DBRS Morningstar Assigns Provisional Ratings to BX Commercial Mortgage Trust 2022-AHP

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2022-AHP to be issued by BX Commercial Mortgage Trust 2022-AHP (BX 2022-AHP):

-- Class A at AAA (sf)
-- Class A-S 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)
-- Class F at B (low) (sf)

All trends are Stable.

The collateral for BX 2022-AHP includes the borrowers’ fee-simple interest in 43 affordable housing multifamily properties totaling 10,965 units throughout eight Florida markets, including Miami, Fort Lauderdale, Tampa, and Palm Beach. The transaction sponsor, BREIT Operating Partnership L.P., acquired the portfolio from Cornerstone Group in December 2021 and January 2022 for a total of $2.7 billion ($246,848 per unit). The properties were built between 1983 and 2011, with a weighted-average year built of 2002. Based on the sponsor’s estimated purchase price and the subject portfolio aggregate as-is appraised value of $2.9 billion, the loan sponsor’s implied equity in the transaction is $1.2 billion.

There are 10,544 (96.2% of total) affordable units (income restricted and rent restricted) across the portfolio, which DBRS Morningstar generally views as favorable because the increasing cost of rental housing has created elevated demand for affordable housing, which lends enhanced cash flow stability to the assets. This stability is demonstrated by the portfolio’s average occupancy of 98.9% from December 2017 through June 2021. As of the December 2021 rent roll, the occupancy rate was 98.5%, despite the disruptions resulting from the Coronavirus Disease (COVID-19) pandemic. Many of the units in the portfolio have below-markets rents, and DBRS Morningstar views the limited risk of rental rate declines to be an added cash flow stabilizer. Ultimately, DBRS Morningstar’s outlook on the stability of multifamily assets in and around the Florida affordable housing market has historically been positive.

Because of the Land Use Restrictions that limit rent and income levels, the State of Florida has granted the properties various property tax exemptions and abatements. While these improve the level of cash flow, they can pose moderate risk should any change in the laws in Florida or any violation of the affordable housing covenants could result in higher future tax rates that may reduce the cash flow and diminish the value of the underlying collateral. However, tax exemption benefits throughout the portfolio are generally correlated with the provision of affordable housing units. Such affordable units are generally considered to be leased at below-market rates to make them affordable to tenants at lower income levels, and loss of tax exemptions or abatements might also result in the ability to lease such affordable units at market rents, potentially offsetting reductions in net cash flow incurred from a loss of the property tax benefit. The portfolio’s favorable locations and strong fundamentals of the surrounding multifamily markets as well as the sponsor’s evidenced experience in the ownership of affordable housing in the U.S. reinforce DBRS Morningstar’s comfort in the portfolio’s ability to maintain cash flow stability.

As a portfolio, the loan is structured to allow for partial releases of collateral, which can increase the risk of adverse selection. Typically, DBRS Morningstar views the inclusion of release premiums of 115% of the allocated loans amounts (ALAs) or higher as a mitigating factor to this risk. The loan documents provide for a premium of 105% of the ALA for the first 30% and 110% thereafter, which is viewed more negatively. Therefore DBRS Morningstar assessed a penalty in its loan-to-value thresholds, resulting in lower proceeds at each rating category.

In addition, the loan provides for pro rata principal paydowns rather than a sequential-pay structure. This can negatively affect the senior bonds in the transaction as they will not deleverage as quickly under this structure. DBRS Morningstar included a penalty for all rated classes above A (high) to account for this potential risk.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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