DBRS Morningstar Confirms Credit Ratings on All Classes of BSPRT 2022-FL9 Issuer, LLC.

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by BSPRT 2022-FL9 Issuer, LLC (the Issuer) as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which has generally remained in line with DBRS Morningstar’s expectations since issuance as the trust continues to be primarily secured by multifamily collateral. 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 24 floating-rate mortgage loans and participation interests in mortgage loans secured by 48 mostly transitional properties with a cut-off balance totaling $803.2 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. As of the October 2023 remittance, the pool comprised 48 loans and participation interests in mortgage loans secured by 76 properties with a cumulative trust balance of $797.2 million. There are 21 loans, representing 76.1% of the current trust balance, that remain in the transaction from closing.

Since issuance, 10 loans with a prior cumulative trust balance of $118.9 million have successfully repaid in full from the pool. An additional two loans with a former cumulative trust balance of $106.2 million were also purchased out of the trust by the Issuer at par. The transaction is managed with a two-year Reinvestment Period, whereby the Issuer can purchase new loans and funded loan participations into the trust. Since the previous DBRS Morningstar rating action in November 2022, 17 loans and participation interests in mortgage loans, representing 14.7% of the current trust balance, have been added to the transaction. The Reinvestment Period is scheduled to end with the June 2024 Payment Date. As of October 2023, the Reinvestment Account had a balance of $6.0 million.

The transaction is concentrated by property type as 35 loans, representing 63.7% of the current trust balance, are secured by multifamily properties; six loans, representing 13.7% of the current trust balance, are secured by hotel properties; and one loan, representing 7.1% of the current trust balance, is secured by a student housing property. The pool is primarily secured by properties in suburban markets, with 32 loans, representing 72.6% of the pool, with a DBRS Morningstar Market Rank of 3, 4, or 5. An additional eight loans, representing 20.6% of the pool, are secured by properties in urban markets, with a DBRS Morningstar Market Rank of 6, 7, or 8, while eight loans, representing 6.8% of the pool, are secured by a property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market.

Leverage across the pool decreased slightly as of the October 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised loan-to-value ratio (LTV) is 67.3%, with a current WA stabilized LTV of 59.5%. In comparison, these figures were 69.4% and 62.6%, respectively, at issuance. DBRS Morningstar recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current rising interest rate or widening capitalization rate environment. In the analysis for this review, DBRS Morningstar applied upward LTV adjustments across 16 loans, representing 55.0% of the current trust balance.

Through June 2023, the lender had advanced cumulative loan future funding of $109.7 million to 38 of the 48 outstanding individual borrowers to aid in property stabilization efforts. The largest advance has been made to the borrower of the Cedar Grove Portfolio ($16.4 million) loan, which is secured by a portfolio of 15 multifamily properties across North Carolina, South Carolina, and Oklahoma totaling 1,690 units. The borrower’s business plan is to complete a significant capital expenditure (capex) project totaling $26.2 million across the portfolio. The borrower appears to be progressing with its capex plan as the Q2 2023 Quarterly Asset Review report provided by the collateral manager noted individual property capex work was at least 50.0% completed with all work across the portfolio expected to be completed by the beginning of Q3 2024.

An additional $68.0 million allocated to 32 individual borrowers remains available. The largest portion, $9.7 million, is allocated to the borrower of the Cedar Grove Portfolio. The second largest portion, $7.5 million, is allocated to the borrower of The American Hotel loan, which is secured by a full-service hotel in the Atlanta Central Business District. Loan future funding is available to the borrower to complete a property renovation and conversion to Hilton Hotel’s (Hilton) Tapestry Collection. According to the Q2 2023 update from the collateral manager, the construction start date has been delayed to October 2023; however, the borrower has received plan approval from Hilton with construction expected to be completed in Q2 2024. The renovation costs are expected to be $3.2 million greater than originally expected, and those costs will be funded from additional borrower cash equity. As a result of the delay, the loan was modified in April 2023, which will allow the borrower to use outstanding interest reserves to pay down the loan balance once the renovation is completed if funds remain outstanding. The property continues to generate positive cash flow with a trailing 12-months (T-12) ended June 30, 2023, net cash flow of $4.6 million, equating to a debt service coverage ratio of 1.40 times. The loan matures in April 2024 with three additional one-year extension options remaining.

As of October 2023 reporting, there are 15 loans on the servicer’s watchlist, representing 42.4% of the current trust balance. The loans have primarily been flagged for below-breakeven debt service coverage ratios, low occupancy rates, and deferred maintenance issues. All loans on the servicer’s watchlist remain current, with performance declines expected to be temporary as the majority of borrowers are in the midst of completing planned capex programs as part of the respective business plans. There are also 26 loans, representing 42.9% of the current trust balance, that have been modified. The majority of loan modifications are the result of the transition of loans’ floating rate benchmark to the Secured Overnight Financing Rate (SOFR) from LIBOR, which DBRS Morningstar views as credit neutral.

There is concentrated upcoming maturity risk in the transaction as 22 loans, representing 54.0% of the current trust balance, have loan maturity dates in the next six months through April 2024. All loans are structured with existing extension options available. According to an update from the collateral manager, the majority of borrowers are likely to exercise loan extensions. In the event individual property performance does not meet required performance tests, DBRS Morningstar expects borrowers and the lender to agree to mutually beneficial loan amendments. One loan, 211 West Fort Street (0.4% of the trust balance), is currently categorized as a matured nonperforming loan. The loan is secured by an office property in Detroit, which matured in October 2023. According to the collateral manager, the lender and borrower are working to agree to a short-term extension to provide the borrower additional time to execute its exit strategy.

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.
22 West Washington Street
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].