Morningstar DBRS Downgrades Credit Ratings on All Classes of BSST 2022-1700 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2022-1700 issued by BSST 2022-1700 Mortgage Trust as follows:

-- Class A to A (sf) from AAA (sf)
-- Class X-EXT to A (high) (sf) from AAA (sf)
-- Class B to BBB (low) (sf) from AA (high) (sf)
-- Class C to BB (low) (sf) from A (high) (sf)
-- Class D to CCC (sf) from BBB (high) (sf)
-- Class E to C (sf) from BB (low) (sf)
-- Class F to C (sf) from B (low) (sf)
-- Class G to C (sf) from CCC (sf)

The trends on Classes A, X-EXT, B, and C are Negative. Classes D, E, F, and G do not carry a trend as these classes have credit ratings that typically do not carry trends in commercial mortgage backed securities (CMBS) credit ratings.

Morningstar DBRS downgraded its credit ratings on all outstanding certificates based on a recoverability analysis of the collateral, 1700 Market Street, in its current review of the transaction. The liquidation analysis, discussed further below, indicates realized losses may affect the Class D certificate, supporting the credit rating downgrades on Classes E, F, and G to C (sf) and on Class D to CCC (sf). The analyzed deterioration of these classes and credit support to the senior bonds supports the credit rating downgrades on Classes A, X-EXT, B, and C. The trends on Classes A, X-EXT, B, and C are Negative due to the possibility that the value of the underlying collateral could decline further or that the servicer makes a nonrecoverability determination and stops advancing interest payments to investors. The subject property, a 32-story, 850,723 square foot (sf) office building in the Central Business District of Philadelphia, is located in a soft submarket with minimal absorption observed in 2024. The occupancy rate at the subject remains below issuance expectations with the financials following a similar trajectory.

The loan transferred to the special servicer in August 2023 at the borrower's request to engage in potential loan modification discussions ahead of the February 2024 loan maturity date. The loan is past due per its initial maturity date and a receiver motion was granted in September 2024 while foreclosure proceedings are ongoing. The earliest trial date is not expected until September 2025. According to communications from the servicer, the receiver continues to manage the subject, and the borrower has yet to submit any revised loan modification proposals for the lender's consideration. The subject is situated two blocks from City Hall and Rittenhouse Square in the Market Street West/City Center submarket of Philadelphia. The transaction sponsor, Shorenstein Realty Investors Eleven L.P., acquired the collateral in January 2016 for $195.0 million. The loan had an initial term of 24 months, with three one-year extension options, for a fully extended maturity in February 2027.

According to the January 2025 rent roll, the subject was 75.7% occupied compared with 80% at YE2022 and 88% at closing. The current largest tenants at the subject include Reliance Standard Life Insurance (Reliance;17.9% of the net rentable area (NRA), lease expiry in December 2031), Deloitte & Touche (10.9% of NRA, lease expiry in June 2031), and OSISOFT LLC (7.1% of NRA, lease expiry in March 2030). Over the next 12 months, there is a cumulative tenant rollover risk of 10.9% of the NRA, however, Teachers Insurance and Annuity Association of America (3.7% of the NRA, lease expiry in March 2025) renewed its lease through 2035, albeit while reducing its footprint, which brought the tenant rollover risk down to 8.9%. According to the online leasing site of the property's leasing broker, Jones Lang Lasalle, approximately 4.6% of the NRA is available immediately on a direct lease and 3.6% of the NRA is available for sublease (the latter is a portion of Reliance's former space). Leasing velocity at the subject, and in the broader submarket, has slowed in recent years with heightened vacancy concerns. According to Reis, the City Center submarket reported a vacancy rate of 13.6% in 2024, which is expected to remain at 14% at YE2025. According to a Q4 2024 market report from CBRE, year-to-date net absorption in the subject property's submarket was reported at -405,863 sf.

The loan's debt service coverage ratio (DSCR) increased slightly to 0.72 times (x) as of the YE2024 reporting compared with the DSCRs of 0.57x at YE2023 and 1.23x at YE2022 but remains below the Morningstar DBRS DSCR of 1.60x concluded at issuance. A total of $2.5 million is held across all reserve accounts as of the March 2025 reserve report.

At issuance, the subject was valued at $244.5 million ($288 per square foot (psf)). Since that time, two appraisals, conducted in April 2024 and again in December 2024, yielded identical in-place valuations of $199 million ($234 psf). The April and December appraisals also provided projected stabilized property values of $254 million ($298 psf) and $248 million ($291 psf) with expected stabilization dates of May 2027 and January 2028, respectively. The December 2024 valuation equates to an updated loan-to-value ratio (LTV) of 94.5% compared with the issuance appraised LTV of 76.8%.

Morningstar DBRS' previous credit rating action in April 2024 included an update to the asset's valuation. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024. For purposes of this credit rating action, Morningstar DBRS used a liquidation scenario based on the most recent appraised value to determine recoverability. Morningstar DBRS' liquidation scenario was based on a 40.0% haircut to the December 2024 appraised value, determined by applying a stressed cap rate to the YE2024 net cash flow of $12.5 million. The haircut to the most recent appraisal reflects Morningstar DBRS' expectation that the property's as-is appraised value will likely decline further over the remainder of the loan term given its location and the availability of similar collateral in the market, including the office building across the street at 1818 Market Street, owned by the subject's sponsor and also backing a defaulted CMBS loan in the BSST 2021-1818 Mortgage Trust transaction, also rated by Morningstar DBRS. The Morningstar DBRS analysis also included the addition of including interest shortfalls and expected servicer expenses, which cumulatively totaled nearly $19 million. This analysis suggested a loss severity in excess of 45%, or approximately $87 million. The resulting value psf of $143 psf is in line with the Morningstar DBRS value psf for the 1818 Market Street property, derived in the analysis for the March 2025 credit rating action for that transaction.

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

Class X-EXT is an interest-only (IO) certificate that reference 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 (February 28, 2025) https://dbrs.morningstar.com/research/448963.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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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 (February 28, 2025),
https://dbrs.morningstar.com/research/448962

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024),
https://dbrs.morningstar.com/research/439702

-- Legal Criteria for U.S. Structured Finance (December 3, 2024),
https://dbrs.morningstar.com/research/444064

-- 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

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.