Morningstar DBRS Confirms Credit Ratings on All Classes of RIAL 2022-FL8 Issuer, Ltd., Changes Trend to Negative from Stable on Two Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by RIAL 2022-FL8 Issuer, Ltd. (the Issuer) as follows:

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

In addition, Morningstar DBRS changed the trends on Classes F and G to Negative from Stable. The trends on all remaining classes are Stable.

The trend changes reflect Morningstar DBRS' higher loan-level loss expectations for select loans in the transaction, including the largest loan in the pool, Oakland Office (Prospectus ID# 3; 13.2% of the pool), which transferred to special servicing in August 2024. The pool includes a high concentration of loans secured by office properties or mixed-use properties with significant office components, representing 31.6% of the current trust balance. Morningstar DBRS notes the majority of the borrowers of these loans are facing increased execution risk regarding their respective business plans because of a combination of factors, including lackluster leasing momentum, higher construction costs, and increases in debt service obligations. Additionally, near-term maturity risk is of concern as 11 loans, representing approximately 70.0% of the current trust balance, have matured, or are expected to mature within the next six months. While all loans are structured with extension options, Morningstar DBRS notes that most will not qualify to exercise those options based on current property performance metrics and therefore will likely need to be modified.

Beyond the office and mixed-use concentration, loans representing 40.2% and 28.2% of the trust are secured by lodging and multifamily properties, respectively. Multifamily properties have historically proven better at withstanding market downturns, thereby sustaining positive cash flow and retaining property value, as compared with other property types. The transaction also benefits from a sizeable unrated first-loss piece totalling $84.6 million, in addition to $87.5 million of below-investment-grade rated bonds, strengthening credit enhancement levels, especially for the higher-rated bonds and further supporting the credit rating confirmations with this review. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction, including business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 18 floating-rate mortgages secured by 24 mostly transitional properties with a cut-off date balance totaling $769.3 million. Most loans were in a period of transition with plans to stabilize performance and improve the values of the underlying assets. As of the September 2024 remittance, the pool comprised 14 loans secured by 20 properties with a cumulative trust balance of $737.6 million. Since issuance, four loans with a prior cumulative trust balance of $89.6 million have been successfully repaid in full. The transaction was structured with a 36-month replenishment period, scheduled to end with the May 2025 payment date. As of the September 2024 reporting, the current cash reinvestment account had a balance of $31.7 million. Morningstar DBRS expects those funds will be used by the Issuer to purchase funded loan participations on existing loan collateral in the trust.

As of the September 2024 remittance, there were nine loans on the servicer's watchlist, representing 63.9% of the current trust balance. The majority of those loans are being monitored for upcoming maturity dates. The Holiday Inn San Jose loan (Prospectus ID#9; 6.2% of the pool) is delinquent with the last debt service payment made in July 2024. An additional two loans, representing 17.2% of the current trust balance, are in special servicing. The larger of those loans, Oakland Office Portfolio (Prospectus ID#3; 13.2% of the pool), is secured by an office portfolio in downtown Oakland, California. The loan transferred to the special servicer in August 2024 and a fourth loan modification is reportedly being discussed with the borrower. The sponsor and the lender previously executed a loan modification in August, the terms of which included an interest rate reduction in exchange for a $5.5 million principal repayment over the next 12 months and a one-year maturity extension to January 2026. As of June 2024, portfolio occupancy had declined to 34.6% from 64.1% at loan closing. Cash flow has decreased significantly from the previous quarter, primarily as a result of increased vacancy. The borrower's business plan to use $11.9 million to fund building upgrades and leasing costs is significantly behind schedule, and as such, Morningstar DBRS analyzed the loan with a stressed loan-to-value (LTV) ratio and elevated probability of default (PoD) penalty resulting in an expected loss (EL) that was approximately 30.0% greater than the pool's weighted-average (WA) EL.

The second specially serviced loan, 152 North 3rd Street (Prospectus ID#11; 4.2% of the pool), is secured by an office building in downtown San Jose, California. The borrower failed to make the April 2023 debt service payment, replenish the interest reserve account, and purchase a replacement interest rate cap, and as such, the loan transferred to special servicing in May 2023. According to the servicer, the borrower has signed a pre-negotiation letter and discussions with respect to a settlement remain ongoing. The borrower's business plan at loan closing was to complete $3.5 million of capex work and to lease the property to stabilization. The capex funds and additional projected carry costs of $3.2 million were to be funded by the borrower while $9.0 million of loan future funding was available for leasing costs and $5.0 million of loan future funding was available as a performance-based earn-out. The property was originally 100.0% leased to WeWork Inc.; however, the tenant terminated its lease in 2020. An appraisal dated March 2024 valued the property on an as-is basis at $52.9 million, a decline from the August 2023 and issuance appraised values of $55.0 million and $67.1 million, respectively. Given the status of the loan, it is unlikely any future funding proceeds will be advanced to the borrower. Based on the current loan exposure of $34.7 million and the updated as-is value, the LTV ratio is 65.5%; however, in its analysis, Morningstar DBRS stressed the value further considering the increased leasing costs and general lack of demand for office product in the submarket. The resulting LTV ratio was capped at 100.0% and Morningstar DBRS also increased the PoD assumption, with the expected loss for the loan approximately 1.5 times (x) greater than the pool average.

The pool is primarily secured by properties in suburban markets, with nine loans, representing 59.4% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional three loans, representing 27.6% of the pool, are secured by properties in urban markets, with a Morningstar DBRS Market Rank of 6, 7, or 8. The remaining loans are backed by properties with a Morningstar DBRS Market Rank of 1 or 2, denoting tertiary markets. These property-type and market-type concentrations remain generally in line with both the pool composition at issuance and the October 2023 credit rating action.

Leverage across the pool has remained consistent since issuance. As of the September 2024 reporting, the current WA as-is appraised LTV ratio was 64.1%, with a current WA stabilized LTV of 55.1%. In comparison, these figures were 63.4% and 58.3%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not fully reflect the effects of increased interest rates and/or widening capitalization rates in the current environment. In the analysis for this review, Morningstar DBRS applied upward LTV adjustments across 10 loans, representing 71.3% of the current trust balance.

Through September 2024, the lender had advanced cumulative loan future funding of $104.3 million to eight of the 14 outstanding individual borrowers to aid in property stabilization efforts. The largest advances have been made to the borrowers of the Warren Corporate Center ($45.0 million) and Paseo ($23.3 million) loans. The Warren Corporate Center loan is secured by an office property in Warren, New Jersey. The advanced funds have been provided to the borrower to complete its renovation and lease-up of the three-building property. The borrower executed a 17-year lease with PTC Therapeutics (PTC) for two (building 400 and 500) of the three buildings, totaling 70.2% of the net rentable area. The tenant received a leasing package of $36.2 million ($100.00 per square foot (psf)) and is slated to pay a base rental rate of $22.50 psf. Reported cash flow has increased considerably from the previous quarter as a result of PTC's rent commencing on approximately 75.0% of its space. The Q2 2024 collateral manager report noted that the majority of PTC's buildout is now complete. The borrower is actively leasing the remainder of the vacant space at building 300, and in March 2024, executed an 11-year lease with Regeneron Pharmaceuticals for approximately 127,000 sf, with rent expected to commence in August 2026. As of September 2024, $11.0 million of loan future funding remained available.

An additional $48.2 million of loan future funding allocated to seven of the outstanding individual borrowers remains available. The largest portion, $14.0 million, is allocated to the borrower of the 152 North 3rd Street loan, which Morningstar DBRS does not expect will be advanced to the borrower given the status of the loan, as noted above. The second-largest portion is allocated to the borrower of the Warren Corporate Center loan.

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/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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

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 Surveillance Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428798).

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

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-DBRS@morningstar.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.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

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)

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

Morningstar DBRS 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)

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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