DBRS Finalizes Provisional Ratings on BX Trust 2019-IMC

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-IMC issued by BX Trust 2019-IMC:

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

All trends are Stable. Classes X-CP and X-NCP are notional.

The collateral for the loan contains some of the premier trade-room space of two major separate bi-annual trade markets in the United States known as the High Point Markets and the Las Vegas Markets. The majority of the portfolio was compiled in a series of transactions from 2011 through 2015 by International Market Centers, Inc. (IMC) and certain affiliates of The Blackstone Group L.P. (Blackstone) acquired IMC for $1.5 billion and was securitized in the BX 2017-IMC transaction. The collateral is substantially the same as the BX 2017-IMC transaction with the addition of the 300 East Green property. The Las Vegas properties represent the only space used for the Winter and Summer Las Vegas Markets and the properties are set up in a campus-like setting, which would make it difficult for newly constructed competitive supply to affect the performance of the property. While there are other competitive properties in High Point, North Carolina, for the Spring and Fall High Point Markets, the portfolio contains the main building complex for the High Point Markets, the International Home Furnishings Center, and other High Point properties are located within walking distance of this property. IMC estimates that the subject portfolio contains 88.0% of the Class A showroom space in the High Point market and there is no other property owner of showroom space in High Point that owns more than 4.0% of the total available square footage. There is sentiment among buyers that they will find more product introductions at High Point than in any other market. In total, there were 88,812 buyers that went to the Las Vegas and High Point Markets in 2018, which represents a variance of 27.4% and 6.6% over the 2011 and 2015 total buyer attendance figures, respectively. DBRS views the possibility of the Las Vegas Markets and the High Point Markets moving to another city as highly unlikely over the course of the loan term or in the medium term after the fully extended loan term because of the historical and current draw to the markets as well as the strength of the portfolio’s management firm, IMC, in playing a major role in conducting these markets.

The loan sponsors, certain affiliates of the Blackstone funds commonly known as Blackstone Real Estate Partners VIII and Blackstone Tactical Opportunities Fund II – Q L.P., are considered very strong because of their extensive holdings in the showroom space industry and ample financial resources. The collateral benefits from the management of IMC, which is the largest operator of premier showroom space for the furniture, gift, home decor, rug and apparel industries in the world. The sponsor cashed out $173.9 million as a result of this refinancing. Since most of the portfolio was assembled in 2015 by IMC, management has been able to increase the portfolio net operating income to $134.9 million in 2018 from $98.4 million in 2015, a variance of 37.1%. The sponsor and management have been able to increase the performance of the portfolio by increasing rents and reducing operating and leasing cost expenses, while maintaining a stable average portfolio occupancy rate. The portfolio averaged a total physical occupancy rate of 83.5% from 2015 to 2018, ranging from 83.0% in 2015 and 2017 to 84.1% in 2018.

There is rollover risk at the initial loan maturity in April 2021 and fully extended loan maturity in April 2024. There are 664 leases, cumulatively representing 35.0% of the net rentable area (NRA) and 34.3% of the DBRS Gross Rent, with leases that expire prior to the initial loan maturity. There are 1,136 leases, cumulatively representing 81.1% of the NRA and 81.2% of the DBRS Gross Rent, with leases that expire prior to the fully extended loan maturity. However, from 2012 to 2018, the portfolios exhibited a straight-line average annual renewal rate of 88.9%, ranging from 82.0% in 2012 to 96.0% in 2013 and 2014. The total amount of annual renewal leasing square feet (sf)-to-total leasing sf has increased to 79.4% in 2018 from 61.9% in 2015, which have lower leasing costs compared with new leasing costs. The re-leasing spread rate from 2015 to 2018 averaged 4.5% and ranged from 2.3% in 2018 to 8.1% in 2017, indicating that management has been able to increase rental rates while maintaining a stabilized occupancy. Furthermore, relatively high rollover is to be expected as leases in excess of six years are not typical in the furniture tradeshow industry.

The portfolio is secured by a non-traditional property type: showroom properties. This property type is vulnerable to high net cash flow (NCF) volatility because of the relatively short-term leases compared with other commercial properties, which can cause the NCF to quickly deteriorate in a declining market. A unique attribute about this property type is the amount of revenue attributable to Temporary License Agreement (TLA) tenants and Tradeshow Revenue, as this source of revenue has averaged 9.5% of total effective gross income before other income from 2015 to 2018. TLA tenants are typically signing short-term exhibitor license agreements with IMC for temporary space to display products during the markets. This space serves as an incubator for new industry players that want to get in front of buyers and presents a unique revenue generator that accounts for the high fragmentation within the furniture and home decor industries. Another unique attribute of the property type is that, outside the tradeshow dates, leased spaces generally are either idle or reconfigured for the next tradeshow, although a few tenants will “office out” their space. Because of the uniqueness of the property type, there is limited market data, such as comparable property rents, vacancies, operating expense and leasing costs, available.

The DBRS value of $1.234 billion represents a 25.1% discount to the as-is appraised value of $1.647 billion but results in a DBRS Loan-to-Value (LTV) of 93.2%, which is indicative of high-leverage financing. However, DBRS utilized a conservative cap rate of 10.50%, which is 235 basis points higher than the appraiser’s weighted-average cap rate of 8.32%. DBRS utilized a conservative cap rate to account for the non-traditional-property type of the collateral. Despite the high mortgage leverage, term default risk is considered modest based on the DBRS Term Debt Service Coverage Ratio (DSCR) of 1.94 times (x), which is derived using a stressed LIBOR of 3.26%, based on DBRS’s “Interest Rate Stresses for U.S. Structured Finance Transactions” methodology, and a spread of 2.55%. The term DSCR would be 1.47x, assuming the YE2015 NCF, which is still very healthy and does not account for the value and NCF growth created by the sponsor and management over the past four years. The associated DBRS Debt Yield based on the cumulative investment-grade-rated proceeds is high at 13.7%. Additionally, the investment-grade-rated proceeds represent an LTV of 57.3% relative to the appraiser’s market valuation.

DBRS identified four loans on eight properties within the portfolio, representing 48.0% of the allocated loan amount, that incurred losses after the prior securitization because of high leverage, significant declines in the DSCRs and/or maturity default: World Market Center Building A, World Market Center Building B, Historic Market Square/Market Square Tower/Market Square Suites, Furniture Plaza/Plaza Suites, the Commerce & Design Building, National Furniture Mart, Hamilton Market and South Main. These properties were securitized in the GECMC 2002-1A, BSCMS 2005-PW10, CD 2006-CD3 and BSCMS 2007-PW15 transactions at a total original balance of $775.5 million and incurred total losses of $362.3 million. The current allocated loan amounts of $552.1 million for the properties that took losses represent variances of -28.8% to the $775.4 original balances of the financings that took substantial losses. IMC acquired the current portfolio in 2011 and has increased the performance of these properties. These properties were both previously securitized in CGBAM 2016-IMC and BX 2017-IMC and the loans performed as agreed.

Classes X-CP and 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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

With regard to due diligence services, DBRS 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’s methodology, DBRS 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 Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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 rated entity or its related entities did participate in the rating process for this rating action. DBRS 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@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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