DBRS Morningstar Assigns Provisional Ratings to BSPRT 2022-FL8 Issuer, Ltd.

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by BSPRT 2022-FL8 Issuer, Ltd.:

-- 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 (high) (sf)
-- Class G Notes at BB (low) (sf)
-- Class H Notes at B (low) (sf)

All trends are Stable.

The initial collateral consists of 26 floating-rate mortgage loans secured by 34 mostly transitional real estate properties with a cutoff balance totaling $1.03 billion (87.3% of the total fully funded balance) exclusive of $80.6 million in remaining future funding commitments and $68.9 million of pari passu debt. Of the 26 loans, two are unclosed, delayed-close loans as of Friday, January 21, 2022, Rivet & Rivet 26 (#1) and Arlowe Townhomes (#20), representing a total initial pool balance of 10.6%. The Issuer has 90 days post-closing to acquire the delayed-close assets. Furthermore, two other loans, Harlem Multifamily Portfolio and The Printhouse, have received loan modifications with a combination of a maturity date extension, an extension fee update, a rate index change, changes to index floors and interest rate spreads, changes in maintenance spreads, and/or changes to carry reserves. The Printhouse modification also included a principal paydown of the loan by $500,000 via a $350,000 equity infusion from the sponsor and $150,000 from the collapse of the Interest Reserve. The transaction is a managed vehicle, which includes a 24-month reinvestment period. As part of the reinvestment period, the transaction includes a 180-day ramp-up acquisition period that is expected to increase the trust balance by $174.8 million to a total target collateral principal balance of $1.2 billion. DBRS Morningstar assessed the $174.8 million ramp component using a conservative loan construct and as a result, the ramp loans have expected losses above the pool weighted average (WA) loan expected loss. If a delayed-close mortgage asset is not expected to close or fund prior to the purchase termination date, then any amounts remaining will be transferred to the unused proceeds account to acquire other ramp-up collateral interests. During the reinvestment period, so long as the note protection tests are satisfied and no event of default has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment collateral interests, including funded companion participations, meeting the eligibility criteria. The eligibility criteria, among other things, have a minimum debt service coverage ratio (DSCR), loan-to-value ratio (LTV), 18.0 Herfindahl score, and loan size limitations. Lastly, the eligibility criteria stipulate Rating Agency Confirmation on ramp loans, reinvestment loans, and on pari passu participation acquisitions if a portion of the underlying loan is already included in the pool, thereby allowing DBRS Morningstar to review the new collateral interest and any potential impact on the ratings.

The loans are mostly secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. In total, 21 loans, representing 78.8% of the pool, have remaining future funding participations totaling $80.6 million, which the Issuer may acquire in the future.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index for all loans, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cutoff balances were measured against the DBRS Morningstar As-Is Net Cash Flow, 18 loans, comprising 70.4% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.0 times (x) or below, a threshold indicative of default risk. Furthermore, three loans, representing 12.3% of the initial cutoff balance, exhibit a DBRS Morningstar Stabilized DSCR below 1.0x. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume assets to stabilize above market levels.

The sponsor for the transaction, Benefit Street Partners Realty Operating Partnership, L.P., is a wholly owned subsidiary of Franklin BSP Realty Trust, Inc. (FBRT), formerly known as Benefit Street Partners Realty Trust, Inc., and an experienced commercial real estate (CRE) collateralized loan obligation (CLO) issuer and collateral manager. As of September 30, 2021, FBRT managed a commercial mortgage debt portfolio of approximately $3.3 billion and had issued nine CRE CLO transactions. Through September 30, 2021, FBRT had not realized any losses on any of its CRE bridge loans while also funding more than $15.5 billion of investments across Benefit Street Partners’ CRE group vehicles since its inception in 2013. Additionally, BSPRT 2022-FL8 Holder, LLC will purchase and retain 100% of the Class F Notes, the Class G Notes, the Class H Notes, and the Preferred Shares, which total $214.5 million, or ¬17.9% of the transaction total.

The pool comprises only multifamily properties. This property type has historically shown lower defaults and losses. Multifamily properties benefit from staggered lease rollovers and generally low expense ratios compared with other property types. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves.

The business plan score (BPS) for the loans that DBRS Morningstar analyzed was between 1.50 and 5.00 with an average of 2.04. On a scale of 1 to 5, a higher DBRS Morningstar BPS is indicative of more risk in the sponsor’s business plan. Consideration is given to the anticipated lift at the property from current performance, planned property improvements, sponsor experience, project time horizon, and overall complexity. Compared with similar transactions, the subject has a relatively low average BPS, which is indicative of lower risk.

The transaction is managed and includes a ramp-up component and reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by eligibility criteria that outline DSCR, LTV, 18.0 Herfindahl score minimum, 95.0% minimum multifamily, and loan size limitations for reinvestment assets. A No-Downgrade Confirmation is required from DBRS Morningstar for all reinvestment loans and ramp-up loans. DBRS Morningstar accounted for the uncertainty introduced by the 180-day ramp-up period by running a ramp scenario that simulates the potential negative credit migration in the transaction based on the eligibility criteria.

As of the cutoff date, the pool contains 26 loans with the top 10 loans representing 61.6% of the pool. Additionally, the pool has an elevated state concentration with 47.4% of the pool located in Texas and 22.2% of the pool within the Dallas-Plano-Irving MSA. The pool's minimum diversity is accounted for in the DBRS Morningstar model, raising the transaction’s credit enhancement levels to offset the concentration risk. Based on CRE CLO standards, the Herfindahl score of 19.97 is considered reasonable, which is higher than the scores of 16.7 in BSPRT 2021-FL7 and 14.9 in BSPRT 2021-FL6. The cutoff date balance will increase from ramp-up loans, which is projected to occur over 60 days after closing. New loans will increase loan count and add broader diversity to the pool, raising the Herfindahl score. The 17 properties are located across six separate MSAs. The eligibility criteria restrict the concentration of Texas properties to be no more than 50% of the aggregate outstanding pool balance and no Texas MSA to be more than 25%. The properties are primarily within core markets of their respective MSAs, with a WA DBRS Morningstar Market Rank of 3.3 for these properties. Additionally, DBRS Morningstar applied a concentration penalty, which elevated the expected loss.

All loans have floating interest rates and 86.2% of the initial pool are interest-only during their entire initial term, which ranges from 18 months to 48 months, creating interest rate risk. The borrowers of all 26 loans have purchased either Secured Overnight Financing Rate (SOFR) or Libor rate caps ranging between 0.50% to 3.5% to protect against rising interest rates over the term of the loans. All loans are short-term and, even with extension options, have a fully extended maximum loan term of five years. Additionally, 21 loans, representing 82.7% of the initial trust balance, have at least one extension option, all of which are exercisable subject to the loan’s achievement of certain LTV, DSCR, and/or debt yield requirements. All loans in the pool, except for one representing 3.6% of the initial trust balance, amortize on a 30-year schedule or a fixed payment schedule at some point during the fully extended loan term, either during the initial loan term and/or the extension options. Twenty of the loans, representing 80.5% of the initial trust balance, amortize during all or a portion of their extension options.

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 North American CMBS Multi-Borrower Rating 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/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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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