DBRS Morningstar Finalized Provisional Ratings on MTN Commercial Mortgage Trust 2022-LPFL, Commercial Mortgage Pass-Through Certificates, Series 2022-LPFL

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the classes of MTN Commercial Mortgage Trust 2022-LPFL, Commercial Mortgage Pass-Through Certificates, Series 2022-LPFL as follows:

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

All trends are Stable. Classes F and HRR are not rated by DBRS Morningstar.

The MTN Commercial Mortgage Trust 2022-LPFL (MTN 2022-LPFL) transaction is collateralized by the borrower’s fee-simple and leasehold interests in a portfolio of 82 industrial properties (78 fee-simple properties, two PILOT leasehold properties, and two ground leasehold properties) totaling approximately 15.9 million sf. The portfolio is part of Industrial Logistics Properties Trust’s (ILPT) larger $4 billion acquisition of Monmouth Real Estate Investment Corporation, and the collateral properties are across 25 states and 52 individual industrial markets including, Charlotte, North Caroline (three properties, 6.9% of NCF), Kansas City, Missouri (five properties, 6.5% of NCF), Dallas, Texas (three properties, 6.0% of NCF) Savannah, Georgia (two properties, 5.9% of NCF), and Indianapolis, Indiana (two properties, 4.9% of NCF). The properties themselves are a mix of warehouse (88.2% of NRA), manufacturing (10.8% of NRA), and light manufacturing (1.0% of NRA) assets. 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 2011 is significantly newer than the average of industrial portfolios DBRS Morningstar recently analyzed (1991). In addition, the portfolio has a WA property size of 193,344 sf, WA clear heights of 29.5 feet, and a minimal 4.9% office buildout.

The portfolio mainly consists of single-tenant properties with NNN leases and is 96.5% occupied by 81 unique tenants. Approximately 83.9% of gross rent is derived from investment-grade-rated tenants, including FedEx (Moody’s Baa2/S&P: BBB, 59.1% of gross rent), Shaw Industries (Moody’s: Aa2/S&P: A+/Fitch: AA, 3.6% of gross rent), Amazon.com, Inc. (Moody’s: A1/S&P: AA-/Fitch: AA, 3.1% of gross rent), and International Paper (Moody’s: Baa2/Fitch BBB, 2.7 % of gross rent). The diverse 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. Other than Fedex, no tenant accounts for more than 5.2% of NRA or 3.6% of gross rent. The top one, five, and 10 tenants account for 59.1%, 71.7%, and 80.3% of gross rent, respectively, and 46.8%, 62.6%, and 75.5% of NRA, respectively. The portfolio has a WA lease term of 6.8 years, with no more than 17.2% of NRA or 15.7% of gross rent rolling in any given year over the fully extended loan term.

Leases representing approximately 56.0% of the portfolio’s NRA and 52.2% of the gross rent are scheduled to roll through the fully extended loan term in 2027. However, the rollover is relatively granular with no more than 17.2% of NRA or 15.7% of gross rent rolling in any given year over the fully extended loan term.

The transaction sponsor is a joint venture of which 61% is owned and controlled by an ILPT entity, and 39% is owned by an institutional investor in connection with the acquisition of the Monmouth Real Estate Investment Corporation. ILPT is a publicly traded REIT formed to own and lease industrial and logistics properties throughout the U.S.. 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 weighted-average lease term (WALT) of approximately 9.0 years. Approximately 50% of annualized rental revenues come 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 revenues come from 226 properties with approximately 16.7 million sf located on the island of Oahu, Hawaii.

The trust collateral was originated by Citi Real Estate Funding Inc., UBS AG, New York Branch, Bank of America, N.A., Bank of Montreal, and Morgan Stanley Bank, N.A. and consists of a mortgage loan in the amount of $1.40 billion. The two year interest only loan with three, one year extension options pay interest at a rate of Term SOFR + 2.4200%. The mortgage loan is evidenced by five pari passu componentized promissory notes, all of which are expected to be contributed to the trust and support payments on the rated certificates.

The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydown of the first 20% of the unpaid principal balance. DBRS Morningstar generally considers this structure to be credit negative, particularly at the top of the capital structure. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace than a sequential-pay structure. DBRS Morningstar penalized the senior classes of the transaction’s capital structure to account for the partial pro rata structure.

The borrowers can release individual properties with customary requirements. However, the prepayment premium for the release of individual assets is just 105% of the ALA for such property until the original principal balance has been reduced to 80% of the original loan balance, and 110% of the ALA for such property balance thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 110%. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the weak property release premiums.

The sponsorship is contributing approximately $1.6 billion of cash equity to facilitate the acquisition of MNR, representing 44.6% of the approximately $3.4 billion total cost. 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 Mountain Industrial REIT LLC, 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.

The underlying mortgage loan for the transaction will pay a floating rate indexed to Term SOFR. However, if upon the sunsetting of Libor, Term SOFR doesn't 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, there is the potential for higher volatility 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.

There are no performance triggers, financial covenants, or fees required for the borrower to exercise the three one-year extension options. The options are exercisable by the borrower, subject only to compliance with the following conditions: (1) no EOD existing as of the commencement of the applicable extension term, (2) borrower’s purchase of a cap agreement for each extension term providing for a cap on SOFR which when added to the spread results in a DSCR of 1.10x.

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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