Morningstar DBRS Confirms All Credit Ratings on BX Commercial Mortgage Trust 2022-LP2

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-LP2 issued by BX Commercial Mortgage Trust 2022-LP2 as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS’ expectations at issuance. At issuance, the interest-only, floating-rate loan was secured by the borrower’s fee-simple interest in a portfolio of 166 industrial properties totaling more than 24.3 million square feet across 16 states. As of the January 2024 reporting, 29 properties have been released from the pool, representing collateral reduction of 19.0% since issuance. Prepayment premiums for released assets is 105% of the allocated loan amount for the first 30.0% of the original principal balance and 110% thereafter. Proceeds are distributed on a pro rata basis for the first 30% of the unpaid principal balance, with all subsequent principal to be applied sequentially.

Initial loan proceeds of $2.4 billion and mezzanine debt of $570.0 million repaid existing debt, returned $888.1 million of equity to the sponsor, funded $6.8 million of upfront reserves, and covered closing costs. The loan is structured with an initial two-year term through February 2024 with three one-year extension options resulting in a fully extended maturity date in February 2027. The borrower is required to purchase an interest rate cap agreement with each extension in order to maintain a minimum debt service coverage ratio (DSCR) of 1.10 times (x). The loan is currently on the servicer’s watchlist for the upcoming maturity and a low DSCR. Morningstar DBRS has requested an update from the servicer regarding the extension.

As of the financial reporting for the trailing 12-month period ended September 30, 2023, the portfolio was 94.5% occupied and generated net cash flow (NCF) of $117.8 million, (which is likely inclusive of properties that have been released). It is worth noting that the most recent financials reported an A note DSCR of 0.79x, considerably lower than the issuance figure of 2.42x. Although occupancy and cash flow remain healthy, the loan’s DSCR has primarily declined because of an increase in debt service obligations given the floating-rate nature of the loan. However, the interest rate cap agreement partially mitigates some of these increases, given the minimum DSCR requirement of 1.10x.

In the analysis for this review, the Morningstar DBRS NCF was updated to reflect the 29 released properties, resulting in a Morningstar DBRS NCF of $95.8 million. A capitalization rate of 6.75% applied at issuance was maintained, yielding an updated Morningstar DBRS value of $1.42 billion, a variance of -53.6% from the adjusted issuance appraised value of $3.06 billion for the remaining 137 properties in the portfolio. The Morningstar DBRS value implies a loan-to-value (LTV) of 138.7%, compared with the Morningstar DBRS LTV at issuance of 133.1%. Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this credit rating analysis, totaling 7.75% to reflect the generally low cash flow volatility, good property quality, and strong market fundamentals.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030)

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023), https://dbrs.morningstar.com/research/422174

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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