Morningstar DBRS Confirms Credit Ratings for All Classes of Citigroup Commercial Mortgage Trust 2022-GC48 Yorkshire & Lexington Towers Loan-Specific Certificates

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the Yorkshire & Lexington Towers Loan-Specific Certificates issued by Citigroup Commercial Mortgage Trust 2022-GC48 as follows:

-- Class YL-A at A (sf)
-- Class YL-B at BBB (low) (sf)
-- Class YL-C at BB (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the relatively limited seasoning for this transaction, which closed in June 2022. The transaction is secured by the borrower's fee-simple interest in two multifamily properties, totaling 808 units. At issuance, it was noted that the sponsor had recently completed 57 unit renovations and had plans to carry out a $6.5 million project, renovating an additional 311 units over a three-year period. The December 2023 rent roll reflects rental rate increases for the fair market units and the stabilized units of approximately 15% and 5%, respectively, since issuance. The in-place cash flows have declined as of the servicer-reported annualized September 2023 financials, which show a decline in the collateral portfolio's occupancy rate since issuance. Morningstar DBRS notes these trends are likely the result of units being taken offline for renovations as the sponsor executes the capital improvement project, as further described below.

The collateral properties are located in Manhattan's Upper East Side neighborhood. The 21-story Yorkshire Towers property is significantly larger, with 681 residential units and 63,778 square feet (sf) of commercial space, as compared with the 15-story Lexington Towers property, which consists of 127 residential units and approximately 17,000 sf of commercial space. At issuance, there were 503 market-rate units (62.3% of the total) and 305 rent-stabilized units (37.7% of the total) across the two properties.

The $221.5 million subject transaction consists of the two junior B notes that are part of a larger $714.0 million whole loan. The whole loan consists of 18 senior A notes totaling $318.0 million, two junior B notes totaling $221.5 million, and four mezzanine loans totaling $174.5 million. Whole-loan proceeds were primarily used to refinance $550.0 million of existing debt, return $55.3 million of borrower equity, fund $20.3 million of various upfront reserves, and cover closing costs. The fixed-rate loan is interest only throughout its five-year term and is scheduled to mature in June 2027, with no extension options available.

As noted, the sponsor is in the process of executing a large-scale renovation of the properties. More specifically, the business plan contemplates 283 traditional renovations (estimated at a cost of $19,382 per unit) and 28 major renovations (estimated at a cost of $37,143 per unit). The major renovations are more complex, combining multiple units into a single floorplan or materially altering floorplans. When the unit size or floorplan is materially altered, rent stabilization regulations allow for the rent-stabilized legal rent to be reset to the first rent achieved following the renovation. Once renovations have been completed, the combined unit count is expected to decrease to 793 units, consisting of 492 market-rate and 301 rent-stabilized units. While Morningstar DBRS considers there to be an inherent risk in the business plan, it also believes that there are appropriate loan structures in place to mitigate the risk, including a $6.5 million upfront unit upgrade reserve and a $5.9 million upfront supplemental income reserve that will be held to cover any income lost while units are undergoing renovation. An update on the status of the renovations was requested from the servicer, but the response remains outstanding as of the date of this press release. The servicer's April 2024 reporting for one of the companion transactions, which holds part of the pari passu senior loan, BMO 2022-C3 Mortgage Trust (not rated by Morningstar DBRS), shows a balance of $2.98 million remaining in the unit upgrade reserve (initial deposit of $6.5 million) and the original balances of $1.1 million and $1.0 million in the replacement and rollover reserves, respectively.

According to the December 2023 rent roll, the residential portion of the towers had a combined occupancy rate of 87.5%, composed of 433 fair market units with an average rental rate of $5,619 per unit and 271 stabilized units with an average rental rate of $2,795 per unit. There are 101 vacant units and two employee units; however, these units are not bifurcated between fair market units and stabilized units. The occupancy rate declined from 96.4% in March 2022, likely a result of the ongoing renovations as average rental rates have improved from $4,930 per unit and $2,636 per unit for fair market and stabilized units, respectively, as of the same period in March 2022. According to Reis, the Upper East Side submarket reported Q4 2023 average asking rental and vacancy rates of $5,283 per unit and 2.7%, respectively.

The servicer reported an annualized net cash flow (NCF) of $26.9 million and a debt service coverage ratio (DSCR) of 1.61 times (x), as of the September 30, 2023, reporting. These figures represent declines from the Morningstar DBRS NCF of $29.4 million and DSCR of 1.77x, derived at issuance. Notably, Morningstar DBRS' NCF figure does not include any stabilization credit. While the collateral cash flow has declined and the vacancy rate has increased, the increase in rental rates demonstrates the sponsor's ability to achieve rent premiums for the renovated units.

The Morningstar DBRS value of $511.4 million was derived at issuance, which was based on the Morningstar DBRS NCF of $29.4 million, a 16.9% haircut to the Issuer's figure of $35.4 million, and a capitalization rate of 5.75%. This results in a Morningstar DBRS loan-to-value ratios (LTVs) of 105.5% on the secured debt balance of $539.5 million and 139.6% on the total debt of $714.0 million. The Morningstar DBRS concluded value estimate represents variances of -46.4% and -51.6% from the appraiser's as-is and as-stabilized value estimates, respectively. If the sponsor is able to successfully carry out its business plan, leverage would considerably improve as the appraiser's stabilized value estimate of $1.1 billion indicates an LTV of 67.5% on the whole loan of $714.0 million.

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) at 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 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 (March 1, 2024), https://dbrs.morningstar.com/research/428799
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205

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