DBRS Morningstar Confirms Ratings on BDS 2020-FL5 Ltd.

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of notes issued by BDS 2020-FL5 Ltd. as follows:

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

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, as there has been collateral reduction of 38.3% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as six loans are secured by office properties (48.5% of the current trust balance). As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. While all loans remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update rating report with in-depth analysis and credit metrics for the transaction and business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

According to the March 2023 remittance report, there are 14 mortgages secured by 13 properties remaining in the pool with a total trust balance of $339.4 million. At issuance, the trust consisted of 24 loans secured by transitional real estate properties with a cut-off pool balance of $492.2 million. The trust featured a two-year reinvestment period that expired with the February 2022 payment date. Since issuance, 27 loans have repaid from the pool (including three loans since the previous DBRS Morningstar rating action in November 2022), which had a former cumulative trust balance of $35.3 million. Seven of the outstanding loans, representing 52.4% of the current trust balance, have maturity dates throughout 2023; however, all loans have remaining extension options. While required performance tests may not be met across all collateral properties, borrowers and lenders may agree to terms to allow loan maturity dates to be extended. Terms may include fresh equity contributions from borrowers to pay down loan balances, fund operating and debt service reserves, and purchase new interest rate cap agreements.

The remaining loans in the transaction beyond the office concentration noted above include five loans secured by multifamily properties (34.7% of the current trust balance), two loans secured by the same hotel property (8.8% of the current trust balance), and one loan secured by a student housing property (8.0% of the current trust balance). The transaction’s property type concentration has remained relatively stable since August 2022, when loans secured by multifamily properties represented 40.9% of the pool and loans secured by office properties represented 44.0% of the pool.

The loans are primarily secured by properties in suburban markets with nine loans, representing 73.9% of the current trust balance, in locations with DBRS Morningstar Market Ranks of 3, 4, and 5. The remaining four loans, representing 26.1% of the pool, are secured by properties in urban locations with DBRS Morningstar Market Ranks of 6 and 7. In comparison with the pool composition in August 2022, loans comprising 75.6% of the pool were in suburban markets and 22.9% were in urban markets. In terms of leverage, the pool has a current weighted-average (WA) appraised loan-to-value ratio (LTV) of 67.8% and a WA stabilized LTV ratio of 65.8%. By comparison, these figures were 70.1% and 65.8%, respectively, as of August 2022.

Through February 2023, the collateral manager had advanced $27.3 million in loan future funding to seven individual borrowers to aid in property stabilization efforts. The largest advance, $18.6 million, was made to the borrower of the Northridge I and II loan, which is secured by two suburban office buildings in Herndon, Virginia. The borrower’s business plan is to complete a capital improvement program with upgrades to the lobbies, food service, conference rooms, fitness centers, tenant collaboration spaces, and various exterior upgrades with a subsequent lease-up of the property. An additional $29.3 million of loan future funding, allocated to five borrowers, remains outstanding. Of this amount, $13.2 million is allocated to the borrower of the Morris Corporate Center I and II loan, and $7.5 million is allocated to the borrower of the 77 Corporate Drive loan for further capital improvement and prospective leasing costs.

There are no loans in special servicing, and two loans are on the servicer’s watchlist, representing 14.7% of the current trust balance. Both loans are secured by office properties and are being monitored for pending loan maturities; however, according to the collateral manager, the borrowers for both are in negotiation to execute loan extension options. The Briarwood Office loan (7.8% of the current trust balance) is secured by a four-building office property in Englewood, Colorado. The loan matured in March 2023 and the borrower had not paid debt service since December 2022. According to servicer commentary, the borrower is expected bring the loan current in order to commence extension negotiations. The property was 80.0% occupied as of February 2023; however, YE2022 cash flow was depressed as two large tenant leases commenced in 2022. While a loan extension is expected to be finalized, it is unclear if the lender will require the borrower to contribute additional cash equity into the transaction.

The 77 Corporate Drive loan (6.9% of the current pool balance) is secured by an office property in Bridgewater, New Jersey. The loan matures in May 2023 after the borrower received a six-month maturity extension in November 2022 to allow additional time to sell the property. The property remains 58.9% occupied by one tenant and, according to the collateral manager, the borrower is pursuing a letter of intent from a prospective tenant, which, if executed, would increase the occupancy rate to a stabilized level. The loan is structured with an additional six-month extension option followed by a 12-month extension option. Given the potential pending lease, DBRS Morningstar expects the second six-month extension option to be executed although it is unknown if the lender will require the borrower to contribute additional cash equity. If the potential lease is executed, there is $3.5 million of available loan future funding to finance tenant build-out and leasing costs.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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 (May 17, 2022).

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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes C and D materially deviate from the ratings implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is the structural features (loan or transaction) and/or provisions in other relevant methodologies outweigh the quantitative model output.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model Version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022), https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022), https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022), https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022),
https://www.dbrsmorningstar.com/research/407008

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