DBRS Morningstar Finalizes Ratings on BX Commercial Mortgage Trust 2020-VIV4

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-VIV4 (the Certificates) issued by BX Commercial Mortgage Trust 2020-VIV4 (BX 2020-VIV4 or the Issuer):

-- Class A at AAA (sf)
-- Class X at AAA (sf)

All trends are Stable.

In a parallel rating action on December 8, 2020, DBRS, Inc. (DBRS Morningstar) also confirmed its ratings on various classes of certificates issued in connection with certain related securitizations. For more information, please see the related surveillance rating action announcement.

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 Commercial Mortgage Trust 2020-VIVA (BX 2020-VIVA) transaction. The Issuer subsequently elected to securitize additional components of the whole loan via the BX 2020-VIV2, BX 2020-VIV3, and BX 2020-VIV4 securitizations. The BX 2020-VIV4 trust, like the BX 2020-VIV2 and BX 2020-VIV3 trusts, 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 $374.147 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 securitized via the BX 2020-VIV3 transaction were the $429.715 million of senior B notes plus $1.000 million of A notes for a total of $430.715 million. The mortgage loan components now being securitized via the BX 2020-VIV4 transaction are between $400.000 million and $550.000 million of senior A notes, subject to final pricing.

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. The properties remain open and operational under local coronavirus guidelines.

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 well into 2021 or 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. There have been no discussions to date regarding a restructuring of the master lease agreement.

MGM Resorts filed a Form 10-Q with the U.S. Securities and Exchange Commission on November 3, 2020, and reported having operating cash on hand and cash investment balances of approximately $4.6 billion as of September 30, 2020, which included $655 million at the MGP Operating Partnership (MGP) and $396 million at MGM China. Regardless of MGM Resorts’ cash position, the Company’s consolidated net revenues decreased by 62% for the nine-month period ended September 30, 2020, compared with the prior year period. The decline was primarily attributable to the temporary suspension of domestic and Macau casino operations, including travel restrictions to Macau and other operational restrictions; this resulted in an 84% decrease in net revenues at MGM China, a 60% decrease in net revenues at the Company’s Las Vegas Strip resorts, and a 48% decrease in net revenues at the Company’s regional operations.

As of September 2020, MGM Resorts had approximately $828 million in annual obligations under its master lease with MGP, annual rent payments of $245 million under its lease with Bellagio BREIT Venture, and annual rent payments of $292 million under its lease with MGP BREIT Venture (MGM/Mandalay). Given MGM Resorts’ liquidity position and the mission-critical nature of both the MGM/Mandalay properties to the Company’s long-term operations, DBRS Morningstar believes that MGM Resorts remains 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. DBRS Morningstar believes that these circumstances could change, however, especially if vaccines and other mitigation strategies are not successful in bringing the coronavirus pandemic under control into 2021.

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 that 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 sponsors, BREIT and MGP, together with certain other parties, formed a joint venture (JV) to acquire the MGM/Mandalay properties 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 JV), 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.

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

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