DBRS Morningstar Assigns Provisional Ratings to BX Commercial Mortgage Trust 2020-VIVA

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-VIVA to be issued by BX Commercial Mortgage Trust 2020-VIVA:

-- Class A at AAA (sf)
-- Class X at A (high) (sf)
-- Class B as AA (low) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

All trends are Stable.

The Class X balance is notional.

The collateral for the BX Commercial Mortgage Trust 2020-VIVA transaction are certain components of a $3 billion first-priority mortgage loan encumbering both the MGM Grand and Mandalay Bay hotels and casinos in Las Vegas. The borrower/sponsor for the transaction is a joint venture partnership between Blackstone Real Estate Income Trust (BREIT; 49.9%) and MGM Growth Properties LLC (MGP; 50.1%). Together, BREIT and MGP acquired the MGM Grand and Mandalay Bay resorts for an aggregate purchase price of $4.6 billion ($471,892 per key) and subsequently executed a 30-year triple-net master lease with two, 10-year renewal options with MGM Lessee II, LLC (MGM Tenant), a wholly owned subsidiary of MGM Resorts International.

Under the terms of the master lease, MGM Tenant is required to make an initial master lease payment of $292 million per year, with $159 million allocated to MGM Grand and $133 million allocated to Mandalay Bay. The master lease payment escalates by 2.0% per year in years two through 15 of the initial lease term, and then the greater of 2.0% and CPI, with CPI capped at 3.0%, for the remainder of the initial lease term.

The $3 billion whole loan comprises senior trust notes in the amount of $634.2 million, pari passu senior companion notes in the amount of $1.000 billion, and junior trust notes in the amount of $1.365 billion. The $1 billion in pari passu senior companion notes will be held back for contribution to future securitizations.

DBRS Morningstar takes a generally positive view on MGP and BREIT’s acquisition of MGM Grand and Mandalay Bay. The transaction represents the second major resort casino sale-leaseback transaction in the past year in Las Vegas. The sale-leaseback strategy allows experienced gaming operators like MGM Resorts International to optimize their capital allocation away from owning real estate while maintaining operational control over their portfolios.

The MGM Grand and Mandalay Bay properties have each benefitted from significant capital investment in recent years, which DBRS Morningstar witnessed during the site inspection. The properties continue to be the marquee Las Vegas destinations for large conventions and conferences, and both stand to benefit from a substantial increase in foot traffic, as the opening of Allegiant Stadium will draw pedestrians toward the southern end of the Las Vegas Strip on game days and during major events at the stadium.

While the properties together derive a below-average proportion of their revenue from gaming operations, both are still susceptible to the volatility inherit in full-service resort casinos. Tourism remains the primary driver of Las Vegas’ economy, and a virtually limitless number of macroeconomic or idiosyncratic factors could reduce domestic or international tourism during the loan term, adversely affecting performance at the properties. Despite these risks, DBRS Morningstar believes the loan benefits from favorable credit metrics as well as the operational expertise and expansive guest loyalty program that MGM Resorts International brings to the table. Furthermore, the MGM payment shortfall guarantee provides further assurances to bondholders over the term of the loan.

The $3 billion whole loan represents a conservative loan-to-value ratio of 65.97% on DBRS Morningstar’s concluded value, well below the typical leverage point for most single-asset/single-borrower transactions. There is also no additional debt in the form of a B note or mezzanine debt, and the sponsor will acquire the properties and contribute more than $1.6 billion in cash equity as a part the transaction.

The MGM Grand and Mandalay Bay properties are both strategically located along the southern portion of the Las Vegas Strip. While this was historically a disadvantage from a foot traffic perspective and the properties relied more on group and conference business, the pending completion of the 65,000-seat Allegiant Stadium (home to the Las Vegas Raiders) across the Las Vegas Freeway from Mandalay Bay stands to fundamentally alter that dynamic and bring more pedestrian traffic to the southern end of the Strip. Authorities plan to shut down Hacienda Avenue on game days and funnel foot traffic across the Freeway directly in front of the property.

MGM Resorts International is a global, publicly traded gaming and hospitality company founded in 1986. It is an experienced hotel casino operator with properties in virtually all of the world’s major gaming markets including Las Vegas, Atlantic City, Macau, and many others. The company has a portfolio of 30 properties and has more than 83,000 employees globally. Furthermore, its “MLife” loyalty program is extensive and provides the company with significant leverage to attract and retain gamblers to its properties around the world.

A substantial component of revenue across both properties is from nonroom revenue, including gaming revenue (18.02%) and revenue from food and beverage outlets (29.89%). Both of these revenue sources are more volatile than room revenue; however, the proportion of gaming revenue across both properties is lower than most other properties on the Las Vegas Strip, which generally derive closer to 30% of their revenue from casino operations. Gaming revenue also disproportionately depends on the trends and habits of ultra-high-end visitors, as evidenced by the drop in certain casino revenue line items (specifically baccarat) during the recent renovation of The Mansion at MGM Grand.

Two major new properties, Resorts World Las Vegas and The Drew (formerly Fontainebleau Resort), will add more than 7,100 new rooms to the Strip between 2021 and 2022. Both projects have seen delays, but they are likely to open for business over the next couple of years. Resorts World Las Vegas will likely compete, to some extent, with both MGM Grand and Mandalay Bay to attract lucrative high-end gamblers, especially from Asia. Occupancy rates are likely to suffer to some degree with the addition of more rooms, but neither new property is likely to compete with the steady stream of convention and conference business that MGM Grand and Mandalay Bay attracts.

Impact from Coronavirus Disease: While it is too soon to gauge the long-term impact to property cash flow and valuations for hotels from the Coronavirus Disease (COVID-19), given the immediate effects that have been observed thus far in cancelled meetings and conventions, personal travel disruptions, and travel restrictions in place for some countries, DBRS Morningstar believes there is the potential for a significant longer-term impact. Because of the nature of advance booking cancellations, daily bookings, and reliance on tourism, it is unknown how prepared operators are to weather these disruptions. For more information on the sensitivity of DBRS Morningstar’s ratings to fluctuations in property net cash flow, please see the BX 2020-VIVA rating sensitivity analysis published on www.dbrsmorningstar.com.

The mortgage loan is interest-only (IO) through the initial 10-year term and does not benefit from deleveraging through amortization.

Class X is an IO certificate that references 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.dbrs.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 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 Morningstar 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 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 [email protected].

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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