Morningstar DBRS Confirms All Credit Ratings on KREST Commercial Mortgage Securities Trust 2021-CHIP

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of KREST Commercial Mortgage Securities Trust 2021-CHIP, Series 2021-CHIP, as follows:

-- Class A at AAA (sf)
-- Class X-A at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BB (high) (sf)
-- Class E at B (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the underlying collateral's performance, which remains in line with Morningstar DBRS' expectations since its previous credit rating action in April 2024. The collateral continues to benefit from long-term, institutional-quality tenancy from Micron Technology, Inc. (Micron), which leases the entirety of the property through 2034. While Micron currently subleases approximately 20% of its space, its lease does not contain any termination options.

The transaction is collateralized by the fee-simple interest in HQ @ First, a 603,666-square-foot (sf), LEED Gold-certified office campus in San Jose, California. The $408.0 million whole loan comprises $230 million in senior debt and $178.0 million in junior debt. The subject transaction of $267.0 million consists of $89.0 million in senior debt and the entire junior debt. The 10-year, fixed-rate loan is interest only (IO) and is structured with an anticipated repayment date of August 2031 and a final maturity date of November 2034. The sponsor is KKR Real Estate Select Trust Inc., a private real estate investment trust for individual investors sponsored by KKR & Co. Inc., which contributed $136.3 million of equity to facilitate the subject's acquisition at a purchase price of $535.0 million.

In 2019, investment-grade tenant Micron executed a 16-year lease for 100% of the property to serve as its Silicon Valley headquarters. Micron's lease is structured with 3% annual contractual rent increases and expires on December 31, 2034. The lease contains two five-year extension options at fair market rate as long as the tenant is not in default under the lease. Micron leased the entire property with the intention of growing into the space over time but has subleased approximately 20% of the net rentable area to Zscaler, which uses the space as its headquarters, until September 2026. Zscaler's sublease is structured with a contractual expansion option in October 2025. According to Reis, office properties in the Airport/Milpitas submarket reported a Q4 2024 vacancy rate of 33.3% with an asking rent of $34.30 per sf (psf), compared with the Q4 2023 vacancy rate of 30.8% and asking rent of $34.20 psf. Micron's rental rate for 2024 was $43.90 psf.

Based on the most recent financials, the loan reported a debt service coverage ratio (DSCR) of 2.11 times (x) for the trailing nine months ended September 30, 2024, compared with the Morningstar DBRS DSCR of 2.16x at issuance. The Morningstar DBRS net cash flow (NCF) analysis includes straight-lining of Micron's rent over the loan term given its consideration as a long-term credit tenant.

Morningstar DBRS' April 2024 credit rating analysis and credit rating action included an update to the Morningstar DBRS value. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024. For purposes of this credit rating action, Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 7.25% applied to the Morningstar DBRS NCF of $26.6 million. Morningstar DBRS also maintained positive qualitative adjustments to the loan-to-value ratio (LTV) sizing benchmarks totaling 7.0% to reflect the subject property's quality and long-term in-place tenancy with an investment-grade tenant. The Morningstar DBRS-concluded value of $366.7 million represents a -31.8% variance from the issuance appraised value of $538.0 million and implies a whole loan LTV of 111.3%.

The credit ratings assigned to Classes B and C are higher than the results implied by the LTV sizing benchmarks. The variances are warranted given the cash flow stability provided by the long-term lease with Micron, an investment-grade tenant, as well as the senior position of the bonds in the capital stack.

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

Class X-A is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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 (December 13, 2024) https://dbrs.morningstar.com/research/444617.

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

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 Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024)
https://dbrs.morningstar.com/research/444612
-- 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
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024)
https://dbrs.morningstar.com/research/438283

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