DBRS Morningstar Confirms All Ratings of BX Trust 2021-LGCY

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

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (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 overall stable performance in the two years since issuance, as the reported net cash flow (NCF) of $32.4 million for YE2022 remains in line with the DBRS Morningstar NCF of $28.8 million. Occupancy rates remain relatively stable across the portfolio as well, and there have been no property releases to date.

The collateral consists of the borrower’s fee-simple interest in 12 Class A/B multifamily properties consisting of 3,030 units across six states, with the largest concentrations in Texas, Florida, and North Carolina. The majority of the underlying properties, built between 1999 and 2014, are situated in highly desirable markets with strong growth potential based on historical occupancy and rental rate trends. No individual property accounts for more than 13.0% of the portfolio net operating income. The loan benefits from experienced sponsorship provided by an affiliate of Blackstone Group, Inc., a global real estate investment platform, which contributed $247.3 million in equity at closing as part of the subject transaction.

The subject transaction totals $575.0 million and consists of three componentized, floating-rate promissory notes. Loan proceeds and sponsor equity were used to acquire the portfolio and fund closing costs. Individual properties can be released, subject to customary debt yield and loan-to-value (LTV) tests. Prepayment premiums for the release of individual assets is 105.0% of the allocated loan amount (ALA) for the first 30.0% of the original principal balance and 110.0% of the ALA thereafter. The transaction has a partial pro rata structure that allows for pro rata pay downs for the first 30.0% of the original principal balance.

The floating-rate loan has an initial maturity date of October 9, 2023, with three 12-month extension options and is interest only throughout its five-year fully extended loan term. As a condition to exercising its extension options, the borrower is required to enter into an interest rate cap agreement with a strike rate equal to the greater of 3.5% or a rate that results in a debt service coverage ratio (DSCR) of at least 1.10 times (x). DBRS Morningstar inquired about the loan’s upcoming maturity date; however, according to the servicer, the borrower has not yet given indication of its plans to execute its extension option. Based on recent performance trends as described below, DBRS Morningstar believes the loan is well positioned to execute on its first extension option.

The loan continues to perform in line with DBRS Morningstar’s expectations. The loan reported a YE2022 NCF of $32.4 million, representing a DSCR of 1.76x and a debt yield of 5.6%. This remains in line with the YE2021 NCF of $31.1 million and is slightly higher than the DBRS Morningstar NCF of $28.8 million. The loan reported an annualized NCF of $35.1 million for the trailing three-month period ended March 31, 2023. Although cash flow has improved year over year, DSCR declined to 1.0x as of Q1 2023 because of the loan’s floating-rate coupon and an increase in debt service. According to the financials provided by the servicer, the loan’s interest rate increased to 6.44% as of March 2023 from 1.82% as of March 2022, and debt service increased 78.0% from 2021 to 2022. DBRS Morningstar’s ratings are based on a value analysis completed at issuance, resulting in a DBRS Morningstar value of $443.6 million and a whole loan LTV of 129.6%. Despite the increase in interest rates, DBRS Morningstar believes the value of the collateral has not materially declined since issuance, providing further support for the rating confirmations.

Per the March 2023 rent roll, portfolio occupancy was 93.7%, in line with the YE2022 figure of 94.0%. Individual property occupancies range from 87.9% to 97.1%. The vacancy rate at issuance was 3.0%, while DBRS Morningstar concluded a blended vacancy rate of 6.1%. According to Reis, the Q2 2023 weighted-average market vacancy rate for the portfolio was 5.8%, an increase from 4.9% the prior year. Although more than 65.0% of the properties in the portfolio are in suburban markets, which have historically higher probabilities of default, the relatively low market vacancy rates and geographical diversity of the portfolio help to mitigate some of the market risk. In addition, there has been year-over-year rental rate growth, as evidence by the portfolio’s weighted-average rental rate of $1,702.20 per unit, compared with $1,449.00 at issuance. Given the stable occupancy, improving cash flow, geographic diversity, and experienced sponsorship, DBRS Morningstar believes the portfolio will continue performing in line with issuance expectations.

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
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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)

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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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