DBRS Morningstar Finalizes Provisional Ratings on BX Commercial Mortgage Trust 2020-VKNG

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-VKNG issued by BX Commercial Mortgage Trust 2020-VKNG:

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

All trends are Stable.

DBRS Morningstar discontinued and withdrew its ratings on the Class X-CP and X-NCP interest-only (IO) certificates initially contemplated in the offering documents, as they were removed from this transaction.

BX Commercial Mortgage Trust 2020-VKNG is a single-asset/single-borrower transaction that is collateralized by the borrower’s fee-simple interest in 67 industrial and logistics properties totaling approximately 8.2 million square feet across six states in the West Coast, Midwest, and mid-Atlantic regions of the United States. The portfolio is primarily composed of last-mile facilities in urban infill locations, with average clear heights of 21.6 feet and an average year built of 1992. The portfolio's composition includes a percentage of light industrial and office properties than other recently analyzed industrial portfolios.

The portfolio has a property with a Herfindahl score of 40.9 by allocated loan amount, which is in line with other smaller single-borrower industrial portfolios. The properties are across six U.S. states in multiple regions, and the portfolio also exhibits both tenant diversity and granularity. No tenant currently accounts for more than 6.7% of in-place base rent, and no property accounts for more than 2.1% of the portfolio’s net operating income.

Citi Real Estate Funding Inc. and Bank of America, N.A. originated the two-year initial term (with three one-year extension options) mortgage loan that pays estimated floating-rate interest of Libor plus 2.000% on an IO basis through the initial maturity of the loan, contingent upon final pricing.

The $645 million whole loan comprises a mortgage loan totaling $600 million and a mezzanine loan totaling $45 million. The mezzanine loan is not securitized in this transaction and is held by BlackRock or an affiliate.

The borrower amassed the portfolio in phases across seven acquisitions dating from October 2019 to April 2020 for a total acquisition cost of approximately $849.3 million (including acquisition and defeasance costs). Whole loan proceeds will recapitalize the borrower's interest in the portfolio, which was unencumbered by secured debt.

The portfolio primarily consists of last-mile logistics properties in infill locations within their respective markets, with a portfolio weighted-average population density of 2.0 million people within a 15-mile radius. Infill markets generally benefit from less new supply because there is little available land, as competition from higher value uses and restrictive zoning inhibit new industrial development. Because required delivery times have shortened for many online retailers and e-commerce companies, they have begun leasing smaller warehouse and distribution spaces closer to dense consumer bases.

The portfolio has been largely unaffected by the immediate-term disruptions from the Coronavirus Disease (COVID-19) pandemic, with collections averaging 97.2% over May (98.2%), June (98.2%), July (95.7%), and August (97.0%). Furthermore, DBRS Morningstar believes that industrial properties are among the best positioned to weather any short- and medium-term market dislocations related to the pandemic.

With regard to the coronavirus pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

The portfolio is heavily concentrated in the Minneapolis-St. Paul metropolitan statistical area (MSA), which contributes approximately 70.7% of the portfolio’s net operating income. While DBRS Morningstar generally has a favorable view on the Minneapolis industrial market, the exposure poses some risk if that industrial demand in the MSA weakens.

Leases representing approximately 66% of DBRS Morningstar’s base rent are scheduled to roll through the fully extended loan term. The rollover is especially concentrated in 2022 and 2023, when 14.6% and 17.9% of the base rent is scheduled to expire, respectively. Significant portfolio rollover typically indicates future cash flow could be volatile, particularly if market rents or occupancy rates have become less favorable.

The loan allows for pro rata paydowns for the first 30% of the unpaid principal balance. The loan has a partial pro rata/sequential-pay structure. We consider this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace as compared with a sequential-pay structure.

The borrower can also release individual properties with customary requirements. However, the prepayment premium for releasing individual assets is 105% of the allocated loan amount until the outstanding principal balance has dropped to $420 million, and 110% thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115%. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the weak deleveraging premium.

The mortgage loan is IO through the five-year fully extended term and does not benefit from deleveraging through amortization.

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.

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 the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), 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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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