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

DBRS Limited (Morningstar DBRS) confirmed the following credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2022-AHP issued by BX Commercial Mortgage Trust 2022-AHP:

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

All trends are Stable.

The credit rating confirmations reflect the portfolio’s overall stable performance in occupancy and revenue since issuance. The collateral for the transaction is backed by a portfolio of affordable housing multifamily properties in Florida, an asset class for which Morningstar DBRS generally has a favorable outlook on the underlying fundamentals; however, there are some concerns surrounding the portfolio’s increased operating expenses since issuance. While the portfolio has yet to report a full calendar year of financials since closing, the annualized figures ended September 30, 2023, indicate a nearly 25% increase over Morningstar DBRS’ issuance expectations, which could lead to possible credit degradation in the future if it persists. While there is a lack of clarity on a few of the increased line items and future expectations, Morningstar DBRS has requested an update from the servicer and will continue to monitor this on an ongoing basis.

The underlying loan is secured by the borrower’s fee-simple interest in 43 affordable housing multifamily properties totaling 10,965 units in eight Florida markets, including Miami, Fort Lauderdale, Tampa, and Palm Beach. No single property accounts for more than 3.6% of total units or 4.1% of the total allocated loan amount (ALA). The floating-rate loan is interest only with an initial two-year term and three one-year extension options. The borrower recently exercised its first extension option, entering into a new interest rate cap agreement and extending the loan’s maturity to January 2025. The loan sponsors are BREIT Operating Partnership L.P., an affiliate of The Blackstone Group Inc., which borrowed $1.5 billion and contributed $1.2 billion in equity to fund the $2.7 billion acquisition and closing costs.

The loan is structured with a partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 30.0% of the original unpaid principal balance subject to a release premium of 105.0% of the ALA, which increases to 110.0% for the remaining 70.0% of the principal balance. Morningstar DBRS penalizes transactions with this structure as it is credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure.

According to the reporting for the trailing nine months ended September 30, 2023, the portfolio’s weighted-average (WA) occupancy was 98.0%, in line with both the YE2022 figure of 97.4% and 98.5% at issuance. Morningstar DBRS expects portfolio occupancy to remain stable, supported by Reis’ WA vacancy for the top five submarkets (by concentration of the subject deal) at 4.4% as of Q3 2023, with a five-year projection rising marginally to 4.6% in 2027. Despite the stable occupancy, however, net cash flow (NCF) decreased in 2023, with the Q3 2023 annualized figure reported at $74.3 million, well below both the YE2022 and Morningstar DBRS figures of $84.8 million and $89.3 million, respectively. While the loan’s debt service coverage ratio (DSCR) fell to 0.73 times (x) as of the Q3 2023 annualized reporting, compared with the Morningstar DBRS figure of 3.44x, the borrower was required to purchase an interest rate cap agreement in January 2024 that results in a DSCR of at least 1.10x, which is not reflected in the reported financials.

As noted, the decline in NCF was a direct a result of the increase in expenses, which had an expense ratio of 67.7% as of the Q3 2023 reporting, reflecting an approximately $19.6 million increase over the Morningstar DBRS figure, which had an expense ratio of 39.2%. The increases were primarily driven by property insurance (+140%) and general and administrative (+210%) fees, but also moderate increases to utilities (+30%) and payroll and benefits (+25%) line items. As reported, the cost of insuring the properties has risen by $7.0 million over the Morningstar DBRS figure, and, according to the servicer, is expected to remain similar in the future. Morningstar DBRS notes that insurance costs for properties in coastal areas have risen substantially in recent years because of increased environmental risks, and, given the location of the underlying collateral, this poses additional risk to future cash flows. General and administrative fees also contributed to an increase in expenses, reported at approximately $8.3 million over the Morningstar DBRS-derived figure; however, the servicer has not yet provided any clarification on the driver behind the recent increase or future projections.

While the significant increases in operating expenses have lowered the subject’s NCF, the portfolio continues to boast strong occupancy and revenue, which reported a moderate increase of nearly 3.0% over the Morningstar DBRS issuance figure. Given the strong underlying fundamentals of affordable housing and the healthy demand in the multifamily property type in Florida, Morningstar DBRS expects the portfolio to continue to perform but will continue to monitor expenses on an ongoing basis given the risk they pose to sustainability of future cash flows.

At issuance, Morningstar DBRS derived a value of $1.6 billion based on the Morningstar DBRS NCF of $89.3 million and a capitalization rate of 5.5%, resulting in a Morningstar DBRS Loan-to-Value Ratio (LTV) of 93.9%, compared with the LTV of 54.7% based on the appraised value of $2.9 billion at issuance. Positive qualitative adjustments totaling 7.5% were applied to the LTV Sizing Benchmarks to reflect low cash flow volatility given the transaction’s diversity outside of the state concentration in Florida, as well as the favorable market fundamentals given the property locations in submarkets with low vacancies and positive demand trends for the multifamily property type.

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 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 at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

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 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.

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

-- North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023), https://dbrs.morningstar.com/research/422174
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687
-- 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
-- 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].