DBRS Morningstar Finalizes Provisional Ratings on BX Trust 2021-LBA

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by BX Trust 2021-LBA:

-- Class A-V at AAA (sf)
-- Class B-V at AA (high) (sf)
-- Class C-V at AA (low) (sf)
-- Class D-V at A (sf)
-- Class E-V at BBB (low) (sf)
-- Class F-V at BB (low) (sf)
-- Class G-V at B (low) (sf)
-- Class X-V-CP at A (high) (sf)
-- Class X-V-NCP at A (high) (sf)
-- Class A-JV at AAA (sf)
-- Class B-JV at AA (high) (sf)
-- Class C-JV at AA (low) (sf)
-- Class D-JV at A (low) (sf)
-- Class E-JV at BBB (low) (sf)
-- Class F-JV at BB (low) (sf)
-- Class G-JV at B (low) (sf)
-- Class X-JV-CP at A (sf)
-- Class X-JV-NCP at A (sf)

All trends are Stable. DBRS Morningstar did not rate Classes H-V and H-JV.

The Class X-V-CP, X-V-NCP, X-JV-CP, and X-JV-NCP certificates are interest-only (IO) classes whose balances are notional.

The transaction consists of two separate, uncrossed portfolios of assets, Pool 1 (Fund V; 17 assets) and Pool 2 (Fund JV; 35 assets), each of which supports the payments on its respective series of certificates. Generally, each of the portfolios exhibits strong functionality metrics and both are well-located in major industrial markets.

The majority of both portfolios consists of functional bulk warehouse product with strong functionality metrics and comparatively low proportions of office square footage. The Fund V properties have a weighted-average (WA) year built of 1997 and WA clear heights of 27.1 feet, while the Fund JV properties have a WA year built of 1994 and WA clear heights of 28.0 feet. The percentage of office across Fund V and Fund JV is 14.5% and 6.1%, respectively. The metrics of both portfolios compare favorably with other industrial portfolios recently analyzed by DBRS Morningstar.

The Fund V and Fund JV portfolios benefit from their locations across numerous strong-performing west-coast gateway industrial markets, including the markets in Los Angeles, Orange County, and Inland Empire in California; Portland, Oregon; Seattle; and Phoenix. The Fund V submarkets have a WA availability rate of 6.38%, and the Fund JV submarkets have a WA availability rate of 6.88%, each of which is below the Q3 2020 national average of approximately 7.6% according to CBRE EA.

The portfolios have been largely unaffected by the immediate-term disruptions from the Coronavirus Disease (COVID-19) pandemic, with collections averaging 99% between April and November 2020 for Fund V, and 98% for Fund JV through the same period. Furthermore, DBRS Morningstar believes that industrial properties are among the best positioned to weather the ongoing short- and medium-term market dislocations related to the pandemic.

The DBRS Morningstar loan-to-value ratios on the trust loans are substantial: 105.45% and 113.88%, respectively, for the Fund V and Fund JV portfolios. The high leverage nature of the transactions, combined with the lack of amortization, could result in elevated refinance risk and/or loss severities in an event of default.

Leases representing approximately 72.5% and 87.1% of DBRS Morningstar’s base rent are scheduled to roll through the fully extended loan term across the Fund V and Fund JV portfolios, respectively. Significant portfolio rollover typically indicates the potential for future cash flow volatility, particularly if market rents or occupancy rates deteriorate over time. Additionally, DBRS Morningstar did not conclude that either portfolio's rents were significantly below market, therefore limiting the roll-to-market upside as leases expire.

Both portfolios are heavily concentrated in terms of both allocated loan amount (ALA) and net operating income in the Southern California region. While these markets continue to be among the best-performing industrial markets in the country, both pools are at an elevated exposure if market fundamentals deteriorate unexpectedly. Additionally, the top five tenants in Pool 1 (Fund V) are responsible for 44.0% of the portfolio's base rent, which is unusually concentrated, even for a smaller portfolio of assets. Similarly, the top five tenants in the larger Pool 2 (Fund JV) are responsible for 25.0% of the portfolio's base rent, which is still comparatively concentrated.

Both mortgage loans have a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the unpaid principal balance. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace as compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments.

The borrower can also release individual properties across both portfolios with customary requirements. However, in both cases, the prepayment premium for the release of individual assets is 105.0% of the ALA for the first 30.0% of the original principal balance of the mortgage loan and 110.0% thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115.0% and, as a result, applied a penalty to the transaction's capital structure to account for the weak deleveraging premium.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-V-CP, X-V-NCP, X-JV-CP, and X-JV-NCP are IO certificates that reference 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.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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