DBRS Morningstar Confirms Ratings on All Classes of BXMT 2020-FL2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of notes issued by BXMT 2020-FL2, Ltd. as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 12.3% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as seven loans are secured by office properties (43.1% of the current trust balance). As a result of complications initially arising from impacts of the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. While all loans remain current, given the decline in desirability for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

As of the April 2023 remittance, the trust reported an outstanding balance of $1.3 billion with 17 loans remaining in the trust. The transaction included a Permitted Funded Companion Participation Acquisition Period that ended in February 2022. Since the previous DBRS Morningstar rating action in November 2022, there has been collateral reduction of $217.8 million, including the full repayment of two loans. The remaining loans in the transaction beyond the office concentration noted above include four loans secured by a mixed-use property (32.7% of the current trust balance) and six loans secured by a portfolio of hospitality properties (24.2% of the current trust balance). The transaction’s property type concentration has remained relatively stable since January 2022 when 57.5% of the trust balance was secured by office collateral, 24.1% of the trust balance was secured by mixed use, and 18.4% of the trust balance was secured by hospitality properties.

The remaining loans are primarily secured by properties in urban and suburban markets. Seven loans, representing 73.0% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 6, 7, or 8, and four loans representing 18.4% of the pool are secured by properties with a DBRS Morningstar Market Rank of 4 or 5, which denotes a suburban market. In comparison with the pool composition in January 2022, properties in urban markets represented 75.4% of the collateral, and properties in suburban markets was unchanged at 18.4% of the collateral. The location of the assets within urban markets potentially serves as a mitigant to loan maturity risk, as urban markets have historically shown greater liquidity and investor demand.

In total, the lender has advanced $275.1 million in loan future funding to 15 of the remaining individual borrowers to aid in property stabilization efforts, with the largest advances made to the borrowers of the Colony Square ($61.9 million), Industrial City ($40.3 million), and One South Wacker ($36.9 million) loans. The funds helped to pay for capital improvements and leasing costs at the properties. An additional $192.9 million of loan future funding allocated to 12 borrowers remains outstanding. The largest portion of available dollars ($56.0 million) is allocated to the borrower of the Liberty View loan for leasing costs. The loan is secured by a mixed-use property in Brooklyn, New York.

No loans are in special servicing; however, seven loans, representing 28.8% of the current trust balance, are on the servicer’s watchlist for upcoming maturity or performance issues. The largest loan on the servicer’s watchlist, Falchi Building (Prospectus ID#17; 8.0% of the current pool balance), is secured by a five-story, mixed-use building in Long Island City, New York. The loan is on the servicer’s watchlist for the upcoming June 2023 maturity. The loan had an initial maturity of January 2022 and was modified to extend the maturity date to December 2022 pursuant to a $2.8 million principal payment. The loan was subsequently modified prior to the December 2022 maturity with terms including three 90-day extension options to a potential final maturity in December 2023, the reduction of the floating interest rate spread to 2.00% from 2.90%, and the waiver of the performance based debt yield test. According to the December 2022 rent roll, the property was 73.2% occupied, a marginal improvement from the 70.6% occupancy rate at YE2021. According to the collateral manager, the property generated a net cash flow of $6.4 million at YE2022, lower than $7.8 million in 2021, which resulted in a debt service coverage ratio (DSCR) of 0.63 times (x).

While not on the servicer’s watchlist, the largest loan in the pool, One South Wacker (Prospectus ID#19; 12.0% of the current pool balance), also remains of concern. The loan is secured by a 1.2 million-square-foot, 43-story office building within the Central Loop submarket of downtown Chicago. Occupancy decreased to 63.8% as of YE2022 from 75.8% at issuance after a number of tenants vacated. The collateral manager reported a YE2022 net operating income of $10.0 million based on trailing 12-month revenue and trailing 12-month expenses, equating to a 0.80x DSCR. The loan has a final loan maturity of December 2023.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)
https://www.dbrsmorningstar.com/research/410913/north-american-cmbs-multi-borrower-rating-methodology

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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