DBRS Morningstar Finalizes Provisional Ratings on BDS 2022-FL11 LLC

DBRS, Inc. (DBRS Morningstar) finalized provisional ratings on the following classes of notes issued by BDS 2022-FL11 LLC (the Issuer):

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

All trends are Stable.

The initial collateral consists of 32 short-term, floating-rate mortgage assets with an aggregate cut-off date balance of $865.6 million secured by 33 properties. The aggregate unfunded future funding commitment of the future funding participations as of the cut-off date is approximately $113.1 million. The holder of the future funding companion participations will be the seller, BDS IV Loan Seller LLC, or affiliates of BDS IV REIT, Inc. (Bridge REIT), which has full responsibility to fund the future funding companion participations on the closing date. The managed collateralized loan obligation (CLO) transaction features a 24-month reinvestment period. During the investment period, so long as the note protection tests are satisfied and no EOD has occurred and is continuing, the collateral manager may direct the reinvestment of principal proceeds to acquire reinvestment mortgage assets, including funded companion participations, meeting the eligibility criteria. The eligibility criteria, among other things, has minimum DSCR, maximum LTV, minimum Herfindahl score, and loan size limitations. This pertains to all loans in the pool. In addition, a no downgrade rating agency confirmation (RAC) is required from DBRS Morningstar during the reinvestment period for all new mortgage assets and funded companion participations, allowing DBRS Morningstar the ability to analyze them for any potential ratings impact. Finally, in respect to transaction structure, interest can be deferred for the Class C, Class D, Class E, Class F, and Class G Notes (including any corresponding Class C-E Notes, Class D-E Notes, and Class E-E Notes, if applicable), for so long as a note with a higher priority is outstanding, and such interest deferral will not result in an EOD. The transaction is a managed vehicle and will have a sequential-pay structure whereby interest and principal payments will be prioritized in order of seniority. In the event that a note protection test is not satisfied, then Interest Proceeds available for the Retained Notes will instead be used to redeem the Offered Notes and the MASCOT P&I Notes, if applicable, in accordance with the Priority of Payments until the note protection tests are satisfied.

Of the 32 loans, 29 are secured by multifamily assets (92.6% of the mortgage asset cut-off date balance). The remaining three loans are secured by industrial properties (two loans; 5.1% of the mortgage asset cut-off date balance) and one full-service hotel (2.3% of the mortgage asset cut-off date balance). The loans are mostly secured by cash flowing assets, most of which are in a period of transition with plans to stabilize and improve the asset value. Four loans are whole loans, 27 are participations with companion participations that have remaining future funding commitments totaling $113.1 million, and one is a pari passu note. The future funding for each loan is generally for capex to renovate the property or build out space for new tenants.

All of the loans in the pool have floating interest rates initially indexed to Libor or Term Secured Overnight Financing Rate (SOFR) and are IO through their initial terms. As such, to determine a stressed interest rate over the loan term, DBRS Morningstar used a stressed index, which was the lower of DBRS Morningstar’s stressed rates that corresponded to the remaining fully extended term of the loans and the strike price of the interest rate cap with the respective contractual loan spread added. The properties are often transitioning with potential upside in cash flow; however, DBRS Morningstar does not give full credit to the stabilization if there are no holdbacks or if the other loan structural features are insufficient to support such treatment. Furthermore, even if the structure is acceptable, DBRS Morningstar generally does not assume the assets will stabilize above market levels.

The transaction is sponsored by Bridge REIT, a wholly owned subsidiary of Bridge Debt Strategies Fund IV LP and an affiliate of Bridge Investment Group Holdings Inc. (Bridge Investment Group). The Sponsor has strong origination practices and substantial experience in originating loans and managing CRE properties. Bridge Investment Group is a privately held real estate investment and property management firm that manages more than $36.3 billion in assets as of December 31, 2021. Bridge is an active CRE CLO issuer, having completed four static CRE CLO transactions and six managed CRE CLO transactions as of the date of this report, not including this transaction which is the Sponsor’s seventh managed CRE CLO.

Thirty loans, representing 94.6% of the mortgage asset cut-off date balance, are for acquisition financing, where the borrowers contributed material cash equity in conjunction with the mortgage loan. Cash equity infusions from a sponsor typically result in the lender and borrower having a greater alignment of interests, especially compared with a refinancing scenario where the sponsor may be withdrawing equity from the transaction. The remaining two loans, or 5.4% of the mortgage asset cut-off balance, are refinance loans.

The pool mostly comprises multifamily assets (92.6% of the mortgage asset cut-off date balance). Historically, multifamily properties have defaulted at much lower rates than other property types in the overall CMBS universe.

The transaction is managed and includes a 24-month reinvestment period, which could result in negative credit migration and/or an increased concentration profile over the life of the transaction. The risk of negative migration is partially offset by eligibility criteria that outline minimum DSCR, maximum LTV, minimum Herfindahl score, property type, property location, and loan size limitations for reinvestment assets. A no downgrade RAC is required from DBRS Morningstar during the reinvestment period for all new mortgage assets and funded companion participations, allowing DBRS Morningstar the ability to analyze them for potential ratings impact. The Eligibility Criteria has a relatively low maximum concentration limit of 10.0% for industrial, office, mixed-use, and hospitality and 5.0% for student housing. These concentration limits reduce the likelihood that the pool’s property type composition will shift considerably.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the in-place cash flow. It is possible that the sponsor will not successfully execute its business plans and that the higher stabilized cash flow will not materialize during the loan term, particularly with the ongoing Coronavirus Disease (COVID-19) pandemic and its impact on the overall economy. The sponsor’s failure to execute the business plans could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar sampled a large portion of the loans, representing 74.0% of the pool cut-off date balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plans to be rational and the loan structure to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss severity given default (LGD) based on the as-is credit metrics, assuming the loan is fully funded with no net cash flow (NCF) or value upside. Future funding companion participations will be held by affiliates of Bridge REIT and have the obligation to make future advances. Bridge REIT agrees to indemnify the Issuer against losses arising out of the failure to make future advances when required under the related participated loan. Furthermore, Bridge REIT will be required to meet certain liquidity requirements on a quarterly basis. Twelve loans, representing 37.7% of the pool balance, include a debt service reserve to cover any interest shortfalls.

Based on the initial pool balance, the overall DBRS Morningstar Weighted-Average (WA) As-Is DSCR of 0.71 times and WA As-Is LTV of 80.8% generally reflect high-leverage financing. Most of the assets are generally well positioned to stabilize, and any realized cash flow growth would help to offset a rise in interest rates and improve the loans’ overall debt yield. DBRS Morningstar associates its LGD based on the assets’ as-is LTV, which does not assume that the stabilization plan and cash flow growth will ever materialize. The DBRS Morningstar As-Is DSCR for each loan at issuance does not consider the sponsor’s business plan, as the DBRS Morningstar As-Is NCF is generally based on the most recent annualized period. The sponsor’s business plan could have an immediate impact on the underlying asset performance that the DBRS Morningstar As-Is NCF is not accounting for.

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/373262.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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 CMBS Multi-Borrower Rating Methodology (March 26, 2021), 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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