Morningstar DBRS Confirms Credit Ratings on All Classes of BDS 2022-FL11 LLC

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by BDS 2022-FL11 LLC as follows:

-- A-CS at AAA (sf)
-- A-TS at AAA (sf)
-- Class B at AA (low) (sf)
-- Class B-E at AA (low) (sf)
-- Class B-X at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class C-E at A (low) (sf)
-- Class C-X at A (low) (sf)
-- Class D at BBB (sf)
-- Class D-E at BBB (sf)
-- Class D-X at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class E-E at BBB (low) (sf)
-- Class E-X at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the favorable composition of the underlying collateral as the trust continues to be primarily secured by multifamily properties. Historically, loans secured by such properties have exhibited lower default rates and the ability to retain and increase asset value. Additionally, the majority of individual borrowers are progressing in their stated business plans to increase property cash flow. In conjunction with this press release, Morningstar DBRS has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. To access this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

As of the July 2024 remittance, the pool comprised 30 loans secured by 32 properties with a cumulative trust balance of $839.4 million. The transaction is a managed vehicle, with no delayed-close assets and no replenishment period, but it was structured with a 24-month reinvestment period that expired with the April 2024 payment date. Since issuance, seven loans with a cumulative trust balance of $162.6 million have been paid in full, and four of these (totaling $93.2 million) were paid in full since Morningstar DBRS' previous credit rating action in August 2023. Additionally, three loans, totaling $50.5 million, have been added to the trust since the August 2023 Morningstar DBRS credit rating action. The remaining loans in the transaction are heavily concentrated, with 25 loans backed by multifamily properties (84.6% of the current trust balance) and only three loans (10.0% of the current trust balance) secured by lodging properties and two (5.4% of the current trust balance) by industrial properties.

As of July 2024, no loans were in special servicing, and 22 loans, representing 68.0% of the current trust balance, were on the servicer's watchlist,. Of these loans, 16 were added to the watchlist for upcoming maturities, while the remaining loans were flagged for deferred maintenance items and/or because of a lockbox trigger event. While borrowers continue to progress in their business plans to stabilize the assets, the majority of loans report DSCRs below 1.0x based on the most recent financials, largely as a result of the floating-rate nature of all the loans in the pool, which has increased debt service payments. Occupancy remains depressed at select properties; however, it is expected to improve as the borrowers work toward achieving their respective business plans.

The loans are primarily secured by properties in suburban markets. Twenty-four loans, representing 85.6% of the current trust balance, are secured by properties in suburban markets, as defined by their Morningstar DBRS Market Ranks of 3, 4, and 5. Four loans, representing 7.0% of the pool, are secured by properties in Morningstar DBRS Market Ranks of 6 and 7, denoting urban markets, while two loans, representing 7.4% of the pool, are secured by properties in tertiary markets, as defined by their Morningstar DBRS Market Rank of 2.

Leverage across the pool has remained relatively unchanged since issuance; the current WA as-is appraised LTV is 71.0% and the WA stabilized LTV is 62.5%. In comparison, these figures were 73.2% and 64.5%, respectively, at issuance. Morningstar DBRS recognizes that select property values may be inflated as the majority of the individual property appraisals were completed in 2022 and may not reflect the current environment of rising interest rates or widening capitalization rates faced by borrowers and lenders. In its analysis for this review, Morningstar DBRS applied upward LTV adjustments to six loans, representing 25.9% of the current trust balance.

Through July 2024, the lender had advanced a cumulative $56.9 million in loan future funding to 21 individual borrowers to aid in property stabilization efforts. The largest advance of $21.1 million was made to the borrower of American Steel Collection (4.6% of the current pool balance), which is secured by a portfolio of two industrial properties in Oakland, California. The borrower's business plan focuses on increasing occupancy and rental rates at the properties to market levels by completing approximately $35.2 million in capital expenditures and leasing costs. An additional $44.4 million of loan future funding allocated to 20 individual borrowers remains available. The largest unadvanced portion of $14.1 million was allocated to the borrower of the aforementioned American Steel Collection. In addition to this loan, Morningstar DBRS identified a number of loans that are lagging in their original business plans. Morningstar DBRS' analysis includes additional adjustments to the loan-level probability of default for these assets to reflect these concerns.

Twenty-six of the outstanding loans, representing 88.2% of the current trust balance, are scheduled to mature by YE2025; however, almost all the loans have remaining extension options. Morningstar DBRS remains cautious about the sponsor's ability to successfully stabilize and refinance the Tailor Lofts loan (Prospectus ID#17; 3.1% of the current pool balance). The loan has been delinquent a few times over the past year and submitted late payments three times in 2024. The loan is discussed in detail in the Surveillance Performance Update report. While required performance tests may not be met across all collateral properties, borrowers and lenders may agree to terms to allow loan maturity dates to be extended.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781).

Classes B-X, C-X, D-X, and E-X are interest-only (IO) certificates that reference 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 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 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 info-DBRS@morningstar.com.

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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0 (https://dbrs.morningstar.com/research/428797)

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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/legal-criteria-for-us-structured-finance)

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. (July 17, 2023)

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.