DBRS Morningstar Confirms Credit Ratings on All Classes of BDS 2022-FL12 LLC

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of notes issued by BDS 2022-FL12 LLC as follows:

-- Class A Notes at AAA (sf)
-- Class B Notes at AA (low) (sf)
-- Class C Notes at A (low) (sf)
-- Class C-E Notes at A (low) (sf)
-- Class C-X Notes at A (low) (sf)
-- Class D Notes at BBB (sf)
-- Class D-E Notes at BBB (sf)
-- Class D-X Notes at BBB (sf)
-- Class E Notes at BBB (low) (sf)
-- Class E-E Notes at BBB (low) (sf)
-- Class E-X Notes at BBB (low) (sf)
-- Class F Notes at BB (low) (sf)
-- Class G Notes 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. Given the recent vintage of the transaction, performance of the underlying collateral has generally remained unchanged from issuance. Additionally, the trust continues to be 100% 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 transaction closed in September 2022 with a cut-off pool balance totaling approximately $708.1 million, excluding approximately $98.3 million of future funding commitments. At issuance, the pool consisted of 24 floating-rate mortgage loans secured by 27 mostly transitional real estate properties. The majority of the collateral is in a period of transition, with plans to stabilize and improve asset value. The collateral pool for the transaction is static; however, the Issuer has the right to use principal proceeds to acquire fully funded future funding participations subject to stated criteria. The replenishment period ends with the April 2025 Payment Date. As of the October 2023 remittance, the Replenishment Account had a balance of $3,681. The pool currently comprises of 23 loans with a cumulative trust balance of $708.1 million, as one loan with a former cumulative trust balance of $15.0 million was successfully repaid from the pool in August 2023.

The transaction is concentrated by property type as all 23 loans are secured by multifamily properties. The pool is primarily secured by properties in suburban markets, as defined by DBRS Morningstar, with 22 loans, representing 95.9% of the pool, assigned a DBRS Morningstar Market Rank of 3, 4, or 5. There is one loan, representing 4.1% of the pool, that is secured by a property with a DBRS Morningstar Market Rank of 2, denoting a tertiary market, and no loans secured by properties in urban markets. Both the suburban and tertiary market concentrations remain in line with issuance levels.

Leverage across the pool has remained consistent as of October 2023 reporting when compared with issuance metrics. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 70.3%, with a current WA stabilized LTV of 60.9%. In comparison, these figures were 70.6% and 61.0%, 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 environments. At issuance, DBRS Morningstar applied elevated LTVs across 10 loans (53.6% of the current trust balance), reflecting DBRS Morningstar views of the respective markets, comparable data and inherent risk associated with each sponsor’s business plan. These adjustments were maintained in the analysis for this review.

Through October 2023, the lender had advanced cumulative loan future funding of $55.9 million to the borrowers of 20 of the 23 outstanding loans to aid in property stabilization efforts. The largest advance, $12.2 million, has been made to the borrower of the Sahara Palms & Playa Palms Apartments loan (Prospectus ID#10, 3.5% of the pool). The loan is secured by an 840-unit, Class B multifamily property in Gilbert, Arizona. The advanced funds have been used for the borrower’s planned $13.2 million capital improvement plan. The plan entails approximately $10.7 million ($12,709 per unit) for interior upgrades to all 840 units as well as $457,000 to cure deferred maintenance and $2.0 million for common-area improvements and amenity upgrades. As of Q2 2023, 467 units have been renovated and are achieving rent premiums between $50 per unit and $100 per unit over the nonrenovated units.

An additional $40.5 million of loan future funding allocated to 19 individual borrowers remains available. The largest portions are allocated to the borrowers of the Haven at Towne Center (Prospectus ID#1, 9.3% of the pool) and Harmon at 370 Apartments (Prospectus ID#5, 6.6% of the pool) loans. Haven at Towne Center is secured by a 240-unit, Class B multifamily property in Glendale, Arizona. The available funds are to be used for unit-interior renovations totaling $6.3 million ($26,133 per unit) across all 240 units and $1.3 million for common area improvements and amenity upgrades. Through September 2023, the lender had advanced $1.4 million of future funding to the borrower. As of Q2 2023, 40 units had been renovated with average rent premiums of $444 per unit, exceeding the DBRS Morningstar stabilized estimate of $252 per unit. The Harmon at 370 Apartments loan is secured by a 996-unit multifamily property in Las Vegas. The sponsor’s business plan is to invest $15.0 million toward capital improvements across the property, consisting of $8.9 million ($8,928 per unit) toward unit interiors to all 996 units and $6.1 million toward exterior renovations. Through September 2023, the lender had advanced $6.8 million of future funding to the borrower.

As of the October 2023 remittance, there are no delinquent or special serviced loans; however, 19 loans, representing 84.4% of the pool, are being monitored on the servicer’s watchlist. The loans have primarily been flagged for below breakeven debt service coverage ratios or low occupancy. Performance declines noted in the pool are expected to be temporary as multifamily units are being taken offline by respective borrowers to complete interior renovations. There is one loan, representing 2.6% of the pool, that is scheduled to mature in the next six months. Two other loans, representing 11.3% of the pool, have maturity dates in 2024, with the majority of loans scheduled to mature in 2025. All 23 loans are structured with extension options.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes C-X, D-X, and E-X 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 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 CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 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)

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].