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

DBRS Limited (DBRS Morningstar) confirmed its 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 rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance.

At issuance, the $2.4 billion trust 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 January 2023 remittance, 156 properties remain, as the loan has been paid down by $174.0 million (approximately 7.2% of the original balance) following the release of 10 properties since issuance. The loan sponsor, Blackstone Real Estate Partners IX, acquired Colony Industrial, the industrial assets, and an affiliated industrial operating platform from Colony Capital in 2019 for $5.9 billion. The collateral originally included 161 properties formerly securitized in the BX 2020-BXLP transaction and five new properties, which were part of the Colony Industrial acquisition.

At closing, whole loan proceeds of $3.0 billion, consisting of a $2.4 billion mortgage loan and a $570 million mezzanine loan, were used to acquire the portfolio and fund upfront reserves. The loan is structured with an initial two-year term and has three one-year extension options. The loan is interest only throughout its fully extended loan term and has a floating interest rate capped at 3.0%.

As of June 2022, the property was 100% occupied, increasing from 94.5% at issuance. Leases representing approximately 72.0% of total net rentable area (NRA) and 74.8% of the portfolio's gross rent are scheduled to expire throughout the fully extended five-year loan term, with tenant rollover concentrated in 2023 and 2024. The tenant rollover risk potentially exposes the portfolio to cash flow volatility; however, there are more than 400 unique tenants, with no single tenant accounting for more than 1.9% of gross rental revenue. The property reported a net cash flow and debt service coverage ratio of $114.4 million and 1.45 times, respectively, for the trailing 12-month (T-12) period ended June 30, 2022. The portfolio benefits from geographical diversity, with the largest concentrations in Georgia (approximately 19.5% of the portfolio NRA), Texas (approximately 19.0% of the portfolio NRA), and Florida (approximately 12.3% of the portfolio NRA). The collateral is generally well located in strong industrial markets with close proximity to large population centers. At issuance, DBRS Morningstar noted that tenants throughout the portfolio were paying below-market rental rates; however, the leasing spread had increased more than 17.0% since the sponsor acquired the portfolio in 2019, indicating strong demand for industrial space in these markets.

While the net cash flow (NCF) of $114.4 million for the T-12 period ended June 30, 2022, is lower than the DBRS Morningstar-derived NCF of $123.2 million and there is potential significant tenant rollover in 2023 and 2024, these risks are mitigated by the strong sponsorship and individual submarket fundamentals, as the current below-average rental rates provide upside rental revenue potential. Additionally, the long-term growth and stability of the warehouse and logistics sector continues with increased consumer reliance on e-commerce and home delivery.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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@dbrsmorningstar.com.

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.

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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