DBRS Morningstar Confirms Ratings on All Classes of BSST 2022-1700 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2022-1700 issued by BSST 2022-1700 Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The transaction is collateralized by the borrower’s fee-simple interest in 1700 Market Street, a 32-story, 850,209-square-foot (sf) Class A office building situated two blocks from City Hall and Rittenhouse Square in the Market Street West/City Center submarket of Philadelphia. The transaction sponsor, Shorenstein Realty Investors Eleven L.P., acquired the collateral in January 2016 for $195.0 million and used loan proceeds to refinance existing debt and withdraw approximately $7.4 million in equity. The property’s two-year renovation project was complete in 2019, where the sponsor spent more than $16.7 million in capital expenditures, tenant improvements, and leasing commissions. Property upgrades included improvements to the lobby and elevator, a new tenant-only fitness center, and a new conference center. The loan has an initial term of 24 months, with three one-year extension options, resulting in a fully extended loan term of five years.

The sponsor backfilled space previously occupied by Independence Blue Cross by executing a 10-year lease with Reliance Standard Life Insurance Company (Reliance). Reliance took the entirety of the former tenant's 150,000-sf space. Reliance, which has an investment-grade rating, is now the largest tenant at the property (17.9% of the net rentable area (NRA)), followed by Deloitte (10.9% of the NRA), the second-largest tenant. The property benefits from having moderate lease rollover of 24.6% during the fully extended loan term, with leases representing approximately 5.6% of the NRA set to roll within the next 12 months.

Although the property has performed well historically, leasing velocity at the subject, and in the broader submarket, has slowed in recent years. Since acquiring the property, the sponsor temporarily increased occupancy to 87.7% from 81.6%; however, the September 2022 rent roll indicates occupancy has dipped to 80.7%, with an average rental rate of $36.59 per square foot (psf). An additional 2.9% of the NRA was scheduled to roll by YE2022, suggesting vacancy could have ticked up slightly higher by January 2023. According to Reis, the City Center submarket had a vacancy rate of 11.9% as of Q3 2022, with average asking rental rates of $32.98 psf. Reis expects vacancy rates within the submarket to stay elevated above 10.0% through to 2025. The loan’s debt service coverage ratio (DSCR) declined to 1.2 times (x) as of September 2022, lower than the issuer’s and DBRS Morningstar’s DSCRs at issuance of 1.9x and 1.6x, respectively. DBRS Morningstar believes the coverage is lower because of the servicer’s partial-year reporting and expects cash flows to normalize with a full year reporting period.

While there are leasing challenges in the weakening submarket and the property’s vacancy rate remains elevated, DBRS Morningstar notes the collateral benefits from its desirable location, recent capital improvements, solid historical operating performance, and strong sponsorship. The DBRS Morningstar net cash flow (NCF) of $12.1 million derived at issuance was 15.1% lower than the issuer’s NCF figure. DBRS Morningstar assumed a capitalization rate of 7.0% that resulted in a DBRS Morningstar value of $173.3 million, a variance of -29.1% from the as-is appraised value at issuance of $244.5 million. The DBRS Morningstar value implies a loan-to-value ratio of 108.5%.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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 (May 17, 2022).

Classes X-CP and X-EXT are interest-only (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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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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