Morningstar DBRS Confirms Credit Ratings on All Classes of SMRT Commercial Mortgage Trust 2022-MINI

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

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

All trends are Stable.

The credit rating confirmations reflect the transaction's overall stable performance. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in January 2022, the loan continues to exhibit healthy credit metrics, with the servicer-reported financials for the trailing 12-month period ended June 30, 2024, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with Morningstar DBRS' expectations.

The transaction is collateralized by the borrower's fee-simple interest in a portfolio of 18 self-storage facilities totaling 56,042 units (of which 80.2% are climate controlled) and approximately 2.1 million rentable square feet throughout Manhattan, New York. The loan was structured with conditional release provisions. To date, all of the original 18 collateral properties remain in the pool. The loan benefits from sponsorship provided by an experienced self-storage operator, StorageMart, which contributed $1.2 billion in equity at closing as part of the subject transaction.

Whole-loan proceeds of $2.1 billion along with sponsor equity were used to acquire the portfolio for $3.2 billion. The interest-only floating-rate loan had an initial two-year term, with three 12-month extension options and a fully extended maturity date in January 2027. As a condition to exercising each of its extension options, the borrower is required to enter into an interest rate cap agreement with a strike rate that results in a debt service coverage ratio (DSCR) of at least 1.10 times (x). The loan is currently on the servicer's watchlist because of its upcoming maturity in January 2025; however, the loan has two extension options remaining.

The loan continues to perform in line with Morningstar DBRS' expectations. The portfolio reported an annualized NCF of $119.3 million (with a DSCR of 0.40x) for the trailing six months ended June 30, 2024, surpassing the Morningstar DBRS NCF of $108.0 million (with a DSCR of 2.21x). Despite the increase in cash flow, the Q2 2024 DSCR and occupancy declined to 0.40x and 81%, respectively, from the Morningstar DBRS DSCR of 2.21x and occupancy of 93% at issuance. Morningstar DBRS has requested confirmation from the servicer on the referenced occupancy figure, as no consolidated reporting was provided. The decline in DSCR was driven by increased debt service resulting from the loan's floating rate. As noted above, the borrower is required to retain an interest rate cap agreement with a strike price that results in a minimum DSCR of 1.10x, which would imply that the June 2024 DSCR does not incorporate proceeds received from the loan's interest rate cap.

Morningstar DBRS' credit ratings are based on a value analysis completed at issuance, which considered a blended capitalization rate of 6.19%, resulting in a Morningstar DBRS value of $1.7 billion and a whole-loan loan-to-value ratio (LTV) of 119.2%. The Morningstar DBRS value represents a 45.5% haircut to the appraiser's value of $3.2 billion. To account for the high leverage, Morningstar DBRS programmatically reduced its LTV benchmark targets for the transaction by 2.5% across the capital structure. Additionally, Morningstar DBRS applied positive qualitative adjustments to its sizing, totaling 9.5%, to reflect the portfolio's quality, given that the majority of units are climate controlled as well as the portfolio's strong historical operating metrics, strong market fundamentals, and high barriers to entry. Morningstar DBRS believes the portfolio will continue to exhibit stable to improving performance over the loan term.

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.

Class X-NCP is an interest-only (IO) certificate that references 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 Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699
-- 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 (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.