DBRS Morningstar Assigns Provisional Ratings to BBCMS Mortgage Trust 2022-C16

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of notes to be issued by BBCMS Mortgage Trust 2022-C16:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at A (high) (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class X-F at BB (high) (sf)
-- Class X-G at BB (low) (sf)
-- Class X-H at B (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class F at BB (sf)
-- Class G at B (high) (sf)
-- Class H at B (low) (sf)

All trends are Stable.

Classes X-D, X-F, X-G, X-H, X-J, D, E, F, G, H, J, S, R, and VRR will be privately placed.

The collateral consists of 60 fixed-rate loans secured by 155 commercial and multifamily properties with an aggregate trust cut-off date balance of $1.1 billion. Five loans (Yorkshire & Lexington Towers, 1888 Century Park East, 70 Hudson Street, ILPT Logistics Portfolio, and The Summit), representing 21.7% of the pool, are shadow-rated investment grade by DBRS Morningstar. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off date balances were measured against the DBRS Morningstar Net Cash Flow and their respective actual constants, the initial DBRS Morningstar Weighted-Average (WA) Debt Service Coverage Ratio (DSCR) of the pool was 2.00 times (x). The DBRS Morningstar WA Issuance Loan-to-Value (LTV) of the pool was 52.3%, and the pool is scheduled to amortize to a DBRS Morningstar WA Balloon LTV of 50.0% at maturity. These credit metrics are based on the A note balances. Excluding the shadow-rated loans, the deal still exhibits a favorable DBRS Morningstar WA Issuance LTV of 56.6% and DBRS Morningstar WA Balloon LTV of 53.7%. The pool additionally includes three loans, representing 4.3% of the allocated pool balance, that exhibit a DBRS Morningstar Issuance LTV in excess of 67.1%, a threshold generally indicative of above-average default frequency. The transaction has a sequential-pay pass-through structure.

Four loans, representing 17.3% of the pool, are in areas identified as DBRS Morningstar Market Rank 7 or 8, which are generally characterized as highly dense, urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Urban markets represented in the deal include New York and Los Angeles. Furthermore, 13 loans, representing 34.7% of the pool balance, have collateral in DBRS Morningstar MSA Group 3, which represents the best-performing group among the top 25 metropolitan statistical areas (MSAs) in terms of historical commercial mortgage-backed security (CMBS) default rates.

Five loans (Yorkshire & Lexington Towers, 1888 Century Park East, 70 Hudson Street, ILPT Logistics Portfolio, and The Summit), which together represent 21.7% of the pool, exhibited credit characteristics consistent with investment-grade shadow ratings. The credit characteristics of Yorkshire & Lexington Towers, 70 Hudson Street, and The Summit were consistent with a AA (low) shadow rating; those of ILPT Logistics Portfolio with an A (high) shadow rating; and those of 1888 Century Park East with a BBB shadow rating.

There are 33 loans, representing 66.4% of the pool by allocated loan amount, that exhibit DBRS Morningstar Issuance LTVs of less than 59.3%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency. Even with the exclusion of the shadow-rated loans, which represent 21.7% of the pool, the transaction exhibits a favorable DBRS Morningstar WA Issuance LTV of 56.6%. No loans in the pool have a DBRS Morningstar LTV above 70%.

Term default risk is relatively low, as indicated by a DBRS Morningstar DSCR of 1.98x. Even with the exclusion of the shadow-rated loans, the deal exhibits a relatively favorable DBRS Morningstar DSCR of 1.61x.

Eight loans, representing 30.7% of the pool balance, received a property quality assessment of Average + or better, including two loans, representing 7.6% of the pool, graded as Above Average. Only one loan had a property quality score of Average -, and it accounts for 3.1%.

Five loans, representing 21.7% of the pool, were classified as having Strong sponsorship strength. All five loans with Strong sponsorship have investment-grade shadow ratings.

The pool has a relatively high concentration of loans secured by office and retail properties at 34 loans, representing 56.8% of the pool balance. The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges globally, and the future demand for office and retail space is uncertain, with many store closures and companies filing for bankruptcy, downsizing, or extending their remote-working strategy. Three office loans, 1888 Century Park East, 70 Hudson Street, and The Summit, which represent 12.0% of the total pool, are shadow-rated investment grade by DBRS Morningstar. Two of the office loans, representing 10.4% of the total pool, are in DBRS Morningstar Market Ranks 7 or 8, which exhibit the lowest historical CMBS probability of default (POD) and loss given defaults. Six of the office loans, representing 22.9% of the pool balance, are in DBRS Morningstar MSA Group 3, which is the best-performing group among the top 25 MSAs in terms of historical CMBS default rates. Three office loans, representing 12.0% of the total pool balance, have a DBRS Morningstar sponsorship strength of Strong. Five office loans, representing 21.7% of the pool balance, have Above Average or Average + property quality.

Thirty-eight loans, representing 71.3% of the total pool balance, are structured with full-term interest-only (IO) periods. An additional two loans, representing 3.2% of the total pool balance, are structured with an anticipated repayment date and hyper-amortize after a full-term IO period. Eight loans, representing 8.9% of the pool balance, are structured with partial IO terms ranging from 12 to 60 months. Loans that are full-term IO do not benefit from amortization, and loans that are partially IO receive less benefit than a loan that makes principal and interest debt service payments throughout the term. Historically, loans that do not amortize have exhibited higher rates of default and losses. Of the 40 loans structured with initial-term IO periods, eight loans, representing 27.2% of the pool balance, are in areas with DBRS Morningstar Market Ranks of 5 or higher. Market Ranks of 5 or higher generally reflect more urban markets that benefit from increased liquidity and exhibit lower levels of historical default than loans in more suburban, rural, or tertiary markets. Five loans structured with full-term IO periods, representing 21.7% of the total pool balance, are shadow-rated investment grade by DBRS Morningstar. This represents all the shadow-rated loans within the transaction. The full-term IO loans are effectively pre-amortized, as evidenced by the low DBRS Morningstar WA Issuance LTV of only 49.6% for this concentration of loans.

Forty loans, representing 67.2% of the total pool balance, are refinancing or recapitalizing existing debt. DBRS Morningstar views loans that refinance existing debt as more credit negative compared with loans that finance an acquisition. Acquisition financing typically includes a meaningful cash investment by borrowers, which can align their interests more closely with the lender’s, whereas refinance transactions may be cash neutral or cash-out transactions, the latter of which may reduce the borrower’s commitment to a property. The loans that are refinancing existing debt exhibit relatively low leverage. Specifically, the DBRS Morningstar WA Issuance and Balloon LTVs of the loans refinancing existing debts are 51.5% and 49.0%, respectively. The loans that are refinancing existing debt are generally in slightly stronger DBRS Morningstar Market Ranks and MSA Groups than the broader pool of assets in the transaction. The DBRS Morningstar WA Market Rank of the loans refinancing existing debt is 4.1, whereas the DBRS Morningstar WA Market Rank for the entire transaction is 4.0. Additionally, seven of the loans refinancing debt, representing 15.9% of the total pool balance, are secured by assets located in DBRS Morningstar MSA Group 3, and 10 of the loans refinancing debt, representing 18.5% of the total pool balance, are secured by assets located in DBRS Morningstar MSA Group 2.

DBRS Morningstar identified five loans, representing 21.3% of the pool, as having Weak sponsorship for reasons that may include lower net worth and liquidity, a history of prior loan defaults, or a lack of experience in commercial real estate. Of the loans assigned a Sponsor Score of Weak, which increases the POD in DBRS Morningstar’s model, only one of the loans had a DBRS Morningstar LTV above 60%.

With respect to the Bell Works mortgage loan, although a non-consolidation opinion was delivered, such opinion did not express an opinion regarding the substantive consolidation of the assets and liabilities of the related borrower with those of the related guarantor due to the existence of certain specified guaranty obligations of the guarantor under the related full recourse guarantee. DBRS Morningstar view such qualifications as credit negative and eviscerating the purpose of the opinion, thus not providing the expected benefit of reducing the risk of substantive consolidation in bankruptcy.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Classes X-A, X-B, X-D, X-F, X-G, and X-H are 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.

The DBRS 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.

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.

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

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