DBRS Morningstar Confirms Ratings on All Classes of BX Trust 2018-EXCL and Removes Four Classes From Under Review With Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-EXCL issued by BX Trust 2018-EXCL (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at BBB (low) (sf)
-- Class D at BB (low) (sf)

The ratings of Classes A, B, C, and D have been removed from Under Review with Negative Implications, where they were placed on October 9, 2020. All trends are Stable.

The rating confirmations and removal of four classes from Under Review with negative Implications reflects the overall stable performance of the transaction, which is secured by a portfolio of retail properties as further described below. In October 2020, DBRS Morningstar noted Coronavirus Disease (COVID-19) pandemic-driven concerns for retail property types as the driver for the Under Review with Negative Implications rating actions; however, in general, the underlying properties have shown resilience amid the effects of the pandemic and the most recently reported occupancy rates remain in line with DBRS Morningstar’s expectations for the portfolio as a whole.

The transaction’s only asset is a single mortgage loan evidenced by two componentized promissory notes in the original aggregate principal amount of $576.2 million. The loan is secured by the first mortgage or deed of trust liens on the borrower’s-fee simple interest in a portfolio of cross-collateralized and cross-defaulted retail properties in California, Texas, Arizona, and Virginia. The interest-only mortgage loan bears interest at a floating rate and had an initial maturity date in September 2020, subject to five successive one-year extension options. The loan was on the servicer’s watchlist as of the August 2021 remittance period for the extended maturity date of September 2021; however, the servicer noted that the borrower planned to exercise its second extension option to September 2022. With the release of the League City Towne Center property in May 2021, some outstanding interest shortfalls resulted in a realized loss to the Class D certificates of $3,403 (not including the portion allocated to the VRR piece), as first shown in the June 2021 remittance. DBRS Morningstar deems this relatively miniscule loss to be one-time in nature and not indicative of the credit quality of the security, and, as such, DBRS Morningstar did not downgrade the rating with this review.

The transaction is structured with weak release premiums and a pro rata prepayment structure on the first 30.0% of the initial loan balance. The release provisions for individual properties within the portfolio, among other stipulations, are outlined in the offering documents and are subject to no event of default, a debt-yield test, and payment of an amount that is 105.0% for the first 25.0% of the loan balance and 110.0% thereafter. As a result, there is adverse selection risk that could result in poorer performing assets remaining in the pool, while the higher-quality assets are being released. DBRS Morningstar applied negative adjustments to the final loan-to-value ratio (LTV) sizing benchmarks to account for these increased risks.

The senior balance of the loan at issuance was $576.2 million, and the loan was secured by 11 power centers, one community center, one grocery-anchored center, and one movie theater. Since issuance, three properties—Stadium Center, League City Towne Center and Edwards Theater—have been released and the loan amount has been paid down by $98.9 million. The allocated loan amount (ALA) at issuance for the Stadium Center, League City Towne Center, and Edwards Theater properties was $30.2 million, $27.9 million, and $20.0 million, respectively.

The remaining collateral for the loan is secured by nine power centers representing 84.5% of the ALA; one grocery-anchored center, representing 9.2% of the ALA; and one community center, representing 6.3% of the ALA. The remaining collateral is primarily concentrated in California with five properties, representing 48.2% of the ALA. However, these properties, Monte Vista Crossing, Park West Place, Gilroy Crossing, Highland Reserve, and RiverPoint, are located across four separate metropolitan statistical areas. There are three properties, representing 25.4% of the ALA, in Texas; two properties, representing 20.7% of the ALA, in Arizona; and one property, representing 6.4% of the ALA, in Virginia. The remaining properties have a weighted-average DBRS Morningstar Market Rank by ALA of 3, implying the remaining collateral is generally located in light-suburban areas.

The sponsor for the transaction is BPP Retail Holdings, LP, together with certain affiliates of the Blackstone Group, L.P. (Blackstone), however the guarantor’s recourse liability is limited to 10.0% of the then-outstanding principal balance. The sponsor acquired the portfolio as part of the acquisition of Excel Trust in July 2015. The sponsor cashed out $121.5 million of equity with this refinancing. Blackstone has invested more than $55.0 million since acquiring the pool in 2015, which increased the occupancy and operating cash flow from the properties.

At issuance, the portfolio exhibited an occupancy rate of 96.6% per the rent roll dated August 31, 2018, and the properties were leased by more than 350 tenants. The remaining collateral reported an occupancy rate of 87.9% per the June 30, 2021, rent roll. Notable occupancy rate drops since issuance within the portfolio at a property-level basis include (1) Southlake Park Village, as the occupancy rate has declined to 73.2% from 86.8% and (2) West Broad Village, where the occupancy rate has declined to 92.8% from 100.0%. The largest tenants for the remaining pool include Kohl’s Corporation (7.3% of total net rentable area (NRA)), Lowe’s Companies, Inc. (4.3% of total NRA), Living Spaces Furniture (3.7% of total NRA), Ross Stores, Inc. (3.5% of total NRA), and JCPenney (2.9% of total NRA); no other tenant accounts for more than 3.0% of the total NRA.

The servicer reported a consolidated financial statement for the portfolio which showed a year-end (YE) 2020 net cash flow (NCF) of $57.8 million, which included revenue from the League City Towne Center property, which has since been released as of May 2021. This remains in line with the Issuer’s NCF of $58.5 for the remaining pool at that time, and in excess of DBRS Morningstar’s NCF of $49.6 for the 12 properties at the time. The resulting debt service coverage ratio (DSCR) for YE2020 was 5.25 times (x) compared with 2.84x at YE2019, with the increase largely the result of the effects of a favorable interest rate environment on the floating-rate loan, as debt service decreased by 45.2%.

In its analysis for this review, DBRS Morningstar excluded the released property League City Town Center from the pool, resulting in a DBRS Morningstar NCF of $46.9 million. DBRS Morningstar further applied a blended cap rate of 8.01%, which resulted in a DBRS Morningstar value of $586.0 million, a variance of -34.8% from the issuance appraised value of $899.1 million for the remaining collateral. The DBRS Morningstar value implies an LTV of 81.5% compared with the LTV of 53.1% on the issuance appraised value for the remaining collateral.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the retail property subtypes of the collateral, the locations, and market positions of the assets.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling -1.5% to account for cash flow volatility, property quality, and market fundamentals. Also, as previously noted, DBRS Morningstar also made other negative adjustments to account for certain property release thresholds and the pro rata structure of the transaction.

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.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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. 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.

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

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