DBRS Morningstar Confirms Credit Ratings on All Classes of BPCRE 2022-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by BPCRE 2022-FL2, Ltd. (the Issuer) as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. The trust is primarily composed of loans backed by multifamily properties, with recently reported credit and leverage metrics that are in line with issuance figures. There were no significant loan-level concerns noted by DBRS Morningstar as part of this review. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with 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].

The initial collateral consisted of 28 floating-rate mortgages secured by 41 mostly transitional properties with a cut-off date balance totaling $609.4 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the September 2023 remittance, the pool comprised 26 loans secured by 39 properties with a cumulative trust balance of $609.4 million. Since issuance, two loans with a prior cumulative trust balance of $34.0 million have been successfully repaid in full. The transaction has an 18-month Reinvestment Period, whereby the Issuer can purchase new loan collateral or funded loan participations on existing loan collateral into the trust. All new loan collateral must be multifamily assets. The Reinvestment Period is scheduled to end with the November 2023 Payment Date and as of September 2023, the Reinvestment Account had a balance of $26,568.

The transaction is concentrated by property type as 24 loans, representing 97.4% of the current trust balance, are secured by multifamily properties, with one loan (1.4%% of the current trust balance) secured by a manufactured housing community and one loan (1.2% of the current trust balance) secured by a mixed-use property. In comparison with the pool at closing, the property type concentration of the pool remains unchanged.

The pool is concentrated in loans secured by properties in suburban markets, with 17 loans, representing 66.2% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. An additional seven loans, representing 23.1% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 2, denoting tertiary markets, while two loans, representing 10.7% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 6, 7, or 8, denoting urban markets. These concentrations are generally in line with the market representations at issuance.

Leverage across the pool was generally stable to slightly elevated from issuance as of the September 2023 reporting. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 69.6%, with a current WA stabilized LTV of 64.3%. In comparison, these figures were 69.5% and 56.8%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2021 or 2022 and may not reflect the current rising interest rate or widening capitalization rate environments. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across 17 loans, representing 63.1% of the current trust balance.

Through June 2023, the lender had advanced cumulative loan future funding of $66.8 million to 10 of the 21 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $12.7 million, was to the borrower of the Cordillera loan, which is secured by a multifamily property in Phoenix. The borrower’s original business plan was to purchase the remaining 118 units, collapse the condominium structure, and renovate all 228 units. The loan included $37.5 million of future funding, with $31.3 million allocated to unit acquisition ($265,000 per unit) and $6.2 million earmarked for the renovation of all 228 potential units.

According to an update from the collateral manager, the borrower does not believe it can complete the original plan of acquiring all the remaining condominium units and as such, has reached an agreement with the lender to reduce the full loan commitment by $19.8 million to $25.5 million. The collateral manager’s update did not provide specifics on the number of units purchased to date, and it is unclear if the borrower has ceased all efforts to acquire additional units or if the total number targeted has just been lowered. The collateral manager did confirm that the borrower had renovated 60 units to date, with achieved monthly rental rates on renovated units about $100 less than originally expected. An additional $4.0 million of loan future funding remains available to the borrower; however, specifics on how that is allocated between unit renovations and unit acquisitions were not made available. In the analysis for the October 2023 surveillance review, DBRS Morningstar stressed the LTV by reducing the appraiser’s stabilized value provided at issuance given the expected reduction in loan collateral. The adjustment resulted in a loan-level expected loss approximately 1.5 times greater than the pool’s expected loss.

An additional $30.3 million of loan future funding allocated to 19 of the outstanding individual borrowers remains available. The largest portion, $4.1 million, is for the borrower of the Avalon Square Apartments loan, which is secured by a multifamily property in Bradenton, Florida. The loan included total loan future funding of $4.3 million, allocated as $1.3 million for the borrower’s capital expenditures (capex) and $3.0 million as a property performance based earn-out. Through June 2023, only $0.3 million for capex costs had been advanced to the borrower. According to the Q2 2023 collateral manager report, 54 of the planned 127 unit renovations had been completed and net cash flow was $1.5 million with a resulting debt yield of 7.7%. The minimum required debt yield to achieve the performance test is 8.0%. Therefore, the borrower may be able to achieve the earn-out by YE2023.

As of the September 2023 remittance, there were no delinquent loans or loans in special servicing, and there were five loans on the servicer’s watchlist, representing 21.3% of the current trust balance. All loans have been highlighted for upcoming maturity, and according to updates from the collateral manager, all borrowers have either initiated exit strategies or have exercised existing loan extension options. This includes the Cordillera loan noted above, which has been extended to October 2024, and the borrower has purchased a new interest rate cap agreement as part of the extension. Only one loan, Elsinore & Fitch Portfolios (4.3% of the pool), has been modified. The modification allowed the borrower to defer interest payments totaling $62,000 due at loan maturity in October 2023. The update from the collateral manager noted the borrower is working to close takeout financing; however, a potential closing date is unknown. At issuance, DBRS Morningstar applied a loss given default penalty to the loan as the property was deemed as legal nonconforming use; that adjustment remained in the analysis for this review.

ENVIRONMENTAL, SOCIAL, AND 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 the 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 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit 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 22, 2023), https://www.dbrsmorningstar.com/research/420982

-- 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

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