DBRS Morningstar Confirms Ratings on BXHPP Trust 2021-FILM

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-FILM issued by BXHPP Trust 2021-FILM:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-CP at A (sf)
-- Class X-FP at A (sf)
-- Class X-NCP at A (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. The trust loan is a five-year (two years plus three one-year extensions) floating-rate, interest-only (IO) mortgage loan with an outstanding principal balance of $1.1 billion secured primarily by the borrower’s fee-simple and/or leasehold interests in five Class A office properties and three studio facilities in Los Angeles. While not contiguous with each other, the properties come together to form a synergistic creative campus in Hollywood that is attractive for tenants in the content creation space. The borrower is a special-purpose entity affiliate of a joint venture partnership established between Blackstone Property Partners (49%) and Hudson Pacific Properties L.P. (HPP; 51%) to own and operate the collateral, which represents a high-barrier-to-entry real estate portfolio that serves as a hub for a growing industry (digital content).

The loan is structured to allow individual parcels to be released with a relatively weak prepayment premium of only 105% for the first 30% of the loan balance and 110% of the balance thereafter. As of the July 2022 remittance, no properties had been released. In connection with the mortgage loan, the borrower entered into an interest rate cap agreement with a Libor strike price equal to 3.5%, which is required to be in effect until the initial maturity date. The borrower is also obligated to provide a replacement interest rate cap agreement for any extension period.

The office component, totaling 967,000 square feet (sf), has no scheduled lease expirations until more than five years after loan maturity. The studio assets, totaling 1.3 million sf, benefit from longer-term lease structures that are less common for studio properties. The properties have also performed well despite initial disruptions in production schedules related to the ongoing Coronavirus Disease (COVID-19) pandemic.

The servicer provided a consolidated YE2021 operating statement analysis report, which showed some notable discrepancies when compared with the issuer’s expectations. DBRS Morningstar has requested additional information regarding the below figures, and as of the date of this press release, a response is pending. Effective gross income was down $14.1 million dollars (-8.42%), while total operating expenses were up $19.0 million (28.9%). The repairs and maintenance line item was particularly high, increasing to $66.0 million from the issuer’s figure of $10.8 million, representing more than a 500% increase. As a result of these variances, net cash flow (NCF) had decreased to $66.6 million from the issuer’s $99.6 million, and the DBRS Morningstar NCF of $91.3 million. However, the loan continues to remain current, and the YE2021 debt service coverage ratio (DSCR) was still covering at 4.44 times (x) compared with the issuer’s DSCR of 6.62x.

According to a rent roll dated March 31, 2022, the portfolio was 89.0% occupied, with the largest tenant occupying 56.7% of the net rentable area (NRA), across both the studio and office space. The largest tenant that occupies the majority of the office space and a significant portion of the studio space is a publicly traded media services company with more than $20 billion in annual revenue. Company 3, a comprehensive postproduction facility for features, commercials, and music videos, is the second-largest tenant with only 5.8% of NRA, and Streamline Media is the third-largest tenant with 5.5% of NRA. No other tenant represents more than 5.5% of NRA.

Although studio leases are generally shorter term—typically six to 12 months—the sponsor has successfully executed longer-term lease agreements with the studio tenants, which currently have a weighted-average lease term of 7.23 years. Recent leasing spreads for the sound stages have been significant, with a 30% positive leasing spread on the largest tenant’s right-of-first-offer on four stages at the Sunset Gower property and approximately 13.0% for the ABC Studios’ renewal through June 2023 at the Sunset Las Palmas property, where it films the television series Station 19. Furthermore, the sponsor has negotiated must-take minimums with various tenants for grip and light rentals, which reduces the volatility of the grip and light revenue line item.

The properties, specifically the studio component, benefit from high barriers to entry. There have been no substantial deliveries of new studio space to the Los Angeles market in the past 20 years, in part because the high cost of land makes it economically unattractive to construct new studio space. The office and studio components collectively form what is effectively a creative campus for digital content, which DBRS Morningstar believes to be synergistic for tenants at both the office and the studio parcels.

DBRS Morningstar believes that growing demand for creative digital content is likely to continue, and the properties collectively serve as a major creative hub for one of the largest digital streaming services and content producers in the world.

The studio component of the transaction requires specialized knowledge and expertise in order to operate and lease effectively. For example, HPP handles leasing of the studio component through an in-house sales team that specializes in managing relationships with various space users. The pool of potential buyers either for the studio component or the portfolio as a whole may be more limited than other, more traditional property types.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Classes X-CP, X-FP, 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.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 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.

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.

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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