KBRA's preliminary ratings raise questions about stability in $752.2 million CMBS transaction

In a significant financial development, Kroll Bond Rating Agency (KBRA) announced the assignment of preliminary ratings to a large commercial mortgage-backed securities (CMBS) transaction known as Benchmark 2024-V12. This conduit transaction is valued at approximately $752.2 million and is backed by a diversified portfolio comprising 31 commercial mortgage loans. These loans are secured by a total of 164 properties, showcasing extensive geographic diversity across 63 metropolitan statistical areas (MSAs) in the United States. Notably, the largest contributions to the pool come from properties in major markets, with New York, Colorado Springs, and Houston being highlighted as the top three locations by exposure percentage, representing 25.4%, 10.0%, and 8.4%, respectively. The sectors covered in this transaction include multifamily, lodging, and retail, which are the predominant property types, making up significant portions of the overall pool balance at 27.3%, 25.8%, and 22.1%. The loans themselves exhibit a range of principal balances; the lowest begins at $4.5 million, while the largest stands at $75 million, associated with the notable Queens Center property, which accounts for 10% of the pool. This particular mall is strategically located in Queens, New York, approximately seven miles from Midtown Manhattan, emphasizing its prime commercial location. Furthermore, the analysis conducted by KBRA utilized a comprehensive rating process designed for multifamily transactions. This included an evaluation of financial performance and the operational viability of the underlying collateral properties, which ultimately assesses sustainable net cash flow (KNCF) and value, utilizing KBRA's proprietary methodologies for North American CMBS. The findings indicated that on an aggregate basis, KNCF was estimated to be 9.0% lower than the issuer's projected cash flow, which poses potential implications for investment risk. By applying capitalization rates on the KNCF values determined for each asset, it was found that these valuations were approximately 35.9% lower than those provided by third-party appraisals, indicating discrepancies that may affect investor confidence and transaction dynamics. In terms of leverage metrics, the in-trust loan-to-value (KLTV) ratio is reported at 91.4%, while the overall all-in KLTV ratio stands at 96.1%. This high leverage indicates a substantial risk profile tied to these loans, illustrating the complexities and potential vulnerabilities of the commercial mortgage market segment. KBRA offers extensive disclosures concerning its analysis and methodologies that underpin the ratings assigned, suggesting that prospective investors should take these insights into account when considering their financial decisions. As a registered credit rating agency with established presences in both the U.S. and European markets, KBRA's updates reflect crucial developments in asset-backed securities, aiming to provide transparency and facilitate informed investor engagement in a dynamic economic landscape.