DBRS Morningstar Finalized Its Provisional Ratings on BSST 2022-1700 Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2022-1700

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-1700 to be issued by BSST 2022-1700 Mortgage Trust (BSST 2022-1700):

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

All trends are Stable.

The BSST 2022-1700 single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a 32-story, 850 209-square-foot (sf) Class A office building, 1700 Market Street, in the Market Street West submarket of Philadelphia, situated two blocks from City Hall and Rittenhouse Square. The subject was constructed in 1968 and most recently renovated from 2017 to 2019 for $16.7 million. The transaction sponsor, Shorenstein Realty Investors Eleven L.P., acquired the collateral in January 2016 for $195.0 million. DBRS Morningstar takes a generally positive view on the credit characteristics of the collateral based on the property's desirable location, recent capital improvements, solid historical operating performance, and strong transaction sponsorship.

The property is in the Market Street West submarket of Center City, Philadelphia. It has good highway access to I-676, I-76, and I-95, and is near Dilworth Park, which offers commuter and subway access to Center City. The Market Street West submarket remains one of the most desirable office submarkets in Philadelphia thanks to its high-quality office buildings and increasing demand with limited new supply. According to CBRE Econometric Advisors, the Market Street West submarket vacancy rate is about 1.0% lower than the Philadelphia downtown vacancy rate, and the submarket will outperform the broader metropolitan area over the next several years.

The sponsor spent more than $16.7 million in capital expenditures, tenant improvements, and leasing commissions since 2016. These improvements included upgrades to the lobby and elevator, and a new tenant-only fitness center and conference center, built in 2019 at a cost of $3.6 million.

Since acquiring the property, the sponsor has increased occupancy to 87.7% from 81.6%. Furthermore, the sponsor backfilled the property's anchor tenant, Independence Blue Cross, prior to its lease expiration in 2019, by executing a 10-year lease with Reliance Standard Life Insurance Company to completely fill the former tenant's 150,000-sf space.

The largest tenant at the property, Reliance Standard Life Insurance Company (17.9% of net rentable area (NRA); 19.4% of base rent), is investment grade, and the second-largest tenant, Deloitte (10.9% of NRA; 12.5% of base rent), is one of the Big Four accounting firms. Together, these tenants account for 29% of the NRA and 31.5% of the base rent. Moreover, the property benefits from having a low lease rollover during the loan term. During the five-year fully extended loan term, the property will have a cumulative rollover of 24.6% of the NRA and 30.0% of the base rent.

The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all major commercial real estate property types and has created uncertainty about future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has been largely unaffected. Collections have averaged greater than 99% at the property since April 2020, including drawdowns of the Common Grounds letter of credit. Regardless, leasing velocity at the property and in the broader submarket has slowed significantly since the onset of the pandemic.

The sponsor is using loan proceeds to refinance existing debt and is withdrawing approximately $7.4 million in equity as a part of this transaction. DBRS Morningstar typically views cash-out refinancing transactions less favorably given the reduced alignment of the sponsor's and certificate holder's incentives.

The loan has a DBRS Morningstar loan-to-value ratio of 108.5% on the mortgage loan, which is higher than other recently analyzed transactions collateralized by office properties in primary markets. The high leverage nature of the transaction, combined with the lack of amortization, could result in elevated refinance risk and/or loss severities in an event of default.

The transaction is one of a series of issuances based on a novel transaction structure whereby the issuer may periodically offer commercial mortgage pass-through certificates in separate series under one master transaction servicing agreement (TSA) and offering circular. Each series will have an offering circular supplement and a series supplement to the TSA. Further, each series will be rated independently of the others, each will have its own priority of payments, and there will be no pooling of risk.

The underlying mortgage loan for the transaction will pay a floating rate indexed to the Term Secured Overnight Financing Rate (SOFR). However, upon the sunsetting of Libor, if Term SOFR does not survive in its current form, or if a different benchmark replacement is chosen, the loan could be subject to potential benchmark transition risk. Given that Term SOFR is a relatively new rate, it might be more volatile in the near term than other indexes. If Term SOFR is no longer available as a benchmark, it will be replaced with the Prime Rate.

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.

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

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.

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

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