimated five-year timeline. Eighteen of the units identified as affected are considered down units and were concluded as vacant by DBRS Morningstar at issuance.

According to the collateral manager as of May 2023, all of the affected units have been either occupied or re-leased. DBRS Morningstar has not received documentation that a full remediation has been completed at the subject property.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

DBRS Morningstar 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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