DBRS Morningstar Assigns Ratings to BX Commercial Mortgage Trust 2019-XL

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-XL issued by BX Commercial Mortgage Trust 2019-XL (BX 2019-XL or the Issuer) as follows:

-- Class A at AAA (sf)
-- Class X-CP at AA (low) (sf)
-- Class X-NCP at AA (low) (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D as A (high) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)
-- Class J at B (low) (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings. As such, in conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The collateral for the BX 2019-XL mortgage trust is a $5.6 billion first-lien mortgage loan on 406 industrial properties totaling over 65 million square feet (sf) spread across 18 states. In February 2020, the pool was paid down by $249.8 million following the release of 17 properties. The proceeds were distributed pro rata through the capital stack, reducing the total pool balance to $5.35 billion and the non-trust mezzanine loan to $967.1 million.

Original trust loan proceeds of $5.6 billion along with $1.0 billion of mezzanine financing, a $1.9 billion balance sheet loan, $9.4 million of assumed debt, and $2.6 billion of borrower equity were used to facilitate the acquisition of the portfolio for approximately $11.1 billion. The underlying loan for the subject transaction is interest only (IO) throughout with a two-year initial term and three one-year extension options. The loan pays a floating-rate interest of Libor plus 155 points. The portfolio is a part of Blackstone’s larger $18.7 billion acquisition of over 170 million sf of U.S. industrial assets from Singapore-based GLP. Following the acquisition, Blackstone will surpass Prologis as the world’s largest owner of industrial and distribution assets, with a portfolio of over 356 million sf.

At issuance, the portfolio had a property Herfindahl score of over 200 by allocated loan amount, which is among the highest DBRS Morningstar has seen for single-borrower industrial portfolios. The properties are located across 18 U.S. states in multiple regions and the portfolio also exhibits substantial tenant diversity and granularity. No tenant accounts for more than 2.3% of in place base rent and no property accounts for more than 2.1% of trailing 12-month (T-12) net operating income (NOI).

Over 60% of the portfolio by T-12 NOI is derived from properties located in markets that DBRS Morningstar considers global gateway industrial markets. These include the Bay Area, Orange County, Seattle, Portland, Northern and Central New Jersey, Houston, Inland Empire, Eastern Pennsylvania, Los Angeles, Atlanta, Dallas, Philadelphia, Baltimore, and Chicago. Gateway industrial markets serve as key distribution points in the global supply chain, are near major population centers, and generally exhibit greater liquidity and stability in times of economic stress.

Much of the portfolio consists of functional bulk warehouse product, with a weighted-average year built of 1994 and weighted-average clear-heights of over 26 feet. Over 30% of the portfolio by T-12 NOI features clear heights in excess of 30 feet, and approximately 28% of the portfolio by T-12 NOI was built after 2000. Furthermore, the portfolio consists of six different industrial property subtypes, but almost 80% of the portfolio by net rentable area is warehouse/distribution space.

Leasing spreads across the portfolio average approximately 10%, according to a DBRS Morningstar analysis of leasing data for the first three quarters of 2019. Leasing spreads were approximately 9.6% for renewals and 13.5%
for new leases. DBRS Morningstar views these as positive indicators of the borrower’s ability to drive NOI growth and generate value upside across the portfolio. Furthermore, the size and scale of the portfolio create the potential for Blackstone to take advantage of tenant leverage and pricing power, akin to what major mall operators such as Simon Property Group and General Growth Properties have.

In the analysis for these rating actions, DBRS Morningstar utilized a net cash flow (NCF) figure of $348.6 million ($364.9 million at issuance adjusted for property releases) and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $5.35 billion ($5.41 billion at issuance), a variance of -36.7% from the paydown-adjusted appraised value of $8.2 billion ($8.5 billion at issuance). The NCF utilized was the same used by MCR in its original analysis at securitization, but was adjusted downward due to the property releases. Such NCF was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The DBRS Morningstar Value implies an LTV of 103.6%, as compared with the LTV on the adjusted appraised value of 65.7% The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for industrial properties, reflective of the portfolio’s locations in gateway industrial markets with high barriers to entry, asset quality, and investment-grade tenancy. In addition, the 6.75% cap rate applied is substantially above the implied cap rate of 4.3% based on the Issuer’s NCF and appraised value.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -1.03% variance to the Issuer’s NCF, primarily driven by variable expenses and tenant improvements/leasing commissions (TI/LC). DBRS Morningstar matched all variable expense line items to the borrower Year 1 Argus projections across the portfolio and assumed TI/LC costs of $0.30 per square foot on a normalized basis.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 8.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for certain structural aspects: weak release provisions and partial pro rata principal paydown upon a release of any property or properties (up to the free payment amount and subject to certain conditions). For the former, we decreased our LTV thresholds at each rating category by 25 basis points; for the latter, we decreased our thresholds at the AAA (sf) through A (high) (sf) rating categories. We reduced the AAA (sf) category by 1.88% and then tapered the decrease to 1.34% at A (high) (sf).

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-CP and X-NCP are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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.

DBRS Morningstar notes that the above press release was amended on April 23 2020, to correct the rating of the Commercial Mortgage Pass-Through Certificates, Series 2019-XL, Class F to BBB (low) (sf) in the above text. The erroneous rating was in the text only and has now been corrected.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology, which can be found on www.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 www.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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