Morningstar DBRS Confirms All Credit Ratings of MTN Commercial Mortgage Trust 2022-LPFL

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

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

All trends are Stable.

The credit rating confirmations reflect the stable performance since issuance, with minimal changes in performance and portfolio composition. The transaction is secured by the borrower’s fee-simple or leasehold interests in a portfolio of 82 industrial properties (78 fee-simple properties, two payment-in-lieu-of-taxes leasehold properties, and two ground leasehold properties) totaling over 15 million square feet across 25 states. The portfolio was acquired through Industrial Logistics Properties Trust’s (ILPT’s) $4.0 billion acquisition of Monmouth Real Estate Investment Corporation (Monmouth). The loan is sponsored by a joint venture between ILPT, the portfolio owner and controller, and the remaining 39.0% is owned by an institutional investor connected to the Monmouth acquisition.

The transaction documents allow for property releases, at a release price of 105.0% of the allocated loan amount (ALA) for the first 80.0% of the original principal balance of the mortgage loan and 110.0% thereafter. Proceeds from the first 20.0% of property releases by ALA are distributed across the capital stack on a pro rata basis, with all subsequent proceeds applied sequentially. Morningstar DBRS considers this structure to be credit negative, particularly at the top of the capital stack and as such, a penalty was applied in the loan-to-value (LTV) sizing.

The $1.4 billion floating-rate mortgage loan is interest-only (IO) throughout its five-year fully extended loan term. The loan has an initial two-year term and three, one-year extension options taking the fully extended maturity out to March 2027. The loan has a scheduled initial maturity on March 9, 2024. The servicer confirmed that the borrower has requested to exercise the first extension option, which is currently in progress, subject to meeting pre-determined requirements including no events of default and the purchase of a replacement interest rate cap agreement with a rate the lesser of 3.4% or when added to the spread yields a minimum debt service coverage ratio (DSCR) of 1.10 times (x).

The annualized net cash flow (NCF) for the trailing nine months (T-9) ended September 30, 2023, was $83.3 million (reflecting a DSCR of 0.94x), a modest increase from the YE2022 figure of $81.1 million (a DSCR of 1.22x) and the Morningstar DBRS NCF of $79.5 million. The increase in cash flow was driven primarily by increases in both base rent and expense reimbursements; however, at the same time, the DSCR has fallen as the in-place debt service costs on the floating rate debt have continued to rise. Morningstar DBRS notes that the financial reporting does not account for the in-place interest rate cap which serves to keep debt service levels such that the DSCR does not fall below 1.10x. The September 2023 reporting quoted an occupancy figure of 98.9% across the portfolio, a slight increase from the issuance figure of 96.5%.

The portfolio benefits from investment-grade tenants including, FedEx Corporation (46.8% of net rentable area (NRA), expiring April 2030); Shaw Industries Group, Inc. (5.2% of NRA, expiring September 2027); The International Paper Company (3.6% of NRA, expiring July 2025); and Amazon.com, Inc. (2.7% of NRA, expiring August 2028). Approximately 56.0% of the portfolio’s NRA is scheduled to roll throughout the fully extended loan term; however, rollover is relatively granular with no more than approximately 17.0% of the NRA scheduled to roll in any given year. In addition, Morningstar DBRS expects demand to remain stable through the extended loan term for warehouse property types in desirable locations such as those in the subject’s portfolio. The relative distribution of the locations is granular, with the largest state concentration in Texas, with 8.6% of the portfolio NRA. Indiana and Ohio follow with 8.5% of the total portfolio square footage each.

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 DBRS Morningstar 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 [email protected].

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 [email protected].