Morningstar DBRS Confirms Credit Ratings on All Classes of BX Commercial Mortgage Trust 2022-LP2

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-LP2 issued by BX Commercial Mortgage Trust 2022-LP2 as follows:

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

All trends are Stable.

The credit rating confirmations reflect the transaction's overall stable performance, which remains in line with Morningstar DBRS' expectations. At issuance, the interest-only, floating-rate loan was secured by the borrower's fee-simple interest in a portfolio of 166 industrial properties totaling more than 24.3 million square feet across 16 states. As of the November 2024 reporting, 38 properties have been released from the pool, representing collateral reduction of 30.0% since issuance. The release price is set to 105% of the allocated loan amount (ALA) for the first 30.0% of the original principal balance, and 110% of the ALA thereafter. Proceeds are distributed on a pro rata basis for the first 30% of the unpaid principal balance, with all subsequent principal to be applied sequentially.

Initial loan proceeds of $2.4 billion and mezzanine debt of $570.0 million repaid existing debt, returned $888.1 million of equity to the sponsor, funded $6.8 million of upfront reserves, and covered closing costs. The loan was structured with an initial two-year term through February 2024 with three one-year extension options, which push the fully extended maturity date to February 2027. The borrower is required to purchase an interest rate cap agreement with each extension to maintain a minimum debt service coverage ratio (DSCR) of 1.10 times (x). The loan is currently on the servicer's watchlist for the upcoming February 2025 maturity and a low in-place DSCR (as calculated considering the actual debt service based on the floating-rate coupon and not inclusive of the rate cap).

As of the financial reporting for the trailing 12-month period ended June 30, 2024, the portfolio was 90.0% occupied and generated net cash flow (NCF) of $117.0 million, which likely includes properties that have been released since that time. By means of comparison, the Morningstar DBRS NCF derived at issuance and adjusted for the released properties was $90.6 million. It is worth noting that the June 2024 financials also reported an A note DSCR of 0.58x, considerably lower than the issuance figure of 2.42x; however, the interest rate cap agreement is structured with a DSCR floor of 1.10x. Although the remaining portfolio's occupancy rate and cash flows remain healthy, the loan's DSCR has declined primarily because of an increase in debt service obligations given the floating-rate nature of the loan.

In the analysis for this review, the Morningstar DBRS NCF was updated to reflect the 38 released properties, resulting in a Morningstar DBRS NCF of $90.6 million. The 6.75% capitalization rate applied at issuance was maintained, yielding an updated Morningstar DBRS value of $1.34 billion, a variance of -53.3% from the issuance appraised value of $2.87 billion adjusted for the remaining 128 properties in the portfolio. The Morningstar DBRS value implies a loan-to-value (LTV) of 126.7%, compared with the Morningstar DBRS LTV at issuance of 133.1%. The implied LTV on the Morningstar DBRS-rated portion of the capital stack, with a cumulative balance of $1.03 billion, is 76.8%. Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this credit rating analysis, totaling 7.75% to reflect low cash flow volatility, asset quality, and geographic diversity spread throughout key shipping markets.

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

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
-- 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 (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

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.