DBRS Morningstar Confirms Ratings on All Classes of BX Commercial Mortgage Trust 2020-VKNG

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-VKNG issued by BX Commercial Mortgage Trust 2020-VKNG (the Trust) as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance for the underlying warehouse and logistics portfolio, which benefits from tenant granularity and largely urban infill property locations, both of which contribute to strong occupancy rates and cash flow stability over time.

At issuance, the portfolio consisted of 67 industrial and logistics properties totaling approximately 8.2 million square feet across six states—Minnesota, Colorado, California, New Jersey, Georgia, and New York. The issuance whole loan of $645.0 million consisted of $600.0 million of senior debt held in the Trust and $45.0 million of mezzanine debt held outside of the Trust. The interest-only (IO) floating-rate loan had an initial two-year term with three one-year extension options. To exercise an extension, the borrower must purchase an interest rate cap agreement that must be the greater of 3.5% or at a price that will ensure a minimum debt service coverage ratio (DSCR) of 1.10 times (x) during the extension periods. The borrower exercised its first extension option in October 2022 extending the maturity to October 2023, with a fully extended maturity date in October 2025.

The loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the initial 30.0% of the unpaid principal balance and then turns to sequential-pay structure. The loan has release provisions where the prepayment premium to release individual assets is 105.0% of the allocated loan balance until the outstanding principal balance has been reduced to $420.0 million, at which point the release premium will increase to 110.0%. The sponsors, Blackstone Real Estate Partners IX and certain co-investment and managed vehicles under common control, purchased the property through several transactions from October 2019 to March 2020. Since issuance, 33 of the original 67 properties have been released. Thirteen of these loans have been released since the last rating action, reducing the transaction balance by 35.5% to $387.3 million as of the June 2023 reporting.

The portfolio reported a YE2022 occupancy rate of 96.0%, compared with YE2021, YE2020, and issuance occupancy rates of 91.9%, 90.5%, and 90.0%, respectively. According to the financials for the trailing 12 months ended December 31, 2022, the 34 unreleased properties reported net cash flow (NCF) of $35.2 million. This is still above DBRS Morningstar expectations when accounting for property releases. The YE2022 whole-loan DSCR was reported at 2.09x, compared with YE2021 DSCR of 3.44x and DBRS Morningstar DSCR of 3.23x at issuance. Because of the floating-rate structure of the loan and the rising interest rate environment, the debt service amount increased by more than 30% in YE2022.

In the analysis for this review, DBRS Morningstar derived an updated NCF of $29.0 million based on the assets remaining in the pool. Using a 7.25% capitalization rate, DBRS Morningstar calculated a value of $399.3 million. The updated DBRS Morningstar value implies a loan-to-value (LTV) ratio of 97.0% to the trust balance, compared with the original portfolio’s LTV of 93.9% at issuance. The vast majority of the remaining properties (56.3% of the pool) are concentrated in the Minneapolis-St. Paul metropolitan statistical area, which has historically exhibited strong absorption and favorable demographics. The industrial vacancy rate for the Minneapolis-St. Paul market was 2.6% as of Q1 2023, according to CBRE, compared with the national average vacancy rate of 3.5%. The average year built for the remaining portfolio is 1994, compared with 1992 at issuance, suggesting property releases have been concentrated in older stock of lower quality. DBRS Morningstar maintained positive adjustments to the LTV sizing benchmarks to give credit to the cash flow stability, property quality, and favorable market conditions, totaling 5.25%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

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

The credit 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

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

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

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