DBRS Morningstar Finalizes Provisional Rating on BX Commercial Mortgage Trust 2020-VIV2

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating of A (sf) on the Commercial Mortgage Pass-Through Certificates, Series 2020-VIV2, Class C (the Certificates) issued by BX Commercial Mortgage Trust 2020-VIV2 (BX 2020-VIV2 or the Issuer). The trend is Stable.

As a result of market volatility caused by the ongoing Coronavirus Disease (COVID-19) pandemic, the Issuer initially elected to securitize only certain subordinate components of the MGM Grand and Mandalay Bay whole loan via the DBRS Morningstar-rated BX Commercial Mortgage Trust 2020-VIVA transaction (BX 2020-VIVA). The Issuer has since elected to securitize additional components of the whole loan via the BX 2020-VIV2 securitization.

The $3.0 billion whole loan previously comprised a $1.634 billion senior note, an $804.4 million junior note, and a $561.4 million subordinate note. The Issuer has since elected to further subdivide the junior note into a $430.1 million junior A note and a $374.3 million junior B note. The mortgage loan component initially securitized via the BX 2020-VIVA transaction was the $561.4 million subordinate note plus a combined $1 million in senior and junior notes for a total of $562.4 million. The mortgage loan component being subsequently securitized via the BX 2020-VIV2 transaction is the $374.1 million of junior B notes (plus a combined $1.003 million in senior and junior A notes, for a total of $375.15 million). For clarity, DBRS Morningstar created a table summarizing the current capital structure of the MGM Grand and Mandalay Bay whole loan (see page 4 in the related rating report).

DBRS Morningstar is also monitoring the ongoing effects of the coronavirus pandemic on operations at both the MGM Grand and Mandalay Bay (MGM/Mandalay) properties, as well as the Las Vegas gaming and lodging market more broadly. As a result of the pandemic, casino operations at both properties ceased on Monday, March 16, 2020, followed by the closure of hotel operations on Tuesday, March 17, 2020. On March 16, 2020, MGM Lessee II, LLC (the MGM/Mandalay Tenant) also delivered notice to the borrower of the MGM/Mandalay properties' temporary closure and asserted that an Unavoidable Delay, as defined in the master lease agreement, had occurred that affected the properties and the MGM/Mandalay Tenant’s obligations under the master lease (principally, to remain open for business). The properties have since incrementally begun to resume operations, starting with the reopening of the MGM Grand resort on June 4, 2020, with limited amenities and certain coronavirus-related mitigation procedures in place. MGM Resorts International (MGM Resorts) subsequently reopened The Shoppes at Mandalay Bay Place on June 25, 2020, and the Mandalay Bay resort on July 1, 2020, again with limited amenities and certain coronavirus-related mitigation procedures in place.

While it is still too soon to gauge the long-term effect on property cash flow and valuations for hotels from the coronavirus pandemic, given the immediate effects that have been observed thus far in cancelled meetings and conventions, personal travel disruptions, and travel restrictions that remain in place across various jurisdictions, DBRS Morningstar believes there is potential for significant longer-term effects. Furthermore, DBRS Morningstar also believes lasting social distancing restrictions, mandated density reductions, and the costs associated with enhanced sanitization protocols could have a prolonged negative impact on property EBITDAR until the pandemic permanently abates and the macroeconomy fully recovers.

Despite the prospect of short- and medium-term uncertainty, DBRS Morningstar believes the mortgage loan that serves as collateral for the Certificates benefits from unique structural features that provide additional protection for bondholders. Principally, the master lease structure insulates the mortgage loan from direct exposure to the volatility of property operating cash flows. Secondarily, the transaction benefits from a guaranty provided by MGM Resorts, which covers payment and performance of all monetary obligations and certain other obligations of the MGM/Mandalay Tenant under the master lease agreement. In addition to the payment and performance guaranty, MGM Resorts also executed a shortfall guaranty for the benefit of the mortgage lender for the mortgage loan.

Under the terms of the master lease, the MGM/Mandalay Tenant is required to make an initial master lease payment of $292 million per year with $159 million allocated to the MGM Grand and $133 million allocated to Mandalay Bay. The master lease payment escalates by 2.0% per year in Years 2 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.

MGM Resorts filed a Form 8-K with the U.S. Securities and Exchange Commission on March 27, 2020, and reported having operating cash on hand and cash investment balances of approximately $3.9 billion (excluding MGM China Holdings Limited and MGM Growth Properties LLC (MGP)), including approximately $1.5 billion drawn under a revolving credit facility. MGM Resorts also entered into an agreement with its affiliate, MGP, to receive cash for up to $1.4 billion of MGM Resorts’ existing operating partnership units, which the company has not exercised.

As of the March 27, 2020, MGM Resorts had approximately $219 million in outstanding fixed-rent payments under its master lease agreement for the MGM/Mandalay properties through the remainder of 2020. Given MGM Resorts’ liquidity position and the mission-critical nature of both properties to the company’s long-term operations, DBRS Morningstar believes that MGM Resorts is unlikely to default on its obligations under the master lease agreement as a result of operational disruptions caused by the coronavirus pandemic under the current circumstances.

Additionally, the DBRS Morningstar loan-to-value ratio of 65.97%, based on a 9.69% capitalization rate and a concluded valuation of $4.54 billion, represents a conservative leverage point with the ability to withstand a substantial realized decline in market value prior to mortgage impairment. Furthermore, the borrower sponsors for the transaction, Blackstone Real Estate Income Trust (BREIT; 49.9%) and MGP (50.1%), are well-capitalized institutional sponsors that contributed a combined $1.6 billion in cash equity to acquire the properties. Given this equity position, DBRS Morningstar believes both BREIT and MGP are strongly incentivized to avoid defaulting under the mortgage loan.

The collateral for this transaction are certain components of a $3.0 billion first-priority mortgage loan encumbering both the MGM/Mandalay properties in Las Vegas. The borrower sponsors, BREIT Operating Partnership L.P. (BREIT OP) and MGP Operating Partnership LP (MGP OP), together with certain other parties, formed a joint venture (MGP OP, 50.1%; BREIT OP, 49.9%) to acquire the MGM/Mandalay properties. The joint venture acquired the MGM/Mandalay properties for an aggregate purchase price of $4.6 billion ($471,892 per key). The borrowers, Mandalay PropCo, LLC and MGM Grand PropCo, LLC (which are subsidiaries of the joint venture), subsequently executed a 30-year triple-net master lease with two 10-year renewal options with the MGM/Mandalay Tenant, a wholly owned subsidiary of MGM Resorts.

The mortgage loan is interest-only through the initial 10 years of its 12-year term and does not benefit from deleveraging through amortization for the first 10 years of the term.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 (March 1, 2020), 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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].

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.dbrsmorningstar.com or contact us at [email protected].

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