DBRS Morningstar Confirms Credit Ratings on All Classes of SMRT Commercial Mortgage Trust 2022-MINI

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the classes of SMRT Commercial Mortgage Trust 2022-MINI, Commercial Mortgage Pass-Through Certificates, Series 2022-MINI as follows:

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in January 2022, the loan continues to exhibit healthy credit metrics, with the servicer-reported financials for the trailing 12-month (T-12) period ended June 30, 2023, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with DBRS Morningstar’s expectations.

The transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 18 self-storage facilities totaling 56,042 units (of which 80.2% are climate controlled) and approximately 2.1 million rentable square feet (sf) located throughout Manhattan, New York. The loan was structured with conditional release provisions. To date, all of the original 18 collateral properties remain in the pool. The loan benefits from sponsorship provided by an experienced self-storage operator, StorageMart, which contributed $1.2 billion in equity at closing as part of the subject transaction.

Whole-loan proceeds of $2.1 billion along with sponsor equity were used to acquire the portfolio for $3.2 billion. The floating-rate loan has an initial maturity date of January 9, 2024, with three 12-month extension options and is interest only throughout its five-year fully extended loan term. As a condition to exercising each of its extension options, the borrower is required to enter into an interest rate cap agreement with a strike rate that results in a debt service coverage ratio (DSCR) of at least 1.10 times (x). DBRS Morningstar inquired about the loan’s upcoming maturity date and, according to the servicer, the borrower has stated its intention to exercise its first extension option.

The loan continues to perform in line with DBRS Morningstar’s expectations, reporting an occupancy rate of 89.1% as of June 2023. Per the Q2 2023 financials, the portfolio reported a T-12 NCF of $120.9 million (with a DSCR of 0.97x), surpassing the DBRS Morningstar NCF of $108.0 million (with a DSCR of 2.21x). The increase over the DBRS Morningstar NCF is primarily driven by a decline in operating expenses. Despite the increase in cash flow, the Q2 2023 DSCR declined to 0.97x from the DBRS Morningstar DSCR of 2.21x at issuance. This was driven by increased debt service resulting from the loan’s floating rate. As noted above, the borrower is required to retain an interest rate cap agreement with a strike price that results in a minimum DSCR of 1.10x, which would imply that the June 2023 DSCR does not incorporate proceeds received from the loan’s interest rate cap.

DBRS Morningstar’s credit ratings are based on a value analysis completed at issuance, which considered a blended capitalization rate of 6.19%, resulting in a DBRS Morningstar value of $1.7 billion and a whole-loan loan-to-value ratio (LTV) of 119.2%. The DBRS Morningstar value represents a 45.5% haircut to the appraiser’s value of $3.2 billion. To account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.5% across the capital structure. Additionally, DBRS Morningstar applied positive qualitative adjustments to its sizing, totalling 9.5%, to reflect the portfolio’s quality given the majority of units are climate controlled, strong historical operating metrics, strong market fundamentals and high barriers to entry. DBRS Morningstar believes the portfolio will continue to exhibit stable-to-improving performance over the loan term.

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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-NCP is an interest-only (IO) certificate that references 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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

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].