DBRS Morningstar Confirms All Ratings on Five BX Commercial Mortgage Trust Transactions

DBRS, Inc. (DBRS Morningstar) confirmed all ratings of the Commercial Mortgage Pass-Through Certificates (the Certificates) on five BX Commercial Mortgage Trust transactions as follows:

BX Commercial Mortgage Trust 2020-VIVA:
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)

BX Commercial Mortgage Trust 2020-VIV2:
-- Class C at A (sf)

BX Commercial Mortgage Trust 2020-VIV3:
-- Class B at AA (low) (sf)

BX Commercial Mortgage Trust 2020-VIV4:
-- Class A at AAA (sf)
-- Class X at AAA (sf)

BX Commercial Mortgage Trust 2021-VIV5 (BX 2021-VIV5):
-- Class A at AAA (sf)
-- Class X at AAA (sf)

All trends are Stable.

The collateral for these transactions, which had closing dates between May 2020 and October 2021, are certain components of a $3.0 billion first-priority mortgage loan encumbering both the MGM Grand Hotel and Mandalay Bay Resort (MGM/Mandalay) properties in Las Vegas. The issuer elected to issue components of the whole loan across these five transactions because of the market volatility caused by the Coronavirus Disease (COVID-19) pandemic. For a description of the debt pieces by transaction, please see the press release dated October 18, 2021, for the BX 2021-VIV5 transaction on the DBRS Morningstar website at www.dbrsmorningstar.com.

The rating confirmations reflect the improving performance of the underlying assets since DBRS Morningstar’s last rating action in October 2022. At that time, DBRS Morningstar had been monitoring the restabilizing of the hotels’ performance since the onset of the coronavirus pandemic. The hospitality market in Las Vegas continues its strong recovery as per the year-to-date (YTD) June 2023 Las Vegas Convention and Visitors Authority (LVCVA) Executive Summary report indicating a 9.4% year-over-year increase in total visitor volume, a 750-basis-point increase in average occupancy, and a 24.2% year-over-year increase in revenue per available room (RevPAR). Both properties are in excellent condition, with a combined $5.7 million in ongoing or recently completed capital projects as of the February 2023 servicer site inspections.

The underlying properties’ reported cash flows were understandably depressed at the time of issuance, given travel restrictions and other mitigation efforts aimed at restricting the spread of the coronavirus. Since then, cash flow has steadily improved year over year. The net cash flow (NCF) for the trailing 12-month period ended March 31, 2023, was reported to be $311.5 million (reflecting a debt service coverage ratio (DSCR) of 2.88 times (x)), up from the reported NCF of $280.6 million at YE2022 (reflecting a DSCR of 2.59x) and $37.7 million at YE2021 (reflecting a DSCR of 0.35x). The consolidated occupancy for the MGM/Mandalay properties was 91.3% as of March 2023, up from 87.9% at YE2022 and 73.1% at YE2021. In comparison, DBRS Morningstar concluded a stabilized NCF and occupancy of $440.5 million and 91%, respectively, at issuance.

A possible driver of the delta between current and expected performance is convention traffic. The properties together consist of more than 2.9 million square feet of meeting space and are well known in the U.S. hospitality market as major convention destinations. At issuance, DBRS Morningstar noted that both hotels have historically relied heavily on convention business. According to the LVCVA Executive Summary Report, the YTD June 2023 convention attendance for the Las Vegas market totaled 3.2 million, up 30.7% from 2.5 million attendees at YTD June 2022 In comparison, Las Vegas convention attendance for the YE 2019 totaled 6.7 million. Both the MGM/Mandalay properties are located along the southern portion of the Las Vegas Strip within walking distance of the recently completed Allegiant Stadium, home of the National Football League’s Las Vegas Raiders. Based on the positive property level and submarket trends exhibited since issuance, including cash flow, occupancy, average daily rate, RevPAR, and convention attendance, DBRS Morningstar expects that the assets will achieve stabilized performance during the remaining nine-year loan term.

As an additional mitigant, a recent transfer of ownership interests in the properties indicates sufficient value relative to the overall debt. In December 2022, the original sponsor of the MGM/Mandalay properties, Blackstone Real Estate Income Trust, announced the sale of its majority stake in the assets to the existing minority stake owner, VICI Properties. The sale, which closed in January 2023, implies a combined property value of $5.5 billion, a positive 21.0% variance from the DBRS Morningstar concluded value of $4.5 billion. The resulting DBRS Morningstar loan-to-value ratio of 65.97%, based on a 9.69% capitalization rate, represents a conservative leverage point with the ability to withstand a substantial realized decline in market value prior to mortgage impairment.

The loan is interest only (IO) through the initial 10 years of its 12-year term. At issuance, the borrowers, Mandalay PropCo, LLC and MGM Grand PropCo, LLC (which are subsidiaries of the sponsoring entity), executed a 30-year triple-net master lease with two 10-year renewal options with the MGM/Mandalay Tenant, a wholly owned subsidiary of MGM Resorts International (MGM Resorts). DBRS Morningstar believes the mortgage loan that serves as collateral for the Certificates benefits from unique structural features that provide additional protection for bondholders. Notably, the master lease structure insulates the mortgage loan from direct exposure to the volatility of the properties’ operating cash flows. The terms of the master lease require the MGM/Mandalay Tenant to make an initial master lease payment of $292 million per year, with those payments to escalate by 2.0% through the lease’s 15-year anniversary date. The lease payments escalate by the greater of 2.0% and CPI (with CPI capped at 3.0%) for the remainder of the lease term. The transaction also benefits from a guaranty provided by MGM Resorts, which covers payment and performance of the MGM/Mandalay Tenant’s monetary obligations and certain other obligations under the master lease agreement. In addition to the payment and performance guaranty, MGM Resorts also executed a shortfall guaranty.

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).

Class X in the BX 2020-VIV4 transaction and Class X in the BX 2021-VIV5 transaction are IO certificates that reference 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 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

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].