Morningstar DBRS Confirms Credit Ratings on All Classes of ILPT Commercial Mortgage Trust 2022-LPFX

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

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect the continued performance of the transaction, which is in line with Morningstar DBRS’ expectations at issuance as evidenced by the portfolio’s maintenance of high occupancy, low rollover risk in 2024, and stable-to-improving operating performance since the last review. The transaction is secured by the borrower’s fee-simple interests in a portfolio of 17 industrial properties totaling approximately 9.4 million square feet (sf). The portfolio is composed of warehouse and manufacturing facilities located throughout 12 states and 13 industrial markets, with the largest concentrations in Philadelphia; Richmond, Virginia; Nashville, Tennessee; Spartanburg, South Carolina; and Columbus, Ohio. The loan is sponsored by ILPT, a publicly traded REIT formed to own and lease industrial and logistics portfolios across the United States.

The $445 million whole loan is composed of 18 promissory notes: 13 senior A notes totaling $341.1 million and five junior B notes totaling $103.9 million. The subject transaction consists of $176.1 million of senior debt and the entirety of the subordinate debt. The remaining senior A notes are included in several future securitizations including WFCM 2022-C62, MSC 2022-L8, BMARK 2022-B35, BBCMS 2022-C16, and BANK 2022-BNK41, the latter three of which Morningstar DBRS rates. The capital structure also includes two tranches of mezzanine debt, which had an issuance balance of $255 million and are also held outside the trust. The fixed-rate loan is interest only for the full 10-year term.

The portfolio mainly consists of single-tenant properties with triple-net leases and was 100% leased to 19 individual tenants as of the rent rolls dated September 2023. The largest tenants include Amazon (32.3% of net rentable area (NRA), lease expiries in September 2027), Restoration Hardware, Inc. (12.7% of NRA, lease expiry in February 2028), and Barrett Distribution (6.8% of NRA, lease expiry in April 2027). Leases representing 6.4% of the NRA across three of the properties are scheduled to expire through the end of 2024, representing continued low rollover risk over the next year. Morningstar DBRS has a favorable view of the tenant quality, with approximately 63.7% of issuance gross rent being derived from nine investment grade-rated tenants, including Amazon and UPS. The tenant roster includes a variety of industries including air freight and logistics, internet and catalog retail, commercial services and supplies, specialty retail, and food and beverage. According to the trailing six-month (T-6) Q2 2023 financials, the portfolio continues to exhibit stable tenancy and rents, reporting a debt service coverage ratio of 2.44 times (x) compared with 2.36x at YE2022 and the Morningstar DBRS figure of 2.11x.

At issuance, Morningstar DBRS derived a value of $536.8 million based on the Morningstar DBRS Net Cash Flow of $36.2 million and a capitalization rate of 6.75%, resulting in a Morningstar DBRS loan-to-value ratio of 130.4% based on the whole-loan debt of $700.0 million. The Morningstar DBRS value represents a -54.3% variance from the issuer’s appraised value of $1.2 billion. Morningstar DBRS also made qualitative adjustments totaling 8.25% to account for low cash flow volatility given the elevated percentage of base rent attributable to investment-grade tenants, high property quality with a weighted-average year built of 2007, and market fundamentals, given the industrial properties’ locations near major transportation hubs. Given the low concentration of annual rollover, credit tenancy, and improved financials over the past year, Morningstar DBRS expects the subject property to continue to perform in line with issuance expectations.

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 (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 the 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].