DBRS Morningstar Assigns Provisional Ratings to BX Trust 2021-SDMF

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-SDMF (the Certificates) to be issued by BX Trust 2021-SDMF (BX 2021-SDMF or the Trust):

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class B-1 at AAA (sf)
-- Class B-2 at AAA (sf)
-- Class C at AA (high) (sf)
-- Class C-1 at AA (high) (sf)
-- Class C-2 at AA (high) (sf)
-- Class X-CP at A (sf)
-- Class X-NCP at A (sf)
-- Class D at A (low) (sf)
-- Class D-1 at A (low) (sf)
-- Class D-2 at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

Classes X-CP and X-NCP are interest-only (IO) classes whose balances are notional.

For purposes of calculating the Pass-Through Rates for the Class X Certificates, each Class of the Class B, Class C and Class D Certificates will be deemed to be divided into two portions, the “B-1 Portion” and “B-2 Portion”, the “C-1 Portion” and “C-2 Portion” and the “D-1 Portion” and “D-2 Portion”, respectively.

The collateral for BX 2021-SDMF includes the borrowers' fee-simple interest in 32 multifamily properties totaling 4,202 units throughout various submarkets of the greater San Diego area. The transaction sponsor is acquiring the properties for a total purchase price of $1.1 billion ($261,453 per unit). The collateral is generally characterized as Class B or C product constructed between 1960 and 1988 with an average vintage of 1975. Despite the average age of approximately 46 years, DBRS Morningstar generally considers the properties to be adequately maintained and in average to good condition. No major renovations have occurred in recent years, but there was approximately $9.7 million ($2,300 per unit) of capital expenditures (capex) invested in the properties between 2018 and 2020. While the cost of the recent capex was not substantial on a per-unit basis, DBRS Morningstar considers it a sufficient amount to maintain a competitive property quality among Class B or C assets in the market. The sponsor plans to renovate a number of the properties following the acquisition, but the capital improvements will need to be funded out-of-pocket by the sponsor as there are no reserves in the loan structure. However, DBRS Morningstar expects there to be no issues funding any renovations given the sponsor’s strong access to capital.

All units in the transaction are market-rate offerings located in infill, supply-constrained submarkets, providing strong market fundamentals and enhanced cash flow stability. Specifically, the San Diego Metro multifamily market has averaged an annual inventory growth rate of only 1.2% from 2011 to 2020 compared with the national average of 1.8% according to Reis. As a result, the San Diego Metro market has maintained tight vacancies as evidenced by average vacancies of 3.4%, 3.7%, and 3.7% for the 10-year, 20-year, and 30-year periods ended in 2020. Accordingly, the underlying collateral has exhibited consistently low vacancies in past years, including an average vacancy of 2.4% between 2017 and the trailing 12 months (T-12) ended July 31, 2021. Lastly, the strong market fundamentals have allowed rents to grow organically without substantial capital improvements. Specifically, the underlying collateral’s average rent increased by nearly 23.0% to $1,590 per unit as of the August 2021 rent roll from $1,293 per unit in 2017. DBRS Morningstar has a positive outlook on the collateral going forward largely because of the strong market fundamentals and performance in recent years.

The sponsors for the mortgage loan are Blackstone Real Estate Partners IX L.P. and TruAmerica Multifamily LLC (TruAmerica). Blackstone Real Estate Partners IX L.P. is an affiliate of The Blackstone Group, Inc., whose real estate group was founded in 1991 and has approximately $208.0 billion in investor capital under management. Founded in 2013, TruAmerica is a real estate investment firm focused on the repositioning of Class B multifamily properties with a portfolio of 44,780 units valued at approximately $10.6 billion. The sponsors are contributing $230.8 million in cash equity as a part of the transaction to finance their acquisition of the properties for a purchase price of $1.1 billion. DBRS Morningstar generally views acquisition loans with considerable amounts of cash equity more favorably, given the stronger alignment of economic incentives when compared with cash-out financings.

The collateral is located within seven strong infill and supply-constrained submarkets throughout the greater San Diego area. Specifically, each of the submarkets exhibited an average vacancy below 5.0% from 2011 to 2020, with average annual growth rates ranging from 0.1% to 1.9% over the same period. Further, the four submarkets with the largest concentrations, accounting for 27 properties and 76.7% of total units, had average annual growth rates below 1.0% from 2011 to 2020, with average vacancies ranging from 1.7% to 3.6% as of Q2 2021. The collateral demonstrated a very strong performance with regard to occupancy, averaging 97.6% from 2017 through the T-12 ended July 31, 2021, and was 98.6% occupied as of the August 2021 rent roll. While maintaining a high occupancy, the collateral also experienced notable rent growth with the average rent increasing to $1,590 per unit as of the August 2021 rent roll from $1,293 per unit in 2017. As a result, the collateral’s net operating income increased to $47.9 million over the T-12 ended July 31, 2021, from $40.3 million in 2017.

The DBRS Morningstar loan-to-value (LTV) ratio on the full debt load of $890.0 million is substantial at 135.4%. To account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.5% across the capital structure. DBRS Morningstar also programmatically reduced its LTV benchmark targets for the transaction by an additional 0.5% to account for the presence of mezzanine financing. The high leverage point combined with a lack of scheduled amortization pose potentially elevated refinance risk at loan maturity. The DBRS Morningstar LTV ratio of 121.7% on the senior mortgage loan of $800.0 million is also markedly high, but the DBRS Morningstar LTV ratio on the last dollar of rated debt is much lower at 99.0%.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

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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 North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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.

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.

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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