DBRS Morningstar Finalizes Provisional Ratings on BX Trust 2022-CLS Commercial Mortgage Pass-Through Certificates, Series 2022-CLS

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-CLS to be issued by BX Trust 2022-CLS:

-- Class A at AAA (sf)
-- Class X-CP at AA (low) (sf)
-- Class X-NCP at AA (low) (sf)
-- Class B at AA (low) (sf)
-- Class C at A (high) (sf)

All trends are Stable. Classes X-CP and X-NCP are interest-only (IO) classes whose balances are notional.

The BX Trust 2022-CLS single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in the Center for Life Science (CLS), a Class A LEED Gold, 21-story life sciences and medical office building totaling 704,160 square feet (sf) in the heart of Boston’s Longwood Medical Area (LMA). DBRS Morningstar takes a positive view of the credit characteristics of the collateral because of its excellent location within walking distance of major medical centers, high-quality tenancy, and low historic vacancy rate combined with supply constraints within the submarket. These factors help insulate the collateral against broader economic downturns and provide a permanent and sustainable source of growth. The LMA is one of the largest clusters of medical research facilities in the U.S. and is home to 22 medical institutions, including Harvard Medical School, Harvard School of Public Health, Boston Children’s Hospital, Beth Israel Deaconess Medical Center, Dana-Farber Cancer Institute, Brigham and Women’s Hospital, and Joslin Diabetes Center. Per the JLL 2022 Life Sciences Research Outlook & Cluster Rankings report, Greater Boston is the global hub of research and development for the life sciences industry, with 11 of the 15 largest biotechnology companies in the world having a presence there. This self-sustaining ecosystem, which includes top-notch academic institutions, collaborative research space, venture capital firms, start-ups, and global corporations, allows innovation and growth to thrive. The Greater Boston area employs a total workforce of approximately 116,000 people in the life sciences industry, which accounts for nearly 4.4% of the total private employment within the market.

The LMA has little developable land remaining and most new construction projects involve additions to existing structures or the razing of older structures to build new, larger facilities. Per the appraisal, there are no approved development projects that would compete with the subject property and, because of the scarcity of developable land, future new supply is not considered to be a risk. In addition, nearly all life sciences assets in the LMA are institutionally owned-and-occupied medical offices, clinics, and hospitals, with CLS being one of only three Class A laboratory buildings available for tenants. The property benefits from a substantial floor value based on its desirable location in the LMA. The appraiser's concluded land value was approximately $533.5 million or $700 per sf, which covers 87.5% of the $610 million securitized mortgage balance and provides additional downside protection.

In a post-pandemic environment, DBRS Morningstar expects increased growth in healthcare spending, which is a key driver of the life sciences and medical fields. With this rise in spending, much of which is already devoted to disease prevention and treatment of cancer and chronic conditions, companies focused in these fields will continue to thrive. Given the specialized nature of these industries, coupled with advancements in medical and other technologies, a skilled and educated workforce is necessary to sustain the profitability of life sciences enterprises. DBRS Morningstar believes the most important factor for the long-term sustainability of cash flow is proximity to talent, which means access to research and educational institutions as well as other technology and medical centers, typically located in urban centers.

DBRS Morningstar sees continued consolidation within these industries as a benefit for the CLS as life science and medical companies attempt to remain profitable through acquisitions of smaller companies, driving demand for the already limited supply of laboratory space in increasingly urban locations. Space and land constraints create higher barriers to entry that favor the existing quality, location, and strong sponsorship of the CLS. DBRS Morningstar believes the substantial capital required for the build-out of specialized laboratory and medical space, as well as the amenities needed to attract highly skilled employees, bode well for the property in terms of long-term occupancy and continued rental rate growth in the market.

The building benefits from a long-term, institutional-grade tenancy with a weighted average (WA) lease term of 21.3 years and an expected WA remaining lease term of 7.7 years. The CLS is 100% leased to a roster of seven tenants led by Beth Israel Deaconess Medical Center (Beth Israel; 362,365 sf, 51.5% of net rentable area (NRA), 46.4% of base rent, Moody’s: A3, S&P: A), Boston Children’s Hospital (BCH; 224,543 sf, 31.9% of NRA, 37.6% of base rent, Moody’s: Aa2, S&P: AA) and Dana-Farber Cancer Institute (50,716 sf, 7.2% of NRA, 6.1% of base rent (Moody’s: A1, S&P: A). In total, tenants with an investment-grade credit rating comprise 96.2% of the NRA and 95.8% of base rent. The property averaged an occupancy rate of 100% over the past five years and has been at least 90.8% occupied since 2009. With its location in the LMA, the CLS serves as a mission-critical space for many of its tenants, which are concentrated in the life sciences and biomedical research fields. The Beth Israel Deaconess Medical Center, Boston Children’s Hospital, and Dana-Farber Cancer Institute are all teaching hospitals and institutions affiliated with Harvard University and are tenants of CLS. Being within walking distance of these institutions is critical for students, faculty, and researchers to collaborate on research and other projects.

The two largest tenants at the property, Beth Israel and BCH, collectively represent 83.4% of NRA and 84.0% of total base rent. However, both tenants have been at the property since its construction with current rental rates well below market, have invested substantial amounts of money into their spaces and have recently exercised renewal options in 2022. CLS represents a mission-critical location as Beth Israel and BCH are affiliated with the nearby Harvard Medical School as well as being adjacent to Beth Israel Deaconess Medical Center and the Boston Children’s Hospital Karp Family Research Lab. In addition, BCH recently expanded its footprint by subleasing 39,856 sf from Harvard College, which vacated the property as it required more space than CLS could accommodate. In conjunction with the sublease, Harvard College exercised its 2027 renewal option ahead of schedule, extending the lease expiry date to 2031.

While only 355 sf roll over during the five-year loan term, the largest tenant at the property, Beth Israel, has a lease expiry date in June 2028, one year following the maturity of the loan. Beth Israel was instrumental in the development of CLS having been a tenant since delivery in 2008 and having signed its original 15-year lease in 2005 (prior to construction) with two five-year extension options remaining. DBRS Morningstar believes that it is unlikely Beth Israel would opt to vacate the property at the end of its lease term given the CLS location adjacent to Beth Israel Deaconess Medical Center, the 0.0% availability rate in the LMA, and that its maximum renewal rental rate in 2028 is approximately 20% below the current market rate.

A lending syndicate comprised of Morgan Stanley Bank, N.A. and Citi Real Estate Funding Inc originated a $750 million five-year, fixed-rate, interest-only (IO) whole loan. The trust mortgage loan is part of a split loan structure comprised of the following six promissory notes: (i) two promissory A notes with a cut-off date principal balance of $610 million (ii) two subordinate promissory B notes with an aggregate cut-off date principal balance of $100 million and (iii) two promissory C notes with a cut-off date principal balance of $40 million. The trust assets will consist primarily of the mortgage loan and is secured by a first priority lien on the property. The promissory notes comprising Note B and Note C are not assets of the trust.

The mortgage loan sellers and the subordinate note holders entered into an intercreditor agreement, dated as of the closing date, that governs the relative rights and obligations of the holders of, and the allocation of payments to, the mortgage loan and the subordinate companion loans. The mortgage loan will be generally senior in right of payment to Note B and Note C, and Note B will be generally senior in right of payment to Note C.

The sponsor is BRE Edison L.P., a joint venture of BioMed Partners and Blackstone Real Estate Partners. BioMed Realty is a fully integrated real estate investment trust that is focused on acquiring, developing, leasing, owning, and managing laboratory and office space for the life sciences and technology industries. BioMed Realty was founded in 2004 and merged with The Blackstone Group in 2016. The Blackstone Real Estate group was established in 1992 and is the largest private equity real estate investment manager in the world today with more than $320 billion of real estate assets under management as of June 30, 2022. Together, Blackstone and BioMed Realty have 14.9 million sf of owned life sciences real estate and roughly 320 tenants nationwide, including 6.0 million sf of life sciences assets owned and operated in Greater Boston.

The sponsor is partially using loan proceeds to repatriate approximately $33.5 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings as sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. However, the size of equity repatriated is relatively minimal compared with the overall mortgage and appraised value. Based on the appraiser’s as-is valuation of $1.50 billion, the sponsor will have approximately $749 million of unencumbered market equity remaining.

The nonrecourse carveout guarantor, BRE-BMR MA Holdco LLC, a Delaware limited liability company, is not subject to any net worth thresholds or liquidity covenants, 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance (ESG) 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

Classes X-CP and X-NCP are IO certificates that reference 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 the North American Single-Asset/Single-Borrower Ratings Methodology (June 10, 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.

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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