DBRS Morningstar Confirms Credit Ratings on All Classes of ILPT Commercial Mortgage Trust 2022-LPF2

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-LPF2:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s issuance expectations as evidenced by the strong occupancy across the portfolio and high concentration of investment-grade tenants.

The transaction is collateralized by the borrower’s fee-simple or leasehold interests in a portfolio of 105 cross-collateralized manufacturing and warehouse properties spread across 31 states in the United States, totaling 18.6 million square feet. The $1.1 billion interest-only floating-rate loan, along with $135.0 million of mezzanine debt and $223.3 million of sponsor equity, was used to repay existing debt, cover closing costs, and fund reserves. The loan has an initial 24-month term with three 12-month extension options for a fully extended maturity date of October 2027. The loan is also structured with a partial pro rata structure that allows for pro rata paydowns for the first 20.0% of the unpaid principal balance.

As per the March 2023 rent rolls, the collateral continues to be 100% occupied. Tenants representing more than 30.0% of net rentable area (NRA) have leases scheduled to expire in the next 12 months, as noted at issuance. While the tenant rollover risk is notable, this is mitigated by the granularity of the tenants, and approximately half of the collateral is occupied by investment grade-rated tenants with triple net leases. The largest tenant, FedEx (17.5% of NRA), has several leases (totaling 3.8% of NRA) that are scheduled to expire in the next 12 months, but the tenant also has leases that extend beyond the loan term.

According to the YE2022 financials, the loan reported a net cash flow (NCF) of $69.7 million, which is a slight decline from the DBRS Morningstar NCF of $72.6 million at issuance. Considering the transaction closed in September 2022, there are limited updated year-end financials available, and as the loan seasons, NCF is expected to stabilize. The property benefits from a highly diversified group of properties and an experienced sponsor in Industrial Logistics Properties, as well as the substantial amount of sponsor equity injected at issuance.

At issuance, DBRS Morningstar derived a value of $1.1 billion based on the DBRS Morningstar NCF of $72.6 million and a capitalization rate of 6.75%, which represents a 40.0% haircut from the appraiser’s value of $1.8 billion. In addition, positive qualitative adjustments totaling 8.0% were applied to account for the property quality, market fundamentals, and cash flow volatility.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

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

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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