DBRS Morningstar Finalizes Provisional Ratings on BSPRT 2022-FL9 Issuer, LLC

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by BSPRT 2022-FL9 Issuer, LLC (the Issuer):

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

All trends are Stable.

The initial collateral consists of 24 floating-rate mortgage loans and participation interests in mortgage loans secured by 48 mostly transitional properties with a cut-off date balance totaling $803.2 million, excluding $49.9 million of remaining future funding commitments and $70.7 million of pari passu debt. The holder of the future funding companion participations will be BSPRT 2022-FL9 Seller, LLC (the Seller), or an affiliate of the Seller. 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 24-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 requires that, among other things, the Note Protection Tests are satisfied, no event of default has occurred and is continuing, and the acquisition will be in compliance with the Acquisition and Disposition Requirements. The Eligibility Criteria has minimum and maximum debt service coverage ratios (DSCRs) and loan-to-value ratios (LTVs), Herfindahl scores of at least 18.0, and property type limitations, among other items. The transaction stipulates that any acquisition of any reinvestment collateral interests will need a rating agency confirmation regardless of balance size. 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.

Two loans are pari passu participations with additional pari passu debt totaling $70.7 million. In total, 16 loans, representing 66.1% of the pool, have remaining future funding participations totaling $49.9 million, which the Issuer may acquire in the future.

For floating-rate loans, DBRS Morningstar incorporates an interest rate stress, which is based on the lower of a DBRS Morningstar 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), 19 loans, comprising 78.3% 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 eight loans, comprising 38.9% 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 to stabilize above market levels.

The sponsor for the transaction, Benefit Street Partners Realty Operating Partnership, L.P., is a wholly owned subsidiary of Franklin BSP Realty Trust, Inc. (FBRT), formerly known as Benefit Street Partners Realty Trust, Inc., and an experienced commercial real estate collateralized loan obligation (CRE CLO) issuer and collateral manager. Benefit Street Partners’ commercial real estate group (BSP RE) has funded more than 790 loans, with an aggregate total commitment of more than $16 billion through March 31, 2022. BSP RE has $9.0 billion in assets under management, including debt and equity investments in commercial real estate as of March 31, 2022.

BSPRT 2022-FL9 Holder, LLC (the Retention Holder), an indirect, wholly owned subsidiary of FBRT, will purchase and retain 100% of the Class F Notes, Class G Notes, Class H Notes, and Class J Notes as of the Closing Date, representing the most subordinate approximately 16.5% of the aggregate principal and notional amount of all Securities.

The pool exhibits a relatively low Expected Loss of 5.9% in the DBRS Morningstar model. This level compares favorably with some of the most recent BSPRT deals DBRS Morningstar rated in the past. The BSPRT 2022-FL8 and BSPRT 2021-FL7 transactions had higher DBRS Morningstar Expected Losses of 6.5% and 7.7%, respectively.

The majority of the pool comprises primarily multifamily (56.9%) properties. This property type has 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.

Seven loans, representing 25.6% of the pool balance, are secured by properties in areas with a DBRS Morningstar Market Rank of 6, 7, or 8, which are characterized as urbanized locations. These markets generally benefit from increased liquidity that is driven by consistently strong investor demand. Such markets, therefore, tend to benefit from lower default frequencies than less dense suburban, tertiary, or rural markets. Areas with a DBRS Morningstar Market Rank of 7 or 8 are especially densely urbanized and benefit from significantly elevated liquidity. Five loans, comprising 23.1% of the cut-off date pool balance, are secured by a property in such an area.

Nineteen of the 24 loans, representing 75.4% 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. Acquisition financing is also generally based on actual transaction values rather than an appraiser’s estimate of market value.

The DBRS Morningstar Business Plan Score (BPS) for loans DBRS Morningstar analyzed was between 1.58 and 3.88, with an average of 2.18. On a scale of 1 to 5, a higher DBRS Morningstar BPS indicates more risk in the sponsor’s business plan. DBRS Morningstar considers the anticipated lift at the property from current performance, planned property improvements, sponsor experience, projected time horizon, and overall complexity. Compared with similar transactions, this pool has a lower average DBRS Morningstar BPS, which is indicative of lower execution risk.

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 79.7% of the pool cut-off date 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 severity given default (LGD) based on the as-is credit metrics, assuming the loan is fully funded with no NCF or value upside.

The transaction is managed and includes a reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by eligibility criteria (detailed in the transaction documents) that outline DSCR, LTV, Herfindahl score minimum, property type, and loan size limitations for reinvestment assets. DBRS Morningstar has rating agency confirmation for all new reinvestment loans and companion participations. DBRS Morningstar may analyze these loans for potential impacts on ratings. Deal reporting includes standard monthly Commercial Real Estate Finance Council reporting and quarterly updates. DBRS Morningstar will monitor this transaction on a regular basis.

Because of the ongoing coronavirus pandemic, DBRS Morningstar was only able to perform site inspections on two loans totaling 8.1% of the pool (The Hotel at Times Square and JCPenney Queens). As a result, DBRS Morningstar relied more heavily on third-party report data sources and information from the Issuer to determine the overall DBRS Morningstar property quality score for each loan. DBRS Morningstar made relatively conservative property quality adjustments, with no loans receiving Above Average or Excellent property quality.

Nine loans, representing 35.4% of the initial pool, comprise office (5.2%), retail (16.4%), and hospitality (13.8%) properties, which have experienced considerable disruption as a result of the coronavirus pandemic, with mandatory closures, stay-at-home orders, retail bankruptcies, and consumer shifts to online purchasing. The nine loans exhibited DBRS Morningstar weighted-average (WA) as-is and stabilized LTVs of 74.1% and 62.8%, respectively, demonstrating a lower leverage profile than the transaction as a whole, which had DBRS Morningstar WA As-Is and Stabilized LTVs of 78.1% and 66.3%, respectively. DBRS Morningstar conducted NCF reviews for the largest five of the nine loans. DBRS Morningstar modeled the nine loans with an average BPS of 2.49, which is considerably higher than the average BPS of 1.99 for other loans in the sample, indicating elevated complexity and risk associated with the business plans for these nine loans. Five of the nine loans are in a DBRS Morningstar Market Rank of 6, 7, or 8, which represent areas with below-average historical default rates.

As of the cut-off date, the pool contains 24 loans and is concentrated by CRE CLO standards, with the top 10 loans representing 61.6% of the pool. Furthermore, the BSPRT 2022-FL9 transaction has a slightly lower Herfindahl score of 18.8, compared with the BSPRT 2022-FL8 transaction (20.0). The pool's minimum diversity is accounted for in the DBRS Morningstar model, raising the transaction’s credit enhancement levels to offset the concentration risk. Based on CRE CLO standards, the Herfindahl score of 18.8 is considered reasonable, and it is higher than the 16.7 in BSPRT 2021-FL7 and 14.9 in BSPRT 2021-FL6.

There are nine loans, comprising 44.3% of the trust balance, in DBRS Morningstar MSA Group 1. Historically, loans in this MSA Group have demonstrated higher probabilities of default (PODs) and LGDs, resulting in higher individual loan-level expected losses than the WA pool expected loss. Five of these nine loans (24.6% of the pool) are in DBRS Morningstar Market Rank 5 or higher.

Based on the initial pool balances, the overall DBRS Morningstar WA As-Is DSCR of 0.80x and DBRS Morningstar WA As-Is LTV of 78.1% are generally reflective of high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the overall debt yield of the loans. DBRS Morningstar associates its LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR at issuance does not consider the sponsor’s business plan as the DBRS Morningstar As-Is NCF was generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF does not account for. When measured against the DBRS Morningstar Stabilized NCF, the DBRS Morningstar WA DSCR is estimated to improve to 1.03x, suggesting that the properties are likely to have improved NCFs once the sponsor’s business plan has been implemented.

All loans have floating interest rates, and 95.0% of the initial pool are interest only during the entire initial term, which ranges from 12 months to 60 months, creating interest rate risk. The borrowers of all loans except Walgreens Portfolio (10%) have purchased either Secured Overnight Financing Rate or Libor rate caps ranging between 0.20% and 3.0% to protect against rising interest rates over the term of the loan. All loans are short-term and even with extension options have a fully extended loan term of five years maximum. Additionally, 21 loans, representing 90.6% of the initial trust balance, have at least one extension option, all of which are exercisable subject to the loan’s achievement of certain LTV, DSCR, and/or debt yield requirements. All loans in the pool, except for six representing 32.4% of the initial trust balance, amortize at some point during the fully extended loan term, either during the initial loan term and/or the extension options.

Three loans, representing 11.1% of the initial cut-off date pool balance, were deemed to have Weak sponsorship strength. Loans with Weak sponsorship treatment were modeled with increased PODs.

There were no environmental, social, governance factors 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.

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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