DBRS Morningstar Finalizes Provisional Ratings on BLP Commercial Mortgage Trust 2023-IND

DBRS, Inc. (DBRS Morningstar) finalized its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-IND issued by BLP Commercial Mortgage Trust 2023-IND:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The underlying Mortgage Loan has been closed as of the date of the publication of this rating report and Mortgage Loan terms are not subject to change.

The BLP Commercial Mortgage Trust 2023-IND transaction is collateralized by the borrower’s fee-simple or leasehold interests in a portfolio of 30 cross-collateralized properties totaling 4.4 million sf, of which 28 are industrial properties and two are office properties. The portfolio is spread across 12 states, including California, New Jersey, and Maryland and 14 markets, including Inland Empire, CA; Washington D.C.; and New York. The properties themselves are a mix of distribution, warehouse, and logistics properties. Overall, the subject markets have solid fundamentals with positive annual growth in rents while absorbing new supply. DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector.

The portfolio is primarily comprised of warehouse/distribution and light industrial properties, with good WA clear heights of 31.6 feet and a relatively new WA year build of 2003. The portfolio also has a comparatively low percentage of office space by NRA at just 7.9%. DBRS Morningstar made an upward adjustment of 2.00 % to the LTV hurdles to account for the superior property quality.

The sponsor is Brookfield Strategic Real Estate Partners IV (BSREP IV), which is a private real estate fund controlled by Brookfield Asset Management Inc. (Brookfield). BSREP IV is the fourth private real estate fund sponsored by Brookfield and has approximately than $15.3 billion in committed capital. The real estate arm of Brookfield has more than $260 billion in assets under management and more than 500 million sf of commercial real estate. Brookfield is involved in the ownership, operation, and development of all property types in most major markets around the globe. Their global portfolio of logistics properties, similar to the collateral included in the subject transaction, include more than 200 properties that total more than 38 million sf.

Across the entire portfolio, the in-place tenants are paying relatively lower rental rates compared with the market rental rates. Specifically, the in-place rental rates based on the rent roll provided are 12.6% below the WA market rent determined by third party reports provided by the Issuer. Thus, if market conditions don’t deteriorate, it is possible for the sponsor to increase rental rates as tenants expire and increase the portfolio’s cash flow.

Several of the markets within the portfolio are relatively urban and infill in nature. Infill markets with less available land tend to boast higher valuations because of high barriers of entry and higher land valuations. This is particularly true for the markets that have significant population centers, which most of the markets within the subject portfolio have. Furthermore, the aggregate land value of the properties within the portfolio is approximately $523.1 million, which is 95.1% of the total mortgage loan amount, according to the appraisals.

According to the loan documents, the borrower must acquire an LOC in the amount of $6.5 million or may deposit cash into a lender-controlled account. The funds from the LOC or deposit will be utilized to cover tenant leasing costs related to new leases at the properties in the collateral. Given the relatively low occupancy compared with the national industrial average, as discussed below, an LOC to assist with leasing costs will assist the sponsor in increasing occupancy and improving cash flow. As of the closing of the loan, the LOC will be provided by Bank of America.

The mortgage loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 20.0% of the unpaid principal balance. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments.

One tenant, Shein, accounts for 41.8% of the NRA for the portfolio and 51.2% of the DBRS Morningstar base rent. However, Shein is one of the largest fast-fashion retailers in the world, shipping to over 150 countries. Further, Shein reportedly had revenues of over $24 billion in 2022 and was valued at over $100 billion pursuant to an approximately $1.5 billion Series F funding August 2022, according to various news reports. Additionally, despite the length of the its lease, ten years, with one five year renewal option, extending well beyond the fully extended loan term, DBRS Morningstar views the concentration in revenue stemming from Shein is material, and as such did not give it long-term credit tenant treatment.

The I-10 Logistics Center is currently under construction and has not yet received a certificate of occupancy. Additionally, the sole tenant, Shein, has a termination option it can execute if the landlord fails to substantially complete the landlord work on or before September 1, 2023. If Shein were to execute that termination option, the cash flow of the collateral portfolio would be stressed significantly, given the significant proportion of revenue Shein represents relative to the rest of the portfolio. However, as part of the Mortgage Loan structure, the borrower has acquired a letter of credit to fund the outstanding landlord work and tenant improvements associated with the Shein space. Additionally, the I-10 Logistics Center is a state-of-the-art warehouse facility in one of the most sought-after warehouse markets in the United States and DBRS Morningstar believes the sponsor could backfill the space with another tenant should Shein execute its termination option.

As of the cut-off date, 7.0% of the portfolio is unleased, which is significantly above the nationwide availability rate of 4.8% and nationwide vacancy rate of 3.0% as of Q4 2022, according to a report published by CBRE. While this does give the sponsor some room to improve cash flow and revenue, there are several properties that are 100% vacant. These properties include 6300 Park of Commerce Boulevard, 1827 West Hubbard Street, and 733 Massman Drive.

By the year the fully extended loan matures, 2028, 39.8% of the DBRS Morningstar gross rent and 44.7% of the NRA will expire. It will require significant efforts and capital to re-tenant that space if those tenants decide to depart their respective property. There are no performance requirements or hurdles in order for the sponsor to execute an extension option, other than no ongoing EOD. As a result, portfolio performance could be deteriorating at the same time the sponsor is attempting to execute an extension option on the mortgage.

There are four properties (6030 Commerce Boulevard, 74-106 Kenny Place, 125-127 Kingsland Avenue, and 1880 Riverview Drive) which have Recognized Environmental Conditions (RECs) and are outlined in more detail in the offering document. One property in particular, 74-106 Kenny Place, has significant environmental conditions that are under investigation from various parties. The property is currently being investigated by a Licensed Site Remediation Professional (LSRP) for soil contamination and, at a different time, there was a green and brown film discovered on a brook nearby. The police, fire department, and a hazmat team investigated the spill in the brook and the investigation is active. As a mitigant, the sponsor has put in place $10 million environmental insurance to cover any potential issues arising from the RECs.

ESG CONSIDERATIONS
There was one Environmental factor that had a relevant, but not significant, effect on the credit analysis.

There are four properties (6030 Commerce Boulevard, 74-106 Kenny Place, 125-127 Kingsland Avenue, and 1880 Riverview Drive) that have recognized environmental conditions (RECs) and are outlined in more detail in the offering document. One property in particular, 74-106 Kenny Place, has significant environmental conditions that are under investigation from various parties. The property is currently being investigated by a licensed site remediation professional (LSRP) for soil contamination and, at a different time, there was a green and brown film discovered on a brook nearby. The police, fire department, and a hazmat team investigated the spill in the brook and the investigation is active. As a mitigant, the sponsor has $10 million environmental insurance in place to cover any potential issues arising from the RECs.

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.

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 (June 10, 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 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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