DBRS Morningstar Confirms Credit Ratings on All Classes of BX Trust 2021-RISE

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

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

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which is backed by a portfolio of multifamily properties across seven states and has exhibited healthy occupancy and net cash flow (NCF) figures based on the most recent financials.

At issuance, the loan was secured by the borrower’s fee-simple interest in 17 Class A and Class B multifamily properties, totaling 6,410 units, across seven states, including Georgia, Texas, Florida, and Colorado. The issuance loan proceeds of $1.2 billion along with $485.2 million of sponsor equity facilitated the acquisition of the portfolio. All of the properties had received extensive renovations by the previous owners, totaling $162.5 million. The loan is sponsored by a joint venture between Blackstone Real Estate Income Trust (BREIT), with a 98.0% stake in the portfolio, and Cortland Sponsors, LLC.

The transaction features a partial pro rata paydown structure for the first 30.0% of the original principal balance. In addition, individual assets may be released from the transaction, subject to debt yield tests, at a prepayment premium of 105% of the allocated loan amount (ALA) until the outstanding loan amount is reduced to 70%, at which point the prepayment premium increases to 110%. Since issuance, two properties, The Garratt (previously 5.0% of the ALA) and Cortland Southpark Terraces (previously 2.9% of the ALA), were released from the portfolio, therefore reducing the outstanding loan balance to $1.1 billion as per the October 2023 reporting, which represents an 8.3% collateral reduction from issuance.

The interest-only loan has an initial two-year term and three one-year extension options, with the fully extended maturity date in November 2026. As per the issuance documents, the borrower is required to purchase an interest rate cap agreement with each extension. According to the servicer, the borrower intends to exercise its first option to extend the term to November 2024.

According to the trailing-12 month (T-12) financials for the period ended June 30, 2023, the portfolio had a consolidated occupancy rate of 93.2%, compared with 95.4% at issuance. NCFs continue to steadily increase year-over-year and when adjusting for the released collateral, the T-12 for the period ended June 30, 2023, NCF is $75.5 million, compared with the YE2022 NCF of $72.0 million and the DBRS Morningstar NCF of $63.0 million. Despite the improvement in NCF, the increase in interest rates since the loan was closed has resulted in a lower implied debt service coverage ratio (DSCR), which has declined to 1.12 times (x), compared with the YE2022 DSCR of 1.90x. Although the interest rate cap agreement mitigates against large swings in the interest rate, the significant cost to the borrower is also a consideration. In addition, DBRS Morningstar notes that the refinance risks have increased from issuance given the current interest rate environment and low in-place coverage. The sponsor’s significant equity contribution to close the subject transaction, as well as the overall desirability of the collateral portfolio should provide motivation for additional capital injection to continue purchasing the required rate caps and to secure a replacement loan at the final maturity in 2026, if necessary.

Given the property releases, DBRS Morningstar derived an updated value of $969.1 million based on the DBRS Morningstar NCF of $63.0 million and applied a capitalization rate of 6.5%, which represents a 37.6% haircut from the issuance value of the current portfolio of $1.6 billion. This resulted in a DBRS Morningstar loan-to-value ratio (LTV) of 113.6% compared with the LTV of 70.8% based on the appraised value but is relatively unchanged from the DBRS Morningstar Issuance LTV. DBRS Morningstar maintained positive qualitative adjustments totaling 6.5% to reflect the low cash flow volatility, desirable property quality, and favorable market fundamentals.

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 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 (October 19, 2023)/North American CMBS Insight Model v 1.2.0.0 (https://www.dbrsmorningstar.com/research/422174)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].