DBRS Morningstar Assigns Provisional Ratings to BX Commercial Mortgage Trust 2022-LP2

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-LP2 to be issued by BX Commercial Mortgage Trust 2022-LP2 (BX 2022-LP2):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The BX 2022-LP2 single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 166 industrial properties totaling more than 24.3 million square feet across 19 markets, including some of the nation’s core midwestern and coastal industrial markets, in 16 states. Blackstone Real Estate Partners IX (Blackstone) acquired Colony Industrial, the industrial assets and affiliated industrial operating platform from Colony Capital, in 2019 for $5.9 billion. The majority of the assets involved in this acquisition were securitized in the BX 2020-BXLP transaction. This transaction will be securitized by 161 properties from the BX 2020-BXLP transaction and five new properties that were also a part of the Colony Industrial transaction but are currently unencumbered.

DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector, despite the uncertainties and risks that the ongoing Coronavirus Disease (COVID-19) pandemic has created across all commercial real estate asset classes. Increased consumer reliance on e-commerce and home delivery during the pandemic has only accelerated pre-pandemic consumer trends, and DBRS Morningstar believes that retail’s loss generally continues to be industrial’s gain. The portfolio exhibits strong functionality metrics, with weighted-average (WA) clear heights of 27.1 feet and a WA year built of 1998. The portfolio is 94.5% occupied with an incredibly granular rent roll; there are more than 400 unique tenants, with no single tenant accounting for more than 1.9% of gross rent. Therefore, the risk of net operating income (NOI) volatility is minimized, as this is one of the most diverse industrial portfolios rated by DBRS Morningstar in recent years. The portfolio has a WA remaining lease term of 3.8 years and no more than 18.1% of net rentable area (NRA) is expected to roll in a given year. While the WA remaining lease term is not particularly strong, the sponsor believes expiring leases present a positive impact to the portfolio, as the sponsor has seen a positive leasing spread of 17.3% since acquiring the assets in 2019. Investment-grade-rated tenants occupy 19.3% of the NRA, and one tenant qualifies for long-term credit tenant treatment in the DBRS Morningstar net cash flow based on long-dated lease maturity, providing further cash flow stability.

The 166-property portfolio is spread across 19 unique markets in 16 different states, predominantly in major metropolitan statistical areas throughout the country. The portfolio is 94.5% occupied by more than 400 unique tenants with a WA remaining lease term of 3.7 years, with no single property contributing more than 2.1% of NOI and no year within the lease term will experience lease rollover accounting for more than 18.7% of NRA. Based on recently rated industrial portfolios by DBRS Morningstar, the subject portfolio is one of the most diverse, with minimal NOI volatility risk.

The majority of the portfolio consists of functional bulk warehouse product with strong functionality metrics and comparatively low proportions of office square footage. The portfolio benefits from strong WA clear heights of 27.1 feet and a relatively low proportion of office space at 9.7%.

The portfolio benefits from locations across numerous strong-performing coastal gateway and midwestern industrial markets, including markets in Atlanta, Dallas-Fort Worth, Orlando, Seattle, Chicago, and New Jersey. The portfolio's markets have a WA availability rate of 4.69%, which is below the Q3 2021 national average availability rate of 6.0% for industrial properties, according to CBRE Economic Advisors.

The portfolio has a WA base rent of $5.67 per square foot (psf), which is 31.4% below the WA asking rents across each market of $8.27 psf, as reported by CBRE Economic Advisors. The leasing spread since acquiring the properties in 2019 has been 17.3%, indicating strong demand for industrial space in these markets.

The portfolio has been largely unaffected by the coronavirus pandemic, as collections have averaged over 99.0% since April 2020 (averaging 99.2% through 2020 and 99.9% through October 2021). There have been no material requests for rent relief or operating issues across the portfolio.

Blackstone, which is an affiliate of The Blackstone Group, Inc., is the sponsor under the mortgage loan. The Blackstone Group, Inc.'s real estate division was founded in 1991 and the firm had approximately $731 billion of assets under management as of September 30, 2021, across real estate funds, private equity funds, credit and insurance businesses, and hedge fund solutions.

The borrower can also release individual properties across the portfolio with customary requirements. However, the prepayment premium for the release of individual assets is 105% of the allocated loan amount for the first 30% of the original principal balance of the mortgage loan and 110% thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115% and, as a result, applied a penalty to the transaction's capital structure to account for the weaker deleveraging premium.

Leases representing 72.0% of total NRA and 74.8% of portfolio's gross rent are scheduled to expire through the five-year fully extended loan term, based on DBRS Morningstar’s analysis. Lease rollover is especially concentrated in years 2023 and 2024. The WA remaining lease term of the portfolio is 3.7 years. Significant portfolio rollover allows for potential future cash flow volatility, particularly if market rents or occupancy rates deteriorate over time. There are also no ongoing leasing reserves collected.

The mortgage loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30% of the unpaid principal balance. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace as compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments.

ESG CONSIDERATIONS
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 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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