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

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

-- Class A at AAA (sf)
-- Class X at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class HRR at BB (high) (sf)

All trends are Stable. Class X is an interest-only (IO) class whose balance is notional.

The ILPT Commercial Mortgage Trust 2022-LPFX (ILPT 2022-LPFX) transaction is collateralized by the borrower’s fee-simple interests in a portfolio of 17 industrial properties totaling approximately 9.4 million sf. The portfolio is part of Industrial Logistics Properties Trust’s (ILPT) existing unencumbered assets and the collateral properties are located across 12 states and 13 different industrial markets including Philadelphia (two properties, 19.6% of NCF), Richmond, Virginia (one property, 11.4% of NCF), Nashville, Tennessee (one property, 10.7% of NCF), Spartanburg, South Carolina (one property, 10.2% of NCF), and Columbus, Ohio (two properties; 9.3% of NCF). The properties themselves are a mix of warehouse (92.2% of NCF) and manufacturing (7.8% of NCF). Overall, the subject markets have solid fundamentals with positive annual growth in rents while absorbing new supply and compressing vacancies. DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector. The portfolio benefits from favorable tenant granularity, strong sponsor strength, favorable asset quality, and strong leasing trends, all of which contribute to potential cash flow stability over time. The portfolio’s WA year built of 2008 is significantly newer than the average of industrial portfolios DBRS Morningstar recently analyzed (1991). In addition, the portfolio has a WA property size of 555,195 sf, WA clear heights of 31.9 feet, and a minimal 4.8% office buildout.

The portfolio mainly consists of single-tenant properties with NNN leases and is 100% leased to 19 individual tenants. Approximately 63.7% of gross rent is derived from nine investment grade-rated tenants, including: Amazon (Moody’s: A1 / S&P: AA -/ Fitch: AA; 30.9% of gross rent), UPS (Moody’s: A2 / Fitch: A-; 9.2% of base rent), Avnet, Inc. (Moody’s: Baa3 / S&P: BBB- / Fitch: BBB-; 5.8% of gross rent), and YNAP Corporation (S&P: A+, 5.2% of gross rent). The largest property represents 11.9% of NCF with the top five and 10 properties representing 52.3% and 80.7% of NCF, respectively. No single property contributes more than 11.9% of NCF and, aside from Amazon, no individual tenant represents more than 11.8% of gross rent (Restoration Hardware). The tenant roster includes a variety of industries including air freight and logistics, internet and catalog retail, commercial services and supplies, specialty retail, and food and beverage. The portfolio has a WA lease term (WALT) of 7.1 years, with no more than 35.1% of gross rent subject to roll in any given year during the loan term. WA in-place base rent is $4.76 psf, approximately 8.2% below the WA submarket rents of $6.18 psf per the appraisals.

Leases representing approximately 89.8% of the portfolio’s NRA and 86.1% of the gross rent are scheduled to roll through the loan maturity in 2032. The rollover is relatively granular with the exception of 2027 and 2028 in which 35.3% and 14.7% of gross rent roll, respectively. The majority of the roll in 2027 is attributable to three Amazon leases at three separate properties which represent 30.9% of gross rent. The roll in 2028 is primarily attributable to two Restoration Hardware leases, which represent 11.8% of gross rent.

The transaction benefits from elevated cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 12.2 by ALA, which is below the average of recent DBRS Morningstar-rated industrial portfolios (30.2) but nonetheless offers favorable diversification of cash flow when compared with a single-asset securitization.

The transaction sponsor, ILPT, is a publicly traded REIT formed to own and lease industrial and logistics properties throughout the United States. As of September 30, 2021, ILPT owned 294 industrial and logistics properties with 36.5 million rentable sf, which are approximately 99.0% leased to 261 different tenants with a WALT of approximately 9.0 years. Approximately 50% of annualized rental revenue comes from 68 industrial and logistics properties with approximately 19.8 million sf in 33 states on the U.S. mainland. The remaining approximately 50% of annualized rental revenue comes from 226 properties with approximately 16.7 million sf on the island of Oahu, Hawaii.

Citi Real Estate Funding Inc., UBS AG, New York Branch, Bank of America, N.A., Bank of Montreal, and Morgan Stanley Bank, N.A originated the 10-year loan that pays fixed-rate interest of 3.8000% on an IO basis through the entire term. The $445 million whole loan is composed of 18 promissory notes: 13 senior A notes totaling $341.1 million and five junior B notes totaling $103.9 million. The ILPT 2022-LPFX mortgage trust will total $280 million and consist of five senior A notes with an aggregate principal balance of $176.1 million and the junior B notes totaling $103.9 million. The remaining senior A notes will be held by the originators and may be included in one or more future securitizations. The senior notes are pari passu in right of payment with respect to each other. The senior notes are generally senior in right of payment to the junior notes.

The capital stack includes two mezzanine tranches totaling $255 million: Mezzanine A is $175 million and Mezzanine B is $80 million. This additional subordinate debt increases the DBRS Morningstar LTV to 130.4% from 82.9%. A default on the mezzanine debt may potentially complicate workout negotiations or other remedies for the trust. DBRS Morningstar views this as credit negative given the additional NCF stress that occurs when subordinate debt is present.

The nonrecourse carveout guarantor is Industrial Logistics Property Trust, which is required to maintain a net worth of at least $750 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,.

Class X is an interest-only (IO) certificate 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 (February 28, 2022), 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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