Morningstar DBRS Confirms Credit Ratings on BPCRE 2022-FL2, Ltd.

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of notes issued by BPCRE 2022-FL2, Ltd. as follows:

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

All trends are Stable.

The credit rating confirmations reflect the increased credit enhancement to the bonds as a result of successful loan repayment as there has been a collateral reduction of 32.8% since issuance. Additionally, the transaction benefits from a favorable collateral composition as the trust continues to be primarily secured by the multifamily collateral (17 loans, representing 98.2% of the current trust balance). Historically, loans secured by multifamily properties have exhibited lower default rates and the ability to retain and increase asset value. 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 as well as business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info-DBRS@morningstar.com.

The initial collateral consisted of 28 floating-rate mortgages secured by 41 mostly transitional properties with a cut-off date balance totaling $609.4 million. Most loans were in a period of transition with plans to stabilize performance and improve values of the underlying assets. The transaction was structured with a Replenishment Period that expired with the December 2023 Payment Date. As of the September 2024 remittance, the pool comprised 18 loans secured by 27 properties with a cumulative trust balance of $409.4 million. Since issuance, 10 loans with a prior cumulative trust balance of $186.9 million have been successfully repaid from the pool, including eight loans totaling $152.9 million that have repaid since Morningstar DBRS' previous credit rating action in October 2023.

Beyond the multifamily concentration noted above, one loan, representing 1.8% of the current trust balance, is secured by a mixed-use property. As of September 2023, multifamily collateral represented 97.4% of the trust balance.

The pool is concentrated in loans secured by properties in suburban markets, with 13 loans, representing 66.2% of the pool, assigned a Morningstar DBRS Market Rank of 3, 4, or 5. An additional four loans, representing 26.1% of the pool, are secured by properties with a Morningstar DBRS Market Rank of 2, denoting tertiary markets, while one loan, representing 6.7% of the pool, is secured by a property with a Morningstar DBRS Market Rank of 6, denoting urban markets. In comparison, in September 2023, properties in suburban markets represented 66.2% of the collateral, properties in tertiary markets represented 23.1% of the collateral, and properties in urban markets represented 10.7% of the collateral.

Leverage across the pool has remained similar since issuance. The current weighted-average (WA) as-is appraised value loan-to-value ratio (LTV) is 69.2% and the current WA stabilized LTV is 61.9%; in comparison, these figures were 69.5% and 56.8%, respectively, at issuance. Morningstar DBRS recognizes these appraised values may be inflated as the individual property appraisals were completed in 2021 or 2022 and do not reflect the current higher interest rate or widening capitalization rate (cap rate) environments. In the analysis for this review, Morningstar DBRS applied LTV adjustments to 14 loans, representing 88.7% of the current trust balance, generally reflective of higher cap rate assumptions compared with the implied cap rates based on the appraisals.

Through June 2024, the lender had advanced cumulative loan future funding of $64.4 million to 15 of the 16 outstanding individual borrowers to aid in property stabilization efforts. The largest advance, $15.7 million, was to the borrower of the Cordillera loan, which is secured by a multifamily property in Phoenix. The borrower is progressing with its business plan as it has completed interior renovations across 62 units out of the planned 81 units. The borrower will have to fund the remaining unit renovation costs out of pocket, however, as the loan is fully funded. As of the June 2024 rent roll, the property was 97.4% occupied with an average rental rate of $1,690 per unit, which reflects a rental premium of $268 per unit compared with the in-place average rental rate at closing.

An additional $14.5 million of loan future funding allocated to 12 of the outstanding individual borrowers remains available. The largest portion, $3.6 million, is for the borrower of the Avalon Square Apartments loan, which is secured by a multifamily property in Bradenton, Florida. The loan included total loan future funding of $4.3 million at closing, allocated as $1.3 million for the borrower's capital expenditures (capex) and $3.0 million as a property performance based earn-out. Through June 2024, only $0.7 million for capex costs had been advanced to the borrower. According to the Q2 2024 collateral manager report, 82 of the planned 127 unit renovations had been completed and net cash flow (NCF) was $1.8 million with a resulting debt yield of 8.7%. As of the June 2024 rent roll, the property was 91.6% occupied with an average rental rate of $1,425 per unit.

As of the September 2024 reporting, five loans, representing 31.7% of the current trust balance, are in special servicing. The largest loan in special servicing, Walnut Glen Apartments (Prospectus ID#6, 9.0% of the current trust balance), is secured by a Class B, 724-unit multifamily property in Columbus, Ohio. The loan transferred in August 2024 for maturity default after the loan matured in April 2024. According to the collateral manager, the borrower is in the process of selling the property and has received a letter of intent from a third party. The property was 76.4% occupied as of the July 2024 rent roll and reported negative cash flow as of the trailing 12 months ended June 30, 2024. In its current analysis, Morningstar DBRS applied upward LTV adjustments and increased its probability of default to reflect the loan's increased risk, which resulted in an expected loss exceeding the pool average expected loss.

The Elsinore & Fitch Portfolio loan (Prospectus ID#11, 6.3% of the current trust balance), which is secured by two garden-style multifamily properties totaling 227 units in Washington, D.C., transferred to February 2024 for payment default. The properties have underperformed when compared with issuance projections because of business plan execution risk. As of the July 2024 rent roll, the property had a combined occupancy rate of 67.0% and, according to the financials for the trailing 12 months ended March 31, 2024, the collateral reported NCF of $0.9 million, which equated to a DSCR of 0.46x and debt yield of 3.5%. The loan was modified in May 2024, which extended loan maturity to June 2027 and established a new $3.8 mezzanine loan, held outside the trust, to complete capex throughout the property as the initial loan was not equipped with a future funding component. In its analysis, Morningstar DBRS applied upward LTV adjustments resulting in an expected loss just below the pool average expected loss.

Nine loans, representing 55.3% of the current trust balance, are on the servicer's watchlist as of the September 2024 reporting. The loans have all been flagged for upcoming loan maturity. According to the collateral manager, the majority of the loans are either in the process of exercising built-in extension options or are in the early stages of marketing the properties for sale.

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 private rating letters 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 the 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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model Version 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- 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 http://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.