DBRS Morningstar Assigns Provisional Ratings to SMRT Commercial Mortgage Trust 2022-MINI, Commercial Mortgage Pass-Through Certificates, Series 2022-MINI

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the classes of SMRT Commercial Mortgage Trust 2022-MINI, Commercial Mortgage Pass-Through Certificates, Series 2022-MINI as follows:

-- Class A at AAA (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)

All trends are Stable. Classes D, E, F and HRR are not rated by DBRS Morningstar. Classes X-CP and X-NCP are interest-only (IO) classes whose balance are notional.

The SMRT Commercial Mortgage Trust 2022-MINI transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 18 self-storage facilities totaling 56,042 units (of which 80.2% are climate controlled) and approximately 2.1 million rentable sf located throughout Manhattan, New York. The portfolio was acquired by the seller, Edison Properties, over a period of 40 years and represents almost two-thirds of all available self-storage units in Manhattan (based on square footage). Self-storage real estate benefits from broad-based demand caused by the universal need to store goods, particularly during many types of life-changing events. The self-storage sector has earned the label of "recession resistant" given strong relative performance in past recessions (only one year of modestly negative NOI performance during the Global Financial Crisis of 2008). Furthermore, despite the Coronavirus Disease (COVID-19) pandemic, self-storage showed strong performance through 2020, with self-storage REIT total returns up 10% in December 2020, making it the second-best-performing asset class after industrial and demonstrating its resilience even amid market distress.

Unlike most CRE property types, self-storage experienced an increase in both occupancy and effective rental rates during the pandemic, particularly in urban markets, driven by idiosyncratic factors that actually enhanced demand such as a desire for more space at home because of remote schooling/working, renters moving to different housing outside of major cities, business closures, and other temporary displacements. As a result of this sudden need for storage, the industry has experienced record-high occupancy levels over the past 18 months. Although self-storage benefited greatly from these pandemic-induced changes, DBRS Morningstar believes that there could be a reversion to pre-pandemic levels of performance across the industry as things return to normal. As a result of potential for reversionary pricing and occupancy, DBRS Morningstar accounted for this concern in its analysis by assuming concessions of -4.4% of storage gross potential income, in line with the portfolio’s pre-pandemic performance, as opposed to the significantly lower figure of -1.8% for the T-12 period ended September 30, 2021. This resulted in a storage NRI of $135.9 million, approximately 5.40% below the T-12 reported figure of $143.7 million

The portfolio exhibits historically strong operating metrics, with occupancies averaging approximately 93.2% since 2009. As of September 2021, the portfolio had an in-place occupancy of 93.1% and RevPAF of $82.06. The portfolio also benefits from a variety of income sources, namely self-storage (88.1% of EGI), commercial leasing (6.5% of EGI), WorkSpace (2.8% of EGI), parking (1.2% of EGI), antenna and billboard (1.0% of EGI), and Full Service Plus (on-demand storage service, 0.3% of EGI). The commercial leasing revenue is derived from 171,663 sf at six properties with approximately 72.4% of base rent derived from investment-grade tenants with a WA lease term (WALT) of 5.9 years. The WorkSpace revenue is derived from two locations at 5030 Broadway (132 offices) and 131 Varick Street (83 offices), which are currently 91.8% and 89.3% leased with a WALT of 3.4 years and 1.8 years, respectively. WorkSpace areas are of two types: private suites and glass-door offices. 5030 Broadway WorkSpace is 100% private suites, while 131 Varick Street has 94% of WorkSpace area dedicated to private suites. Tenancy is granular and very diverse, covering, among others, the medical, legal, government, construction, and beauty service sectors. Amenities include loading docks, freight elevators, on-site or nearby parking services, package acceptance, on-site discounted storage, and conference rooms.

The portfolio benefits from restrictive zoning that inhibits new self-storage development or building conversions within the general Manhattan market. The ability to add new self-storage supply to the Manhattan market has been hindered by (i) the phase-out of industrial & commercial abatement program (ICAP) tax incentives available to self-storage developers in 2020 and (ii) industrial business zone (IBZ) legislation passed in 2017 which requires a special permit (which among other items requires self-storage facilities to go through the full uniform land use review procedures process for approval before building in an IBZ and also requires self-storage buildings which are greater than 50,000 SF to set aside 25% of space to be industrial use).

The portfolio has several potential opportunities to convert existing vacant or other non-utilized space to additional new self-storage use. For example, a vacant movie theatre at the 400 / 406-426 East 62nd St. property (which has as-of-right self-storage and medical office/life science use), additional floor area ratio in the 131 Varick Street / 272-276 Spring Street, 220 South Street and 5030 Broadway properties, and vacant apartments at the 524 West 23rd Street property, all provide potential opportunities to create additional storage units. According to the sponsor, the conversion of the movie theatre and apartments to storage units would add approximately 2,281 new storage units and could lead to an incremental approximately $6.4 million in stabilized NOI. DBRS Morningstar did not ascribe any value to this potential upside in its analysis.

The transaction sponsor is an affiliate of StorageMart, a Columbia, Missouri-based owner, developer, and operator of approximately 243 self-branded, high-quality self-storage properties throughout the U.S., Canada, and the UK as of November 2021. StorageMart is currently one of the largest privately held pure-play self-storage owners/operators in Canada and the United States. StorageMart was founded and is operated by members of the Burnam family, who are pioneers in the self-storage industry, with a history dating back to the 1970s. E. Stanley Kroenke is a majority owner of StorageMart. Mr Kroenke was a Wal-Mart Stores, Inc. director from 1995 to 2000 and, as of June 2021, had an estimated net worth of approximately $8.6 billion. In October 2020, StorageMart announced that a sovereign wealth fund, along with Cascade Investment, L.L.C. and other investors joined E. Stanley Kroenke and the Burnam Family as partners in the business. The transaction valued StorageMart at an enterprise value of $2.7 billion. This acquisition will approximately double StorageMart’s size, making it the seventh-largest owner of self-storage globally bases on square footage. StorageMart owns more than 20 million sf of storage space comprising more than 200,000 storage units.

The trust collateral was originated by Citi Real Estate Funding Inc. and Barclays Capital Real Estate Inc. and consists of a mortgage loan in the amount of $2.08 billion. The mortgage loan is evidenced by six promissory notes. All six promissory notes are expected to be contributed to the trust and support payments on the rated certificates. The sponsor is contributing approximately $1.2 billion of cash equity to facilitate the acquisition, representing 37.1% of the approximately $3.3 billion purchase price. DBRS Morningstar generally views acquisition financings involving significant amounts of cash equity contributions from the transaction sponsors favorably given the stronger alignment of economic incentives when compared with cash-out financings.

The nonrecourse carveout guarantor is SMARTCO Properties, L.P., which is only required to maintain a net worth of at least $500 million, excluding the properties, effectively limiting the recourse back to the sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the borrower or its sponsor.

Classes X-CP and X-NCP are interest-only (IO) certificates that references multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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