Morningstar DBRS Confirms All Credit Ratings of BLP Commercial Mortgage Trust 2023-IND

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-IND issued by BLP Commercial Mortgage Trust 2023-IND as follows:

-- 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 credit rating confirmations and trends reflect the overall stable performance of the transaction, which has remained in line with Morningstar DBRS’ expectations since issuance. The transaction benefits from long-term leases, experienced sponsorship, a diverse mix of high-quality tenants, and a favorable asset type, all of which hold potential for ensuring cash flow stability over the life of the transaction.

The transaction is collateralized by the borrower’s fee-simple or leasehold interests in a portfolio of 30 cross-collateralized distribution, warehouse, and logistics properties totaling 4.4 million square feet, of which 28 are industrial properties and two are office properties, across 12 states, including California, New Jersey, and Maryland. Whole loan proceeds of $550.0 million coupled with sponsor equity of approximately $329.2 million went toward acquiring the portfolio for a purchase price of $807.7 million, funding $43.5 million in letters of credit (LOCs), covering closing costs of $21.5 million, and funding an additional $6.5 million LOC for future leasing costs. The transaction benefits from experienced sponsorship in Brookfield Strategic Real Estate Partners IV, which is a private real estate fund controlled by Brookfield Asset Management Inc.

The $550.0 million floating-rate interest-only loan has an initial maturity date of March 2025; however, it has three one-year extension options and a fully extended maturity date in March 2028. The loan has a partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 20% of the unpaid principal balance. Any property can be individually released at a price of 110% of the allocated loan amount subject to the portfolio’s debt yield not dropping below the debt yield prior to the release or the portfolio’s debt yield at issuance. As of the January 2024 remittance, there have been no property releases to date.

As of the January 2024 remittance, the loan is flagged on the servicer’s watchlist for a low debt service coverage ratio (DSCR) and deferred maintenance issues. According to the financials, for the trailing nine-month period ended September 2023, the subject reported an occupancy rate of 49.5% and a DSCR of 0.17 times (x) compared with the Morningstar DBRS DSCR of 0.99x derived at issuance. The servicer reported figure does not account for the largest tenant, Shein (41.8% of the net rentable area (NRA); lease expiry in March 2033), whose lease term officially commenced in September 2023 with rents that were scheduled to begin in January 2024 following a three-month rent abatement period. Including Shein, the portfolio’s effective occupancy is approximately 91.3%. Morningstar DBRS expects the DSCR to stabilize accordingly in 2024 once rents from Shein are realized, which constitutes 50.6% of the Morningstar DBRS base rent. The portfolio has a comparatively low percentage of office buildings, representing only 2.5% of the portfolio’s NRA, both of which are fully occupied on leases through 2027 and located in San Bernadino, California.

At issuance, the I-10 Logistics Center (41.8% of the NRA) property was under construction and had not yet received a certificate of occupancy. Per communication with the servicer, construction was not finished by the expected date in September 2023 and is estimated for completion by January 2024. At issuance, the tenant, Shein, had a termination option if the property was not completed by September 2023; however, the tenant has not opted to terminate and was scheduled to take occupancy in January 2024.

For this review, Morningstar DBRS utilized the Morningstar DBRS NCF of $34.9 million from issuance and a capitalization rate of 6.75%, resulting in a Morningstar DBRS value of $527.9 million, representing a whole-loan loan-to-value ratio of 104.2%. At issuance, Morningstar DBRS also included an upward dark value adjustment for the three vacant properties totaling $10.5 million. The Morningstar DBRS value represents a 42.4% haircut to the appraiser’s value of $916.1 million at issuance. Additionally, Morningstar DBRS applied positive qualitative adjustments to its sizing, totaling 7.25%, to reflect the portfolio’s quality, cash flow volatility, and market fundamentals. Morningstar DBRS’ credit outlook of the transaction remains unchanged from issuance given the portfolio’s excellent quality, favorable locations, desired asset type, and experienced sponsorship.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There was one Environmental factor that had a relevant, but not significant, effect on the credit analysis: Emissions, Effluents, and Waste.

There are four properties (6030 Commerce Boulevard, 74-106 Kenny Place, 125-127 Kingsland Avenue, and 1880 Riverview Drive) at issuance that had recognized environmental conditions, which are outlined in more detail in the offering document. One property in particular, 74-106 Kenny Place, had significant environmental conditions that were under investigation from various parties at issuance. The property is currently undergoing remediation investigation activities, and a soil remediation investigation has been completed with no further delineation of the soil needed. Ten permanent monitoring wells have been installed although additional monitoring wells will need to be installed and vapor intrusion investigations have been completed.

Per the servicer, the 6030 Commerce Boulevard and 74-106 Kenny Place properties are currently undergoing remediation efforts, while the 1880 Riverview Drive property is not undergoing any remediation currently until closer to the tenant’s lease expiration. The 125-127 Kingsland Avenue property has no need for further remediation.

There were no Social or 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 at (January 23, 2024), 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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687
-- 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
-- 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.