DBRS Morningstar Confirms Credit Ratings on All Classes of BWAY Commercial Mortgage Trust 2022-26BW

DBRS Limited (DBRS Morningstar) confirmed the credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2022-26BW issued by BWAY Commercial Mortgage Trust 2022-26BW as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class X at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect collateral performance that remains in line with DBRS Morningstar’s issuance expectations as evidenced by the subject’s improving cash flow from the previous year, stable occupancy rate, and low tenant rollover risk into 2024. The transaction is secured by 26 Broadway, a 29-story, 839,712-square foot (sf) office property in Manhattan’s Financial District. The $290.0 million whole loan includes $222.2 million held within the trust with $67.8 million held in companion loans and an additional $40.0 million of mezzanine debt. The interest-only (IO) loan is structured with a fixed-rate for the entirety of its 10-year term.

As of the June 2023 rent roll, the property was 80.5% occupied compared with 78.7% as of September 2022 and 82.2% at issuance. The largest tenants include the New York City Department of Education (34.3% of net rentable area (NRA), lease expiries in January 2039 and March 2041), Live Primary (8.8% of the NRA, lease expiry in December 2027), and New York Film Academy (5.2% of NRA, lease expiry in June 2030). At issuance, DRBS Morningstar noted Live Primary would be paying reduced rent through Q1 2023 because of a former bankruptcy filing in 2020. The loan was originally structured with a Live Primary Rent Replication Reserve of $1.15 million to mitigate the reduced rent. In its analysis at issuance, DBRS Morningstar also increased its tenant improvements/leasing commission costs to reflect the concerns surrounding the tenant’s probability of renewal as well as its customized co-working buildouts.

The remaining tenancy is quite granular and there is limited near-term rollover with leases representing only 5.2% of the NRA scheduled to expire in 2024. According to the June 2023 rent roll, the property is achieving an average rental rate of $47.10 per square foot (psf), which is well below the Reis-reported Q3 2023 submarket asking rate of $61.35 psf but in line with the submarket effective rate of $49.05. The submarket vacancy rate is currently 14.9%, up significantly from 10.4% at issuance. Reis projects vacancy will fluctuate between 14.6% and 15.3% over the next five years. Despite the increased submarket vacancy rate, New York City office fundamentals are better positioned than most U.S. markets to stabilize over the loan term.

The loan has been on the servicer’s watchlist for low debt service coverage ratio (DSCR) since September 2022, however, performance has improved over the past year as Live Primary has commenced full rent payments and other scheduled rent steps have been realized. According to the financials for the trailing nine months ended September 30, 2023, the subject’s annualized net cash flow (NCF) was $16.1 million, implying a whole-loan DSCR of 0.97 times (x), up from theYE2022 figures of $13.7 million and 0.77x, respectively.

At issuance, DBRS Morningstar concluded NCF and DSCR of $16.3 million and 1.11x, respectively. DBRS Morningstar derived a value of $232.8 million based on a capitalization rate of 7.0% , resulting in a DBRS Morningstar loan-to-value ratio of 124.5%. The DBRS Morningstar value represents a -49.9% variance from the issuer’s appraised value of $465.0 million. DBRS Morningstar also made qualitative adjustments totaling 3.5% to account for low cash flow volatility, Class B property quality, and market fundamentals. Given the low concentration of annual rollover, credit tenancy, and improved financials over the past year, DBRS Morningstar expects the subject property to continue to perform in-line with issuance expectations.

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

Class X is an 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 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 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].