DBRS Morningstar Assigns Provisional Ratings to BX 2022-MVRK Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2022-MVRK

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the classes of BX 2022-MVRK Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2022-MVRK as follows:

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

All trends are Stable. Classes E, F, G, HRR, JRR and ELP are not rated by DBRS Morningstar.

The BX 2022-MVRK Mortgage Trust (BX 2022-MVRK) transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 77 industrial properties totaling approximately 7.1 million sf. The sponsor, Blackstone Real Estate Partners IX L.P. , assembled the portfolio through a series of acquisitions throughout 2020 and 2021 and is seeking to recapitalize its investment. The collateral properties are located across 10 states and 13 industrial markets including the Inland Empire, California (two properties, 19.6% of NRA), El Paso, Texas (21 properties, 23.8% of NRA), Minneapolis, Minnesota (13 properties, 15.3% of NRA), Atlanta, Georgia (17 properties, 12.5% of NRA), and the New York Metro area (four properties, 3.0% of NRA). The properties themselves are a mix of light industrial (54 properties, 42.8% of NRA), warehouse (17 properties, 32.7% of NRA), bulk warehouse (two properties, 19.6% of NRA), manufacturing (two properties, 3.0% of NRA), parking (one property, 1.5% of NRA), and covered land (one property, 0.5% of NRA). Overall, the subject markets have solid fundamentals with positive annual growth in rents while absorbing new supply and compressing vacancies. DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector. The portfolio benefits from favorable tenant granularity, strong sponsor strength, favorable asset quality, and strong leasing trends, all of which contribute to potential cash flow stability over time. The portfolio’s WA year built of 1991 is in line with the average of industrial portfolios DBRS Morningstar recently analyzed (1991). In addition the portfolio has a WA property size of 92,443 sf, WA clear heights of 25.1 feet, and a relatively low 9.9% office buildout.

The portfolio is 95.4% leased by a granular rent roll of 123 unique tenants pursuant to 137 leases with no individual tenant representing more than 11.2% of total NRA or 11.3% of NCF. Top tenants include Razor USA, LLC (8.4% of NRA), Living Spaces (11.2% of NRA), and International Impulse (2.9% of NRA). The portfolio has a weighted-average (WA) lease term of 4.6 years. While there is a substantial rollover of 61.7% of NRA during the fully extended loan term, WA in-place base rents are approximately 12.6% below appraisal market estimates (with the Inland Empire and Atlanta markets 21.9% and 20.4% below market, respectively), which represents a potentially substantial cash flow appreciation opportunity as the sponsor increases expiring leases to market rates. Since acquiring the portfolio, Blackstone has signed new and renewing leases representing more than 740,000 sf at the properties and achieved positive leasing spreads of approximately 70.9% compared with previous in-place leases.

The transaction benefits from elevated cash flow stability attributable to multiple property pooling. The portfolio has a property Herfindahl score of 21.4 by ALA, which is below the average of recent DBRS Morningstar-rated industrial portfolios (30.2) but nonetheless provides favorable diversification of cash flow when compared with a single-asset securitization.

The transaction sponsor is Blackstone Real Estate Partners IX L.P., which is indirectly owned and controlled by Blackstone Inc. (Blackstone), a global investment firm with $881 billion in assets under management as of December 31, 2021. Blackstone’s alternative asset management businesses include the management of private equity funds, real estate funds, hedge fund solutions, credit-oriented funds, and closed-ended mutual funds. Blackstone’s real estate group was founded in 1991 and is the largest private equity real estate investment manager in the world today with approximately $279 billion of investor capital under management..

The trust collateral is expected to be originated by Barclays Capital Real Estate Inc, Column Financial, Inc., and Société Generale Financial Corporation and consists of a mortgage loan in the amount of $900 million. The mortgage loan is evidenced by three promissory notes, all of which are expected to be contributed to the trust and support payments on the rated certificates. Barclays Capital Real Estate Inc, Column Financial, Inc., and Société Generale Financial Corporation are also expected to originate a $120 million mezzanine loan, which will be held outside the trust which increases the DBRS Morningstar LTV to 175.5% from 152.2%. A default on the mezzanine debt may potentially complicate workout negotiations or other remedies for the trust. DBRS Morningstar views this as credit negative given the additional NCF stress that occurs when subordinate debt is present.

The nonrecourse carveout guarantors for the loan are on a joint and several basis, BREP 9 Industrial Holdings LLC and BREP 9 Industrial Holdings II LLC, each a Delaware limited liability company, which are only subject to an aggregate net worth requitement of $300 million or with no liquidity covenant, effectively limiting the recourse back to the sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the sponsor. The guarantor’s aggregate liability is limited to maximum recourse of 15% of the outstanding loan amount plus out-of-pocket enforcement costs for certain bankruptcy related activities that would typically trigger recourse liability to the sponsor for the full amount of the debt. The cap is a material limitation of the powerful economic disincentives that would be contained in a commercial mortgage-backed security (CMBS) standard bad boy guaranty structure that has no such cap.

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.

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 (February 28, 2022), 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.

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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