DBRS Morningstar Upgrades One Class, Confirms Remaining Classes of BX Trust 2018-EXCL

DBRS Limited (DBRS Morningstar) upgraded one class of the Commercial Mortgage Pass-Through Certificates, Series 2018-EXCL issued by BX Trust 2018-EXCL as follows:

-- Class B to AA (sf) from AA (low) (sf)

In addition, DBRS Morningstar confirmed the ratings on the remaining three classes as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which is secured by a portfolio of retail properties as further described below. The rating upgrade for Class B is supported by the increased credit support that has resulted from property releases to date, as well as the results of the stressed scenario considered by DBRS Morningstar as part of this review, as further described below.

The subject transaction is collateralized by a single mortgage loan evidenced by two componentized promissory notes with an original aggregate principal amount of $576.2 million. The loan is secured by the borrower’s fee-simple interest in a portfolio of cross-collateralized and cross-defaulted retail properties in California, Texas, 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 2022 remittance period for the extended maturity date of September 2022; however, the servicer noted that the borrower intended to exercise its third extension option to September 2023.

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 of the August 2022 remittance, property releases for eight of the original collateral properties had been processed, with six properties remaining. The trust balance of $207 million reflects a collateral reduction of 64.0% since issuance. Five properties have been released in roughly the last 12 months: Promenade, Park West Place, Gilroy Crossing, Highland Reserve, and Lake Pleasant Pavilion. The allocated loan amount at issuance for those five properties was $90.9 million, $63.7 million, $40.9 million, $31.6 million, and $20.3 million, respectively.

The sponsor for the transaction is BPP Retail Holdings, LP, together with certain affiliates of the Blackstone Group, L.P. The sponsor acquired the portfolio as part of the acquisition of Excel Trust in July 2015 and cashed out $121.5 million of equity with this refinancing.

The servicer-reported consolidated financial statement for the portfolio showed a YE2021 net cash flow (NCF) of $51.0 million; however, that figure includes revenue and expenses for properties released during that time frame. The YE2021 NCF represents a decline of 8.1% from the Issuer’s NCF of $55.5 million for the remaining pool at that time but is above DBRS Morningstar’s NCF of $46.9 million for those same properties. The resulting in-place debt service coverage ratio for YE2021 was 6.55 times (x) compared with 5.25x at YE2020 and 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 29.5% at YE2021 from YE2020 and 61.3% at YE2021 from YE2019.

In the analysis for this review, DBRS Morningstar excluded the five released properties from the pool, resulting in a DBRS Morningstar NCF of $23.9 million. DBRS Morningstar further applied a blended cap rate of 8.09%, which resulted in a DBRS Morningstar value of $295.2 million, a variance of -35.8% from the issuance appraised value of $460.1 million for the remaining collateral. The DBRS Morningstar value implies a loan-to-value (LTV) ratio of 70.3% compared with the LTV of 45.1% on the issuance appraised value for the remaining collateral. To evaluate the potential for upgrades given the significant paydown in the last year, DBRS Morningstar further considered a haircut to the DBRS Morningstar NCF that generally represents a peak-to-trough NCF decline, and, based on the LTV sizing benchmarks resulting from that stressed analysis, the upgrade to Class B was warranted.

Primary credit risk persists for the short duration of the remaining lease terms for eight of the top 10 tenants. According to the March 2022 rent roll, portfolio occupancy is 91.9% compared with 94.7% at issuance. The top 10 tenants (37.3% of the net rentable area (NRA)) have a weighted-average remaining lease term of less than four years, compared with five years for the top 10 tenants at issuance. After excluding the two tenants with the longest remaining lease terms, however, the weighted-average remaining lease term falls to approximately three years, which is unchanged from issuance. These tenants comprise 28% of the NRA compared with 32.1% of the NRA at issuance.

As noted, DBRS Morningstar generally considers the release premium structure for this transaction to be weak. While the remaining balance is less than 30.0% of the initial loan balance and a sequential payment structure is now in place, there remains 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 LTV sizing benchmarks to account for this increased risk. Total negative adjustments of –1.5% for cash flow volatility, property quality, and market fundamentals were made.

The blended 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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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