Morningstar DBRS Confirms All Credit Ratings on BX 2022-MVRK Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2022-MVRK issued by BX 2022-MVRK Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS’ expectations at issuance. At issuance, the interest-only, floating-rate loan was secured by the borrower’s fee-simple interest in a portfolio of 77 light industrial and warehouse properties totaling more than 7.1 million square feet. The properties are located across 10 states near major population centers, with the largest three concentrations in Texas, California, and Minnesota, representing approximately 60% of the portfolio’s total net rentable area (NRA). As of the January 2024 reporting, one property was released from the pool, resulting in a nominal collateral reduction of 1.1% since issuance. 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 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.

The loan is sponsored by Blackstone Real Estate Partners IX L.P., which is indirectly owned by Blackstone Inc., the largest alternative asset manager in the world. The $900 million mortgage loan held within the subject transaction and a $120 million mezzanine loan held outside of the trust were used to recapitalize the portfolio. The loan is currently on the servicer’s watchlist because of its upcoming maturity in March 2024; however, the loan is structured with three one-year extension options. Morningstar DBRS has requested an update from the servicer and a response is pending.

Per the January 2024 rent roll, the portfolio was 96.9% occupied, a slight improvement from the YE2022 and issuance figures of 94.1% and 95.2%, respectively. Operating performance remains relatively in line with Morningstar DBRS’ expectations, with the financial reporting for the trailing 12-month period ended September 30, 2023, reflecting a net cash flow (NCF) and A note debt service coverage ratio (DSCR) of $46.2 million and 0.66 times (x), respectively, an increase from the YE2022 NCF of $41.8 million (an A note DSCR of 0.95x) and above the Morningstar DBRS NCF of $39.9 million. Given the floating-rate nature of the loan, debt service amounts have almost doubled since issuance; however, the borrower is required to enter into an interest rate cap rate agreement for the initial loan period, and when exercising any extension option. The interest rate cap agreement for the initial loan period had a strike rate of 4.0% with replacement interest rate cap agreement(s) purchased in connection with the exercise of any extension option required to result in a minimum DSCR of 1.10x.

The largest tenants within the portfolio include Living Spaces Furniture, LLC (11.2% of net rentable area (NRA)), Razor USA, LLC (8.4% of NRA), and International Impulse, Inc. (2.9% of NRA). While tenant leases representing 61.7% of NRA are scheduled to roll throughout the fully extended loan term, the portfolio is leased to approximately 120 unique tenants and benefits from a granular rent roll with the largest concentration of rollover (23.3% of NRA) scheduled to occur in 2026. It is worth noting that at issuance, weighted-average base rents were approximately 12.0% less than market rates, providing potential cash flow growth as leases roll and rental rates are reset to market levels.

At issuance, Morningstar DBRS derived a value of $591.2 million based on a Morningstar DBRS NCF of $39.9 million and a capitalization rate of 6.75%. The released property was vacant at issuance and its dark value was considered in Morningstar DBRS’ initial analysis. For this review, the Morningstar DBRS value was updated to reflect the property release, resulting in an adjusted figure of $584.0 million while the Morningstar DBRS NCF remains the same as issuance. The updated value represents a variance of -57.0% from the issuance appraised value of $1.4 billion for the remaining 76 properties in the portfolio. The Morningstar DBRS value implies a loan-to-value ratio (LTV) of 152.4%, compared with the LTV of 65.4% on the issuance appraised value for the remaining collateral and the Morningstar DBRS LTV at issuance of 152.2%. In addition, positive qualitative adjustments totaling 7.25% were maintained to reflect the low cash flow volatility, good property quality characteristics, 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; 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.