Morningstar DBRS Confirms All Credit Ratings on BSST 2021-SSCP Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-SSCP issued by BSST 2021-SSCP Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction, with minimal changes to the underlying performance since issuance. The loan is secured by a portfolio of 32 industrial/logistics properties and one laboratory property located across 11 states that was acquired by a joint venture between Raith Capital Partners, LLC and Equity Industrial Partners. In addition to $238.0 million in loan proceeds, the sponsors contributed approximately $79.4 million in cash equity to fund the acquisition. The portfolio comprises primarily newer (weighted-average build year of 2005) single-tenant industrial assets located in secondary markets.

As of the June 2023 rent rolls, the collateral properties reported an occupancy rate of 99.7%, unchanged from the previous year and up from the issuance figure of 92.8%. Over the next 12 months, five tenants, representing 11.5% of the portfolio’s net rentable area (NRA), have leases scheduled to roll. In addition, prior to the final extended maturity date in April 2026, 17 tenants, representing 39.3% of the portfolio’s NRA, have scheduled lease expirations. Considering the size of the portfolio, the tenant roster is relatively diverse and portfolio occupancy has remained above 94% over the past seven years.

According to the financials for the trailing 12 months (T-12) ended September 30, 2023, the portfolio generated net cash flow (NCF) of $18.7 million (reflecting a debt service coverage ratio (DSCR) of 1.23 times (x)), an increase from the YE2022 NCF of $16.8 million (a DSCR of 2.11x) and above the Morningstar DBRS NCF of $16.6 million. Given the floating-rate nature of the loan, debt service amounts have more than doubled since issuance; however, the borrower was required to enter into an interest rate cap rate agreement when exercising the first of three one-year extension options in March 2023. Morningstar DBRS has requested an update on the borrower’s plan for its upcoming maturity in April 2024, for which the loan was recently added to the servicer’s watchlist. Although the increased debt service obligations have weighed on the loan’s coverage, cash flows continue to grow as leases roll and rental rates are reset to market levels.

The loan is structured with a partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 30.0% of the original unpaid principal balance, subject to a release premium of 105.0% of the allocated loan amount, which increases to 110.0% for the remaining 70.0% of the principal balance. As of the January 2024 reporting, there have been no property releases. Morningstar DBRS penalizes transactions with this structure as it is 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.

At issuance, Morningstar DBRS derived a value of $228.9 million based on the Morningstar DBRS NCF of $16.6 million and a capitalization rate of 7.25%, resulting in a Morningstar DBRS loan-to-value ratio (LTV) of 104.0%, compared with the LTV of 74.6% based on the appraised value of $319.0 million at issuance. In addition, positive qualitative adjustments totaling 6.5% were applied to the LTV Sizing Benchmarks to reflect Morningstar DBRS’ favorable outlook on cash flow volatility, supported by the pools diversity and historical performance, property quality characteristics across the portfolio, and favorable market fundamentals given the location of the collateral properties within their respective markets, which serve as important supply chain links for the tenants.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

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 (March 16, 2023), https://dbrs.morningstar.com/research/410912.

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 (October 19, 2023), https://dbrs.morningstar.com/research/422174.

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023),
https://dbrs.morningstar.com/research/420982).

North American Commercial Mortgage Servicer Rankings (August 23, 2023); https://dbrs.morningstar.com/research/419592.

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687.

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081.

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.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.