DBRS Morningstar Finalizes Provisional Rating on BX Commercial Mortgage Trust 2020-VIV3

DBRS, Inc. (DBRS Morningstar) finalized its provisional rating of AA (low) (sf) on the Commercial Mortgage Pass-Through Certificates, Series 2020-VIV3, Class B (the Certificates) issued by BX Commercial Mortgage Trust 2020-VIV3 (BX 2020-VIV3 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 (MGM/Mandalay) whole loan via the BX 2020-VIVA transaction. The Issuer has subsequently elected to securitize additional components of the whole loan via the BX 2020-VIV2 and BX 2020-VIV3 securitizations. The BX 2020-VIV3 trust, like the BX 2020-VIV2 trust, will not have its own master or special servicer; it will have the master and special servicers under the BX 2020-VIVA trust perform those duties.

The $3.000 billion whole loan previously comprised $1.634 billion of A notes, $804.4 million of B notes, and $561.4 million of C notes. The Issuer subsequently elected to further subdivide the B notes into $430.1 million of senior B notes and $374.3 million of junior B notes. The mortgage loan components initially securitized via the BX 2020-VIVA transaction were $561.4 million of C notes plus a combined $1.0 million of A and B notes for a total of $562.4 million. The mortgage loan components securitized via the BX 2020-VIV2 transaction were $374.100 million of junior B notes plus a combined $1.003 million of A notes and senior B notes for a total of $375.150 million. The mortgage loan components now being securitized via the BX 2020-VIV3 transaction are the $429.715 million of senior B notes plus $1.000 million of A notes for a total of $430.715 million. For clarity, DBRS Morningstar created a table summarizing the current capital structure of the MGM/Mandalay whole loan (see page 4 in the related presale report).

DBRS Morningstar continues to monitor the ongoing effects of the coronavirus pandemic on operations at the 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 notified the borrowers 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 mitigation procedures. MGM Resorts International (MGM Resorts or the Company) 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 mitigation procedures.

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 occurred 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 believes lasting social distancing restrictions, mandated density reductions, and the costs associated with enhanced sanitization protocols could have a prolonged negative impact on properties’ EBITDAR until the pandemic permanently abates and the macroeconomy fully recovers.

Despite the 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 the properties’ operating cash flows. Secondarily, the transaction benefits from a guaranty provided by MGM Resorts, which covers payment and performance of the MGM/Mandalay Tenant’s monetary obligations and certain other obligations under the master lease agreement. In addition to the payment and performance guaranty, MGM Resorts executed a shortfall guaranty for the benefit of the lender for the mortgage loan.

Under the terms of the master lease, the MGM/Mandalay Tenant must 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 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.

MGM Resorts filed a Form 8-K with the U.S. Securities and Exchange Commission on July 30, 2020, and reported having operating cash on hand and cash investment balances of approximately $4.8 billion, which included $726 million at the MGP Operating Partnership and $294 million at MGM China. Total liquidity at June 30, 2020, was $8.1 billion, which included $1.9 billion at the MGP Operating Partnership and $1.5 billion at MGM China and comprised cash and cash equivalents and amounts available under the Company’s revolving credit facility, MGP Operating Partnership’s facility, and MGM China’s revolving credit facilities. Regardless of MGM Resorts’ liquidity position, the Company’s net revenue decreased 50% through June 30, 2020 compared to the same periods in the prior year quarter.

As of March 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 Operating Partnership (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 Operating Partnership 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 hotels and casinos in Las Vegas. The sponsors, BREIT and MGP Operating Partnership, together with certain other parties, formed a joint venture to acquire the MGM/Mandalay resorts for an aggregate purchase price of $4.6 billion ($471,892 per room). 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].

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

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