DBRS Morningstar Finalizes Provisional Ratings on BPCRE 2022-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings to the following classes of notes issued by BPCRE 2022-FL2, Ltd. (BPCRE 2022-FL2):

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

All trends are Stable.

The initial collateral consists of 28 floating-rate mortgage loans and participation interests in mortgage loans secured by 41 mostly transitional properties with a cut-off balance totaling $609.4 million, excluding $107.2 million of remaining future funding commitments. The holder of the future funding companion participations will be Bryant Park Commercial Real Estate Partners I, LLC (the Seller), a wholly owned subsidiary of Varadero Master Fund L.P. and Varadero Special Opportunities Master Fund L.P.

The holder of each future funding participation has full responsibility to fund the future funding companion participations. The collateral pool for the transaction is managed with a 18-month reinvestment period. During this period, the Collateral Manager will be permitted to acquire reinvestment collateral interests, which may include Funded Companion Participations, subject to the satisfaction of the Eligibility Criteria and the Acquisition Criteria. The Acquisition Criteria require that, among other things, the Note Protection Tests are satisfied and no EOD is continuing. The Eligibility Criteria have a minimum and maximum debt service coverage ratio (DSCR) and loan-to-value ratio (LTV), require a 14.0 Herfindahl score, and set property type limitations, among other items. The Eligibility Criteria stipulate a rating agency confirmation (RAC) on reinvestment loans and pari passu participation acquisitions above $500,000 if a portion of the underlying loan is already included in the pool, thereby allowing DBRS Morningstar the ability to review the new collateral interest and any potential impact on the overall 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. The transaction will have a sequential-pay structure.

For the floating-rate loans, DBRS Morningstar used the one-month Libor index, 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 debt service payments were measured against the DBRS Morningstar As-Is Net Cash Flow (NCF), 24 loans, comprising 85.9% of the initial pool balance, had a DBRS Morningstar As-Is DSCR of 1.00 times (x) or below, a threshold indicative of default risk. However, the DBRS Morningstar Stabilized DSCR of only seven loans, comprising 22.1% of the initial pool balance, was 1.00x or below, which is indicative of elevated refinance risk. 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 structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The majority of the pool (83.7%) comprises primarily multifamily properties. These property types have historically shown lower defaults and losses. Multifamily properties benefit from staggered lease rollover 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. Additionally, the Eligibility Criteria only permit loans secured by multifamily properties to be brought in during the reinvestment period.

Twenty-four loans, representing 84.3% of the mortgage asset cut-off date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. Cash equity infusions from a sponsor typically result in the lender and borrower having a greater alignment of interests, especially compared with a refinancing scenario where the sponsor may be withdrawing equity from the transaction. The remaining four loans, or 15.7% of the mortgage asset cut-off balance, are refinance loans.

DBRS Morningstar analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the Sponsor will not successfully execute its business plans and that the higher stabilized cash flow will not materialize during the loan term, especially with the ongoing Coronavirus Disease (COVID-19) pandemic and its impact on the overall economy. The Sponsor’s failure to execute the business plans could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar sampled a large portion of the loans, representing 72.9% of the pool cut-off date balance. Additionally, DBRS Morningstar conducted site inspections for eight of the 28 loans in the pool, representing 42.6% of the initial pool balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss given default (LGD) based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside.

DBRS Morningstar sampled 16 loans, representing 72.9% of the initial cut-off balance. Of the sampled loans, there were 12 loans, representing 68.3% of the sampled loans, deemed to be secured by properties with either Average – of Below Average DBRS Morningstar property quality. DBRS Morningstar took a conservative approach to property quality for the nonsampled loans and modeled them with Average – property quality. Loans modeled with Average – and Below Average have an increased expected loss profile compared with loans with average or favorable property quality. The loans in this pool were generally structured with renovation and capital expenditure reserves, which will likely improve the collateral property quality upon completion of the business plan.

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.

The DBRS Morningstar Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Reserve at LaVista Walk Apartments (11.1% of the pool)
-- Prospectus ID#2 – Nitya Apartment Portfolio (6.1% of the pool)
-- Prospectus ID#3 – Charlestown Ropewalk (5.9% of the pool)
-- Prospectus ID#4 – Crossings at Glassboro (5.8% of the pool)
-- Prospectus ID#5 – Columbia SC Portfolio (5.4% of the pool)
-- Prospectus ID#6 – Walnut Glen Apartments (5.0% of the pool)
-- Prospectus ID#7 – Tuscaloosa Portfolio (4.9% of the pool)
-- Prospectus ID#8 – Shelter Island Apartments (4.7% of the pool)
-- Prospectus ID#9 – Granville Apartments (4.7% of the pool)
-- Prospectus ID#11 – Elsinore & Fitch Portfolios (4.3% of the pool)

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.

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.

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

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