DBRS Morningstar Confirms Ratings on All Classes of BXHPP Trust 2021-FILM

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-FILM issued by BXHPP Trust 2021-FILM (the Issuer):

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

All trends are Stable.

The rating confirmations and Stable trends reflect the relatively short time since the transaction closed and the lack of significant changes in the overall performance of the underlying collateral property portfolio, as further detailed below.

The transaction is secured by the borrower’s fee-simple and/or leasehold interests in five Class A office properties, totaling 967,000 square feet (sf) and three studio facilities, totaling approximately 1.3 million sf in Los Angeles. The noncontiguous portfolio forms a synergistic creative campus in Hollywood that is attractive to tenants in the content creation space. Additionally, the properties, specifically the studio component, benefit from high barriers of entry. There have been no substantial deliveries of studio space in past 20 years, largely because of the high cost of land, which is economically unattractive for new construction. The loan is sponsored by a joint venture between Blackstone Property Partners, representing 49.0% of the transaction, and Hudson Pacific Properties, L.P., representing 51.0% of the transaction.

The $1.1 billion mortgage loan was used to refinance the properties and return equity to the sponsors. The loan has an initial two-year loan term, with three one-year extension options. It is interest only (IO) throughout the fully extended five-year loan term, with a fully extended maturity date in August 2026. The loan was added to the servicer’s watchlist in May 2023 for the upcoming maturity in August 2023. The servicer has contacted the borrower regarding maturity plans, and the borrower has informed the servicer it is planning to extend.

The loan is structured to allow individual parcels to be released with a relatively weak prepayment premium of only 105% for the first 30% of the loan balance and 110% of the balance thereafter. The DBRS Morningstar analytical approach penalizes this structure given the possibility that the lower release price could compound adverse selection should the most attractive properties in a portfolio be released first, which would generally be the case. As of the May 2023 remittance, no properties had been released. At closing, the borrower entered into an interest rate cap agreement with a Libor strike price equal to 3.5%, which was required to be in effect until the initial maturity date. The borrower is also obligated to provide a replacement interest rate cap agreement for any extension period.

The reported cash flows have shown significant variance from the issuance figures, as noted at last review. The YE2022 financials reported a net cash flow (NCF) of $79.7 million, up from $73.1 million reported at YE2021. These figures compare with the Issuer’s NCF of $99.6 million and the DBRS Morningstar NCF of $91.3 million. The declines were caused by a combination of drops in effective gross income from the issuance figures and a sharp increase in operating expenses. The servicer reported that the revenue decline can be attributed to the Issuer’s base rent, including $7.4 million for Company 3, whose lease commenced in April 2021. Additionally, the Issuer largely excluded rent abatements and included future rent steps occurring through August 2022, as well as letters of intent from two tenants committed to studio spaces. As the full year’s rent for the new and abated tenants are reflected, income is expected to come back in line with issuance expectations; expense increases were also attributed to one-time costs that will not recur in the near term.

According to the March 2023 rent roll, the property was 89.0% occupied, in line with the prior year. The largest tenant occupies 56.7% of net rentable area (NRA), across both the studio and office space. The tenant has significantly invested in the space and uses the property as its production headquarters. The remaining tenancy is quite granular, with the second- and third-largest tenants each representing approximately 6.0% of NRA. The earliest lease expiration between the largest three tenants is September 2031, and there is minimal roll scheduled through the next year. While studio leases are generally short term (typically six to 12 months), the sponsor has successfully executed longer-term lease agreements, with a weighted-average lease term of 7.2 years at issuance. Additionally, the sponsor has negotiated must-take minimums with various tenants for grip and light rentals, thereby reducing the volatility of the grip and light revenue line item.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X-NCP is an IO certificate that references 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.

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 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 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

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