DBRS Morningstar Finalizes Provisional Ratings on BXMT 2020-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of notes issued by BXMT 2020-FL2, Ltd. (the Issuer):

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

All trends are Stable. Classes F and G have been be privately placed.

The initial collateral consists of 34 floating-rate mortgages secured by 80 mostly transitional properties with a cut-off balance totaling $1.5 billion, excluding approximately $1.2 billion of participated loan future funding cut-off date commitment. Most loans are in a period of transition with plans in place to stabilize and improve the asset value. The Issuer may direct principal proceeds to acquire a portion of one or more companion participations without rating agency confirmation (RAC), subject to the Replenishment Criteria. The Replenishment Criteria requires, among other things, for the underlying mortgage loan not to be a defaulted mortgage loan or specially serviced loan, for no event of default to have occurred or be continuing, and for certain note protection tests to be satisfied. Commercial real estate collateralized loan obligation transactions often allow for principal prepayment proceeds to be held in an account and used to purchase pari passu companion participations of existing trust assets instead of being used to pay down bonds. Typically, if RAC is not required to acquire these participations, DBRS Morningstar performs a paydown analysis whereby the loans in the pool with the lowest expected loss (EL) that have no future funding are assumed to pay off and then all future funding is brought in, with the pool balance staying constant. The effect of this paydown analysis is that the EL migrates to a higher level as DBRS Morningstar assumes a worst-case scenario where only good loans pay off. As a result, the pool loss levels are higher than they would be on the pool as it stands at closing.

In this transaction, RAC is not required to acquire participations of existing trust assets, but the transaction documents require the resulting pool DBRS Morningstar weighted-average (WA) EL to be no greater than 6.5%. This is intended by the Issuer to keep credit risk fairly constant, as the initial-pool DBRS Morningstar WA EL is 6.0%. As a result, DBRS Morningstar did not perform a paydown analysis on this transaction and assumes negative credit migration. While it is possible for loans to get worse (or better) after securitization, and the EL being used could be lower (or higher) than it truly should be, DBRS Morningstar believes that the capital structure as proposed by the Issuer adequately accounts for this risk. Any significant modifications will require RAC and such loan will have its EL updated based on such modification.

For the floating-rate loans, DBRS Morningstar used the one-month LIBOR index, which is based on the lower of a DBRS Morningstar stressed rate that corresponds to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. When the cut-off balances were measured against the DBRS Morningstar As-Is Net Cash Flow, 10 loans, comprising 28.9% of the initial pool, had a DBRS Morningstar As-Is Debt Service Coverage Ratio (DSCR) below 1.00 times (x), a threshold indicative of default risk. Additionally, none of the DBRS Morningstar Stabilized DSCRs are below 1.00x, which is indicative of elevated refinance risk. 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 other loan structural features in place are insufficient to support such treatment. Furthermore, even with the structure provided, DBRS Morningstar generally does not assume the assets to stabilize above market levels. The transaction has a sequential-pay structure.

The properties are primarily located in core markets with the overall pool’s WA DBRS Morningstar Market Rank at a very high 5.8. Four loans, totaling 12.5% of the pool, are in markets with a DBRS Morningstar Market Rank of 8, and 10 loans, totaling 29.0% of the pool, are in markets with a DBRS Morningstar Market Rank of 7. These higher DBRS Morningstar Market Ranks correspond to zip codes that are more urbanized in nature. These markets benefit from increased liquidity that is driven by consistently strong investor demand; therefore, such markets tend to benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Some of the urban markets represented include New York; Brooklyn, New York; San Francisco; and Chicago.

As measured, including all future funding in the calculation, the WA as-is loan-to-value (LTV) is low at 74.6%. Further, the WA as-stabilized LTV is quite low at 58.0%. The WA DBRS Morningstar As-Is LTV reflects an as-is appraised value adjustment to one loan based on the appraiser’s as-complete value, based on upfront capital expenditure facilities.

Property quality for the pool is considered strong, as 14 loans in the pool, totaling 74.5% of the DBRS Morningstar sample by cut-off-date pool balance, are backed by a property with a quality deemed to be Average (+), Above Average, or Excellent by DBRS Morningstar. The borrowers of all 34 floating-rate loans have purchased Libor rate caps that range between 2.5% and 4.0% to protect against rising interest rates over the term of the loan.

Twenty-one loans, representing 64.3% of the initial pool balance, represent acquisition financing. Acquisition financing generally requires the respective sponsor(s) to contribute material cash equity as a source of funding in conjunction with the mortgage loan, resulting in a higher sponsor cost basis in the underlying collateral.

The pool consists of mostly transitional assets. Given the nature of the assets, DBRS Morningstar determined a sample size representing 58.7% of the pool cut-off-date balance. Although this is lower than the typical sample size for traditional conduit commercial mortgage-backed security (CMBS) transactions, the pool is quite diversified given the loan count as the Issuer has cut mostly identically sized pari passu pieces. Physical site inspections were performed as well, including management meetings. DBRS Morningstar also notes that when it visits the markets, it may actually visit properties more than once to follow the progress (or lack thereof) toward stabilization. The servicer is also in constant contact with the borrowers to track progress.

All of the loans in the pool have floating interest rates, and all loans are interest-only during the original term with original terms ranging between 24 months and 70 months, creating interest rate risk. For the floating-rate loans, DBRS Morningstar used the one-month Libor index, which is based on the lower of a DBRS Morningstar stressed rate that corresponded to the remaining fully extended term of the loans or the strike price of the interest rate cap with the respective contractual loan spread added to determine a stressed interest rate over the loan term. Additionally, all loans have extension options, and in order to qualify for these options, the loans must meet minimum DSCR and LTV requirements.

DBRS Morningstar has analyzed the loans to a stabilized cash flow that is, in some instances, above the current in-place cash flow. There is a possibility that the sponsors will not execute their business plans as expected and that the higher stabilized cash flow will not materialize during the loan term. Failure to execute the business plan could result in a term default or the inability to refinance the fully funded loan balance. DBRS Morningstar made relatively conservative stabilization assumptions and, in each instance, considered the business plan to be rational and the future funding amounts to be sufficient to execute such plans. In addition, DBRS Morningstar analyzes loss given default based on the as-is LTV, assuming the loan is fully funded.

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.dbrs.com.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#2 – Cammeby Industrial Portfolio (3.1% of the pool)
-- Prospectus ID#4 – Northbridge Centre (3.1% of the pool)
-- Prospectus ID#5 – Bank of America Plaza (3.1% of the pool)
-- Prospectus ID#6 – Pasea Hotel and Spa (3.1% of the pool)
-- Prospectus ID#7 – Hudson Commons (3.1% of the pool)
-- Prospectus ID#8 – Industry City (3.1% of the pool)
-- Prospectus ID#9 – Old Post Office (3.1% of the pool)
-- Prospectus ID#11 – Flagler (3.1% of the pool)
-- Prospectus ID#13 – 444 North Michigan (3.1% of the pool)
-- Prospectus ID#14 – Westin Las Vegas (3.1% of the pool)
-- Prospectus ID#17 – Falchi Building (3.1% of the pool)
-- Prospectus ID#19 – One South Wacker (3.1% of the pool)
-- Prospectus ID#20 – Walton on the Park (3.1% of the pool)
-- Prospectus ID#22 – 360 Spear Street (3.1% of the pool)
-- Prospectus ID#23 – Colony Square (3.1% of the pool)
-- Prospectus ID#28 – Park Central (3.1% of the pool)
-- Prospectus ID#29 – Reebok HQ (3.1% of the pool)
-- Prospectus ID#31 – Wynwood 25 (3.1% of the pool)
-- Prospectus ID#32 – SunTrust Center (2.4% of the pool)
-- Prospectus ID#34 – Bellevue West (0.6% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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 the North American CMBS Multi-borrower Rating Methodology, which can be found on www.dbrs.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 www.dbrs.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 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@dbrs.com.

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

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