DBRS Morningstar Assigns Provisional Ratings to BX Trust 2021-ARIA

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-ARIA to be issued by BX Trust 2021-ARIA:

-- Class A at AAA (sf)
-- Class A-1 at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (sf)
-- Class HRR at BB (low) (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT at AAA (sf)

All trends are Stable.

Classes X-CP and X-EXT are interest-only (IO) classes whose balances are notional.

BX Trust 2021-ARIA is a single-asset/single-borrower transaction collateralized by the borrower’s leased-fee interest in the Aria Resort & Casino (Aria) and Vdara Hotel & Spa (Vdara) hotel and casino properties located on Las Vegas Boulevard in Las Vegas, Nevada.

Despite the disruptions and ongoing uncertainty in the lodging and gaming sectors attributable to the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar takes a generally positive view on Blackstone Real Estate Partners IX L.P.’s (BREP) acquisition of the Aria and Vdara properties. The transaction represents their third major resort casino sale-leaseback transaction in the past two years in Las Vegas; previous transactions using the same structure were collateralized by the Bellagio and the MGM Grand/Mandalay Bay properties. The sale-leaseback strategy allows experienced gaming operators like MGM Resorts International (MGM) to optimize capital allocation away from the ownership of real estate while maintaining operational control over their portfolios.

The Aria and Vdara properties are well located along the central portion of the Las Vegas Strip, which results in a critical mass of foot traffic attributable to numerous nearby attractions and properties, including the Bellagio and Cosmopolitan. Furthermore, the properties are the centerpiece of the 16.7 million-square-foot mixed-use development known as CityCenter, which includes the high-end Shops at Crystals retail complex, among other attractions. Finally, the Aria Express (formerly known as the CityCenter Tram) monorail system connects the properties via the Shops at Crystals with Bellagio to the north and Park MGM to the south.

Predictably, performance at the Aria and Vdara properties has suffered over the last 18 months as the ongoing coronavirus pandemic besieged the economy, crippled domestic and international travel, and resulted in mandated closures and other operating restrictions. However, the properties experienced a robust rebound in performance as vaccinations rolled out and as Americans emerged from months of quarantine. In 2021, combined monthly EBITDAR during the months of May, June, July, and August exceeded the same periods in 2019. Additionally, the combined financials for both properties for the trailing-12-month (T-12) period ended August 31, 2021, which include several heavily depressed months of performance during the second wave of the pandemic, have rebounded to approximately 70% of their stabilized 2019 levels, compared with only 52% in the T-12 period ended June 30, 2021 (further illustrating the strong rebound over the summer).

MGM Resorts has invested a significant amount of capital, nearly $700 million, into both properties since 2012 in order to maintain and improve their performance. MGM is planning to invest several hundred million dollars across both properties over the next four years, including a major room renovation at Aria. Furthermore, under the terms of the master lease, MGM is required to invest a minimum of 4.0% of actual net revenues per year into the properties throughout the five-year loan term and between 2.5% and 3.0% per year thereafter.

The transaction benefits from a guaranty provided by MGM, which covers payment and performance of all monetary obligations and certain other obligations of the MGM Tenant under the master lease agreement. However, unlike prior transactions, MGM has not provided a shortfall guaranty for the mortgage loan. While MGM is not an investment grade-rated entity, the firm is well capitalized and had revenues of approximately $12.9 billion and EBITDA of approximately $3 billion in 2019.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types, creating a substantial element of uncertainty around the recovery of demand in the hospitality sectors, even in stronger markets that have historically been highly liquid. Both properties were closed from April 2020 through June 2020 because of government restrictions as a result of the pandemic and experienced combined occupancy and revenue per available room declines to 50.2% and $125.14 as of YE2020 from 90.6% and $231.89 as of YE2019. As previously discussed, the properties have rebounded sharply in 2021, but the recovery could be hampered by unforeseen changes in public health circumstances or the emergence of new variants.

DBRS Morningstar’s net cash flow and value reflects normalized occupancy assumptions of 90.2% for Aria and 90.8% for Vdara, which are above the 55.5% and 56.0% occupancy rates for the properties, respectively, as of the T-12 period ended August 31, 2021. DBRS Morningstar elected to stabilize the properties and assumed occupancy in line with pre-pandemic performance given the robust recovery trajectory, MGM's extensive experience operating casino and hospitality properties, strong operating history, and superior location in the center of the Las Vegas Strip. DBRS Morningstar accounted for this stabilization risk by applying a penalty to its qualitative adjustments.

A substantial component of revenue across the properties is derived from non-room revenue, including gaming revenue (27.3% of DBRS Morningstar Revenue) and revenue from food and beverage outlets (29.5%). These revenue sources are generally more volatile than room revenue; however, the proportion of gaming revenue across both properties is consistent with most other properties on the Las Vegas Strip, which generally derive around 30% of revenue from casino operations. Gaming revenue is also disproportionately dependent on the trends and habits of high-end international gamblers, who have been slower to return to Las Vegas than domestic gamblers because of international travel restrictions.

The borrowers have entered into a master lease agreement with MGM Lessee III, LLC (the Master Tenant or the MGM Tenant). While the borrowers and the Master Tenant are not under common control and a true lease opinion was provided, master lease arrangements may still pose a risk of recharacterization of the master lease as a financing from the borrowers to the Master Tenant. Furthermore, the master lease allows the Master Tenant to obtain leasehold mortgage and/or mezzanine financing. The master lease and loan documents also contain certain restrictions that may affect the lender’s rights and remedies. For example, the master lease restricts certain transfers of the property to designated competitors of the Master Tenant, which could significantly reduce the pool of qualified buyers and therefore reduce liquidity.

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-CP and X-EXT are IO certificates that reference 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.

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 North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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