DBRS Morningstar Assigns Ratings to BX Trust 2018-EXCL, Places All Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-EXCL issued by BX Trust 2018-EXCL as follows:

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

DBRS Morningstar has also placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

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; such withdrawal will occur on or about October 23, 2020. 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot will be the most affected.

LOAN/PROPERTY OVERVIEW
The BX Trust 2018-EXCL transaction is currently backed by a $522.8 million loan secured by 12 retail properties located throughout California, Texas, Arizona, and Virginia. The loan was structured with an initial two-year term with five one-year extension options. The loan is interest only throughout the fully extended loan term. The loan was added to the servicer’s watchlist in June 2020 because of the impending initial maturity date on September 1, 2020, but the borrower has since exercised the first one-year extension option for the loan.

BPP Retail Holdings, LP together with certain affiliates of the Blackstone Group, L.P. (Blackstone) are the sponsors for the transaction. The guarantor’s recourse liability is limited to 10.0% of the then-outstanding principal balance. The sponsor acquired the portfolio as part of the acquisition of Excel Trust in July 2015. The sponsor cashed out $121.5 million of equity with this refinancing. Blackstone has invested more than $55.0 million since acquiring the pool in 2015, which increased the occupancy and operating cash flow from the properties.

The transaction is structured with weak release premiums and a pro rata prepayment structure on the first 30.0% of the initial loan balance. The release provisions for individual properties within the portfolio, which are subject to no event of default, a debt-yield test, and payment of an amount that is 105% for the first 25.0% of the loan balance and 110.0% thereafter, among other stipulations outlined in the offering documents. As a result, there is adverse selection risk that could result in poorer performing assets remaining in the pool, while the higher quality assets are being released. The senior balance loan at issuance was $576.2 million, and the loan was secured by 11 power centers, one community center, one grocery-anchored center, and one movie theater. Since issuance, two properties—Stadium Center and Edwards Theater—have been two released and the loan amount has been paid down by $53.5 million. The allocated loan amount (ALA) at issuance for Stadium Center and Edwards Theater was $30.2 million and $20.0 million, respectively.

The remaining collateral for the loan is secured by 10 power centers representing 85.5% of the ALA; one grocery-anchored center, representing 8.6% of the ALA; and one community center, representing 5.9% of the ALA. The remaining collateral is primarily concentrated in California as there are five properties, representing 45.6% of the ALA, located in this state. However, these properties, Monte Vista Crossing, Park West Place, Gilroy Crossing, Highland Reserve, and RiverPoint, are located across four separate metropolitan statistical areas within California. There are four properties, representing 24.2% of the ALA, located in Texas; two properties, representing 21.5% of the ALA, located in Arizona; and one property, representing 8.6% of the ALA, in Virginia. The remaining properties have a weighted-average DBRS Morningstar Market Rank by ALA of 3, implying the remaining collateral is generally located in light-suburban areas.

At issuance, the portfolio exhibited an occupancy rate of 96.6% per the rent roll dated August 31, 2018, and the properties were leased by more than 350 tenants. The remaining collateral reported an occupancy rate of 93.6% per the June 30, 2020, rent roll. Notable occupancy rate drops since issuance within the portfolio at a property-level basis include (1) Southlake Park Village, as the occupancy rate dropped to 70.7% from 86.8% and (2) West Broad Village, where the occupancy rate dropped to 92.8% from 100.0%. Notable occupancy rate increases since issuance on a property-level basis include (1) Gilroy Crossing, as the occupancy rate increased to 98.6% from 87.4% and (2) League City Towne Center, as the occupancy rate increased to 95.2% from 85.2%.

DBRS Morningstar excluded tenants that have plans to close their stores at individual properties such as Stein Mart, Pier 1 Imports, Justice, Dress Barn, Sur la Table, and Cato, which represented $2.9 million of in-place base rent and reimbursement revenue at issuance in the DBRS Morningstar NCF analysis. Additionally, DBRS Morningstar excluded revenue in the DBRS Morningstar NCF analysis from six tenants, representing $1.4 million of in-place base rent and reimbursement revenue, because the tenants vacated their suites, according to the rent rolls dated June 30, 2020. The largest of these tenants was the Cost Plus at the Park West Place, which reportedly vacated its suite in January 2020. At Park West Place, prior to the coronavirus pandemic, the sponsor was able to bifurcate a box formerly occupied by Babies ‘R’ Us at issuance and re-lease the space to Old Navy and Five Below in 2019 and 2020, respectively. While the sponsor’s previous experience releasing and subdividing anchor space to a tenant is a positive, the proliferation of bankruptcy and store closures by national anchor and junior anchor tenants will likely continue to negatively affect the performance of the portfolio over the near term.

Since mid-March 2020, the pandemic has had severe impacts on national and local economies. Much economic activity has ceased following mandated lockdowns and stay-at-home orders, which resulted in significantly less foot traffic for many retailers. Small retail shops, fitness centers, movie theaters, and other retail spaces were forced to close while grocers and other essential stores were permitted to remain open. Restrictions have slowly been lifted in some areas based on phased approaches to reopening and decreases in active coronavirus cases.

DBRS Morningstar reanalyzed the NCF derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $49.6 million and DBRS Morningstar applied a blended cap rate of 8.01%, which resulted in a pre-coronavirus DBRS Morningstar Value of $618.7 million, a variance of -35.0% from the appraised value of $951.4 million at issuance for the remaining collateral. The pre-coronavirus DBRS Morningstar Value implies an LTV of 84.5% compared with the LTV of 55.0% on the appraised value at issuance for the remaining collateral.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the retail property subtypes of the collateral, the locations, and market positions of the assets.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling -1.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for certain property release thresholds and the pro rata structure of the transaction.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 10.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

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.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes A, B, C, and D to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus on the collateral assets and as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), 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.

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. 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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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