DBRS Morningstar Confirms Ratings on KKR Industrial Portfolio Trust 2021-KDIP

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-KDIP issued by KKR Industrial Portfolio Trust 2021-KDIP as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. At issuance, the loan was secured by the fee-simple interest in a portfolio of 96 industrial/distribution properties totalling approximately 10.9 million square feet (sf) across nine U.S. states. The whole loan of $740.0 million consisted of $695.0 million of senior debt held in the trust and $45.0 million of mezzanine debt held outside of the trust. The sponsor, KKR Real Estate Partners Americas II L.P, is an affiliate of KKR & Co. Inc. (KKR), a global investment firm with more than $459 billion in assets under management as of September 2021. Whole-loan proceeds along with approximately $300.4 million of cash equity facilitated the acquisition of the portfolio at a purchase price of $989.5 million, funded upfront reserves of $36.8 million, and covered closing costs.

The interest-only loan includes an initial two-year term with three one-year extension options. The loan was structured with a partial pro rata/sequential-pay structure, which allowed for pro rata paydowns of the initial 25.0% of the unpaid principal balance. The loan also has release provisions where the borrower may release one or more pre-approved release parcels at a release price equal to 100.0% of the allocated loan amount (ALA) (aggregate releases must not exceed 10.0% of the original principal balance). Otherwise, the prepayment premium to release individual assets is 105.0% of the ALA (aggregate releases must not exceed 15.0% of the original principal balance) and 110% of the ALA for the release of individual properties assets thereafter.

In October 2021, 32 properties were released from the trust, in accordance with the release provisions and payment structure noted above, resulting in a $222.1 million principal repayment of the senior debt for a collateral reduction of 31.8%. According to the loan documents, a concurrent pro rata payment of the mezzanine loan was to be made with prepayment. Per the January 2022 reporting, 64 industrial/distribution properties remain as collateral, totalling approximately 7.9 million sf, with the largest state concentrations in Illinois (24.2% of the ALA), Texas 20.4% of the ALA), Pennsylvania (14.9% of the ALA), and Georgia (14.9% of the ALA). By property subtype, the portfolio is primarily classified as distribution space, which represents approximately 66.6% of the portfolio’s net rentable area (NRA), while 17.1% of the NRA is classified as general industrial and 14.4% of the NRA is warehouse space. While it is notable that leases representing 15.9% of the NRA are scheduled to expire in 2022, with another concentration of 15.1% scheduled to expire in 2024, the loan was structured with $10.5 million upfront in tenant improvement/leasing commission reserves to help mitigate future tenant rollover and aid with leasing costs.

While no updated financial reporting has been made available to date, the DBRS Morningstar net cash flow derived at issuance was adjusted for this review, accounting for the release of the aforementioned properties. Leverage increased since issuance given the weak collateral release provisions, but remained within the DBRS Morningstar loan-to-value (LTV) benchmarks. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the weak deleveraging premium.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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.

The principal methodology is the North American CMBS Surveillance 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.

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 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.

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

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