Morningstar DBRS Confirms Credit Ratings on All Classes of ILPT Commercial Mortgage Trust 2022-LPF2

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-LPF2 issued by ILPT Commercial Mortgage Trust 2022-LPF2:

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

The trends on all credit ratings are Stable.

The credit rating confirmations reflect Morningstar DBRS' stable performance expectations for the transaction. Although in-place occupancy has declined slightly, Morningstar DBRS expects ongoing cash flow to remain in line with its derived cash flow at issuance.

The transaction is collateralized by the borrower's fee-simple or leasehold interests in a portfolio of 105 cross-collateralized manufacturing and warehouse properties spread across 31 states in the U.S., totaling 18.6 million square feet. The $1.1 billion interest-only floating-rate loan, along with $135.0 million of mezzanine debt and $223.3 million of sponsor equity, was used to repay existing debt, cover closing costs, and fund reserves. The loan has an initial 24-month term with three 12-month extension options for a fully extended maturity date of October 2027. The loan also has a partial pro rata structure that allows for pro rata paydowns for the first 20.0% of the unpaid principal balance.

As per the March 2024 rent rolls, the portfolio was 97.2% occupied. Leases representing 21.0% of the net rentable area (NRA) were scheduled to expire in 2024, including leases at the largest underlying property by size and allocated base rent, 91-399 Kauhi (12.0% portfolio NRA), and a smaller property, 9215-9347 E Pendleton Pike (2.6% portfolio NRA). At issuance, Morningstar DBRS noted that the tenant Par Hawaii was occupying the full site at 91-399 Kauhi on a lease expiring in March 2024 and that Home Depot had signed a future lease, scheduled to commence in April 2024; however, Home Depot exercised its out option and Par Hawaii did not renew its lease, leaving the site vacant. The borrower is marketing the full space online for lease, along with 100% of the space at 9215-9347 E Pendleton Pike, which is vacant following the departure of Monarch Distributing after its June 2024 lease expiration. Morningstar DBRS expects that the portfolio occupancy has declined to approximately 82% as a result of these changes. Leases representing an additional 11.9% of the portfolio NRA are scheduled to roll in 2025.

According to the YE2023 financials, the combined reported net cash flow (NCF) was $78.0 million. Excluding rental revenue from the two departed tenants noted above, Morningstar DBRS expects that NCF will fall to approximately $72.0 million. While this is a decline from the YE2023 figures, it would remain in line with the Morningstar DBRS NCF of $72.6 million derived at issuance. Given this, Morningstar DBRS did not update its cash flow analysis or valuation approach as part of the current review.

At issuance, Morningstar DBRS derived a value of $1.1 billion based on the Morningstar DBRS NCF of $72.6 million and a capitalization rate of 6.75%. Morningstar DBRS maintained positive qualitative adjustments totaling 8.0% to account for the property quality, stable market fundamentals, and low cash flow volatility of the underlying portfolio. The Morningstar DBRS value, which represents a 40.0% haircut from the appraiser's value of $1.8 billion, implies a pooled loan-to-value (LTV) of 102.3% and an all-in LTV of 114.8%. Although the declined occupancy may present a challenge leading up to the initial maturity in October 2024, Morningstar DBRS only rates the three senior-most classes in the capital stack, with a cumulative debt-to-value ratio of 72.7%.

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

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 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, 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 (July 11, 2024), https://dbrs.morningstar.com/research/436004
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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, 2024), https://dbrs.morningstar.com/research/438283
-- 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 info-DBRS@morningstar.com.