DBRS Morningstar Confirms Ratings on Five Classes of BX Trust 2019-IMC, Maintains Four Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-IMC issued by BX Trust 2019-IMC:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)

The trends on Classes A, B, X-NCP, C, and D are Negative as the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. DBRS Morningstar also removed the ratings on these classes from Under Review with Negative Implications, where they were placed on April 24, 2020.

The following ratings on Classes E, F, G and HRR remain Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral and the bonds’ subordinate position in the transaction structure:

-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)
-- Class HRR at B (high) (sf)

The ratings on these classes do not carry trends.

DBRS Morningstar also discontinued the rating on Class X-CP as the class reached its stated maturity in April 2020 and is no longer receiving interest payments.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. While the collateral for the transaction is utilized primarily as trade show and showroom space and not as traditional retail space, DBRS Morningstar expects the pandemic to affect the collateral. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com.

During its review of the ratings for this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants and, in the case of the collateral, reductions in trade show and convention attendance. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. While DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location, the collateral property functions as showroom and trade show space which presents unique challenges.

LOAN/PROPERTY OVERVIEW
The collateral for the first-mortgage loan is a portfolio of 16 properties comprising 9.6 million square feet (sf) of premier showroom space in the High Point, North Carolina, and Las Vegas, Nevada, markets collectively known as International Market Centers, L.P. (IMC). The collateral represents 88.0% and 92.7% of the Class A trade show and showroom space in the High Point and Las Vegas markets, respectively, with the allocated loan balance split between the 13 High Point properties (50.1%) and the three Las Vegas properties (49.9%).

The loan is sponsored by affiliates of the Blackstone Group Inc. (Blackstone), which began purchasing individual properties in the High Point market in 2011 and has owned all of the collateral properties since 2017, when it purchased the three World Market Center properties in Las Vegas and the 2.66 million-sf International Home Furnishings Center in High Point. Including its ownership of AmericasMart Atlanta, the sponsor owns the majority of the Class A showroom space throughout the United States. At loan closing, Blackstone maintained $400.0 million of cash equity in the deal. The loan matures in April 2021 with three one-year extension options available to the sponsor.

According to the servicer, the portfolio was 84.6% occupied at YE2019, relatively unchanged from closing when tenancy consisted of approximately 1,000 individual retailers and designers with no single tenant accounting for more than 3.0% of the portfolio net rentable area (NRA). DBRS Morningstar did not receive any update regarding tenants that have requested and/or received rent deferrals or abatements as a result of the coronavirus pandemic; however, the loan remains current and the borrower has not requested any relief to date. Under Blackstone’s ownership, the tenant renewal rate has historically been above 85.0%.

Each market holds biannual home and furnishings trade shows, staggered so that an event occurs once every quarter throughout the year with the spring and fall events held in High Point and the summer and winter events held in Las Vegas. The quarterly events are the most important demand drivers for the portfolio, positioned as business-to-business (B2B) trade shows focused on the home furnishings and decor as well as gift industries. The events are essential for buyers to efficiently access and view products in the highly fragmented industries with thousands of manufacturers and more than 60,000 commercial buyers attending each event.

The coronavirus pandemic has had significant effects on the quarterly trade shows as the spring 2020 event in High Point was canceled and the summer 2020 event in Las Vegas was postponed by one month to August 2020. According to event organizers, attendance was down by 80% at the August event compared with the previous year. Additionally, the 315,000-sf IMC Expo expansion, adjacent to the IMC Building C collateral property, opened for the event. The expansion is not collateral for the loan and is expected to compete directly with the collateral given its new, modern showroom status.

The fall 2020 event in High Point commenced on October 12, 2020, and organizers extended it to nine days from five days to account for the enhanced spacing and safety measures. According to the event’s website, 70% of exhibitor and showroom space is open and, while attendance will likely be down from previous years, organizers were optimistic because many East Coast buyers are able to drive to High Point. The week-long winter 2021 event in Las Vegas is currently scheduled to begin on January 24, 2021.

In response to the ongoing pandemic, Blackstone increased the pace and emphasis of its digital strategies. In May 2020, IMC held a three-week High Point Virtual Market Experience, which offered webinars and promoted ShopZio, a B2B platform that IMC’s digital innovation unit, IMC_in, acquired in January 2020. ShopZio allows buyers to have an integrated e-commerce platform with physical markets in Atlanta, High Point, and Las Vegas. According to a June 2020 IMC press release, the number of active ShopZio vendors had nearly doubled and active stock-keeping units increased by 7.0% to 726,287, following IMC’s April 2020 offer of complimentary subscriptions. During May 2020, ShopZio’s month-over-month sales volume doubled with the average order size totaling nearly $1,100 per transaction, which was generally in line with pre-coronavirus spending levels. IMC continues to develop and offer virtual experiences and buyer options. DBRS Morningstar expects these initiatives to work in concert with the physical quarterly events rather than compete with them directly as the in-person trade shows are expected will likely continue to be the most important demand drivers for the collateral. As such, the uncertainty surrounding the viability and attendance of the current and near-term quarterly trade shows enhances risk for the portfolio, especially if tenants determine they can operate and succeed with a diminished or no physical footprint at the collateral properties.

DBRS Morningstar has not received 2020 financial reporting for the loan. The YE2019 net cash flow was $127.1 million, representing a -1.9% variance from the DBRS Morningstar NCF at issuance and a -5.8% variance from the YE2018 figure. The year-over-year change is a result of a decline in base rental revenue; however, as the occupancy rate has remained stable and the impacts of the coronavirus pandemic are not reflected in the YE2019 figure, DBRS Morningstar believes the variance was not indicative of declining portfolio performance prior to the onset of the pandemic. As 2020 financials are reported, there may be a decline in total revenue, however, as trade show revenue has accounted for 9.0% of EGI since 2018.

DBRS Morningstar reanalyzed the NCF derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $129.6 million and DBRS Morningstar applied a cap rate of 10.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $1.233 billion million, a variance of -25.1% from the appraised value of $1.646 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 93.2% compared with the LTV of 69.8% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the specialty use of the collateral as trade show and convention space.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 3.5% to account for property quality and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for the specialty use of the collateral as trade show and convention space as well as for bankrupt retailers and/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value for this review.

Under the moderate scenario, the cumulative rated debt through Class HRR exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from the coronavirus had affected the class.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had variances that were generally higher than those results implied by the LTV sizing benchmarks for Classes E, F, G, and HRR. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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.

Class X-NCP is an interest-only (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.

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

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.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 www.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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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