DBRS Morningstar Finalizes Provisional Ratings on BX Trust 2021-LGCY

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-LGCY (the Certificates) issued by BX Trust 2021-LGCY (BX 2021-LGCY), as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D 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.

The collateral for BX Trust 2021-LGCY (BX 2021-LGCY or the Trust) includes the borrower’s fee-simple interest in 11 Class A multifamily properties totaling 2,882 units across six states. After the Origination Date, it is expected that the Mortgage Loan will be secured by the fee simple interest in one additional multifamily property (Bell Quarry Hill or the Earn-Out Property) that is not currently collateral for the Mortgage Loan. It is expected that Bell Quarry Hill will become collateral for the mortgage loan upon repayment of the existing debt on the property. At origination, the Borrowers funded an earn-out reserve in the amount of $24,600,000. If and when the Earn-Out Property becomes collateral for the Mortgage Loan, such reserve will be distributed to the Borrowers. However, if the Borrowers are unable to repay the existing debt encumbering the Earn-Out Property and satisfy the other applicable earn-out conditions on or before March 22, 2022, after using commercially reasonable efforts, then the Borrowers will be permitted to instruct the Lender to apply such reserve to prepay the Mortgage Loan, without payment of a spread maintenance premium, and such Earn-Out Property will not become collateral for the Mortgage Loan. Such prepayment amount, if made, will be applied to the prepayment of the Mortgage Loan on a pro rata basis. Allocated Mortgage Loan Amounts are based on the Original Mortgaged Properties and the Earn-Out Property, collectively, and the Allocated Mortgage Loan Amount for the Earn-Out Property has been reserved for at origination. For the purposes of net cash flowNCF, valuation, and sizing analyses, DBRS Morningstar assumed that the loan sponsor completed the outstanding debt repayment for Bell Quarry Hill. All metrics within this report are generally based on the portfolio inclusive of Bell Quarry Hill, unless otherwise noted. The addition of Bell Quarry Hill would increase the collateral for the Trust to 12 Class A/B multifamily properties totaling 3,030 units across six states. BREIT Operating Partnership L.P. (the Loan Sponsor) is using mortgage loan proceeds of $575.0 million ($189,769 per unit) in addition to a borrower equity contribution of nearly $247.3 million ($81,614 per unit) to finance the $807.4 million acquisition of the collateral and cover closing costs associated with the transaction.

The properties comprising the portfolio generally exhibit favorable finish qualities and comprehensive amenity offerings with a WA weighted-average year built of 2007 and four properties, representing 36.0% of the portfolio’s net operating income (NOI) for the trailing 12 months (T-12) ended June 30, 2021 T-12 NOI, were delivered after 2011. In addition to the generally favorable asset quality of the underlying collateral, DBRS Morningstar generally views the markets to which the portfolio is exposed as highly desirable for multifamily development, with strong growth potential and favorable population statistics. Eight properties, representing 69.2% of the portfolio’s NOI for the T-12 ended June 30, 2021 T-12 NOI, are located in areas with appraisal-projected population growth rates that more than quadruple the U.S. 2020 national average of 0.351%, and all properties are located in areas with projected population growth rates in excess of the U.S. 2020 national average. The generally favorable market conditions are further evidenced by relatively tight submarket vacancy rates, which averaged 6.3% across the portfolio per the Q2 2021 Reis reports and are generally projected to decline through the fully-extended loan maturity. While 10 of the 12 properties (representing 77.6%% of the portfolio by allocated loan amount) are located in areas characterized as having a DBRS Morningstar market rank of between 2 and 4 (ranks generally associated with more suburban locations that exhibit higher historical probabilities of default PODs within conduit securitizations), the cross-collateralized and geographically diversified nature of the portfolio generally mitigates some of the market risk.

As of July 2021, the portfolio was 96.9% occupied with favorably increasing portfolio occupancy and rent trends demonstrated from YE2018 through the T-12 ended June 30, 2021. Additionally, despite the noise surrounding lease defaults and nonpayment of rent in the U.S. through the recent and ongoing coronavirus pandemic, the portfolio demonstrated relatively stable collections (averaging 97.7% monthly) between July 2020 and July 2021. These collection figures are generally above the national averages provided by the National Multifamily Housing Council, which reported collection rates ranging from 93.2% to 95.9% between January 2021 and May 2021. As part of their its acquisition thesis, the Loan Sponsor has shared capital investment plans that contemplate renovating approximately 80.0% of portfolio units, potentially further elevating the cash flowing potential and stability of the portfolio. While the Loan Sponsor’s renovation plans are neither required by nor reserved for as part of this transaction, the portfolio’s generally favorable asset quality, strong amenity packages, and locations in high-growth markets make it well positioned to maintain stable operating performance through the loan term. Additionally, DBRS Morningstar expects there to be no issues funding any planned renovations, given the Loan Sponsor’s strong access to capital and generally significant financial wherewithal.

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.

Class X-CP and Class X-NCP are interest-only (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.

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.

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

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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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482 /baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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