Morningstar DBRS Confirms All Credit Ratings of MTN Commercial Mortgage Trust 2022-LPFL

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of MTN Commercial Mortgage Trust 2022-LPFL, Commercial Mortgage Pass-Through Certificates, Series 2022-LPFL 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)
-- Class E at BB (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the stable performance of the collateral portfolio, which has exhibited minimal changes in performance and composition since issuance. The transaction is secured by the borrower's fee-simple or leasehold interests in a portfolio of 82 industrial properties (78 fee-simple properties, two payment-in-lieu-of-taxes leasehold properties, and two ground leasehold properties) totaling over 15 million square feet across 25 states. The portfolio was acquired through Industrial Logistics Properties Trust's (ILPT's) $4.0 billion acquisition of Monmouth Real Estate Investment Corporation (Monmouth). The loan is sponsored by a joint venture between ILPT, the portfolio owner and controller, and the remaining 39.0% is owned by an institutional investor connected to the Monmouth acquisition.

The $1.4 billion floating-rate mortgage loan is interest-only (IO) throughout its five-year fully extended loan term. The loan had an initial two-year term and was structured with three one-year extension options with a fully extended maturity date in March 2027. The current scheduled maturity date is on March 9, 2025. The most recent servicer commentary indicates that the borrower intends to exercise the second extension option, subject to meeting pre-determined requirements including no events of default and the purchase of a replacement interest rate cap agreement with a rate the lesser of 3.4% or, when added to the spread yields, a minimum debt service coverage ratio (DSCR) of 1.10 times (x).

The transaction documents allow for property releases at a release price of 105.0% of the allocated loan amount (ALA) for the first 80.0% of the original principal balance of the mortgage loan and 110.0% thereafter. Proceeds from the first 20.0% of property releases by ALA are distributed across the capital stack on a pro rata basis, with all subsequent proceeds applied sequentially. Morningstar DBRS considers this structure to be credit negative, particularly at the top of the capital stack; as such, a penalty was applied in the loan-to-value (LTV) sizing. To date, there have been no property releases.

The annualized net cash flow (NCF) for the trailing six months (T-6) ended June 30, 2024, was $84.9 million, a modest increase from the year-end 2023 figure of $83.3 million and the Morningstar DBRS NCF of $79.5 million. The increase in cash flow is primarily driven by increases in both base rent and expense reimbursements; however, the DSCR has fallen since issuance as the in-place debt service costs on the floating rate debt have continued to rise. Morningstar DBRS notes that the financial reporting does not account for the in-place interest rate cap. The June 2024 rent rolls reported an occupancy figure of 98.7% across the portfolio, a slight increase from the issuance figure of 96.5%.

The portfolio's largest tenant is FedEx Corporation (46.8% of net rentable area (NRA)). Leases representing approximately 56.0% of the portfolio's NRA are scheduled to roll throughout the fully extended loan term; however, rollover is relatively granular with no more than 17.0% of the NRA scheduled to roll in any given year. In addition, Morningstar DBRS expects demand to remain stable through the extended loan term for warehouse property types in desirable locations such as those in the subject's portfolio. The relative distribution of the locations is granular, with the largest state concentration in Texas, with 8.6% of the portfolio NRA. Indiana and Ohio follow with 8.5% of the total portfolio square footage each.

Morningstar DBRS' credit ratings are based on a value analysis from issuance, which considered a net cash flow of $79.5 million and a capitalization rate of 6.5%, resulting in a Morningstar DBRS value of $1.2 billion and a loan-to-value (LTV) ratio of 114.5% on the mortgage loan. The Morningstar DBRS value represents a variance of -41.6% from the issuance appraised value of $2.1 billion. In addition, Morningstar DBRS maintained positive qualitative adjustments to the LTV-sizing benchmarks totaling 8.5% to reflect the high quality of the properties, geographic diversity in key markets, and historically stable cash flow.

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 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 (December 13, 2024, https://dbrs.morningstar.com/research/444617).

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 (December 13, 2024; https://dbrs.morningstar.com/research/444612)

-- 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 (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.