Morningstar DBRS Upgrades Credit Ratings on Three Classes of BX Commercial Mortgage Trust 2019-XL

DBRS Limited (Morningstar DBRS) upgraded its credit ratings on the following three classes of Commercial Mortgage Pass-Through Certificates, Series 2019-XL issued by BX Commercial Mortgage Trust 2019-XL:

-- Class C to AAA (sf) from AA (high) (sf)
-- Class D to AA (sf) from A (high) (sf)
-- Class X-NCP to AA (high) (sf) from AA (low) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (low) (sf)
-- Class J at B (low) (sf)

All trends are Stable.

The credit rating upgrades reflect the increased credit support provided to the bonds as a result of property releases and prepayments within the collateral portfolio. At issuance, the interest-only (IO) loan was secured by a portfolio of 406 industrial/distribution properties totaling approximately 65 million square feet (sf) across 18 U.S. states. As of the January 2024 reporting, 104 properties had been released, including 16 since Morningstar DBRS’ last credit rating action in January 2023. The remaining collateral is located across 14 U.S. states, with the highest concentrations by allocated loan amount in California (27.7%), Washington (22.1%), and Nevada (10.2%). The current trust balance of $3.4 billion represents collateral reduction of 38.6% since issuance. Proceeds from the first 15.0% of property releases were distributed on a pro rata basis across the capital stack, with all subsequent principal applied sequentially.

Initial loan proceeds of $5.6 billion along with $1.0 billion of mezzanine financing, a $1.9 billion balance sheet loan, $9.4 million of assumed debt, and $2.6 billion of borrower equity facilitated the acquisition of the portfolio for approximately $11.1 billion. The IO loan had an initial two-year term, with three one-year extension options. The borrower has exercised all three extension options, with the loan scheduled to mature in October 2024. The portfolio is part of the larger $18.7 billion acquisition by Blackstone Real Estate Partners, which included more than 170 million sf of U.S. industrial assets from Singapore-based GLP.

Operating performance remains relatively in line with Morningstar DBRS’ expectations, with the financial reporting for the trailing 12-month period ended June 30, 2023, reflecting an occupancy rate, net cash flow (NCF), and A note debt service coverage ratio (DSCR) of 94.6%, $356.8 million, and 1.47 times (x), respectively. However, Morningstar DBRS notes that the most recent reporting is inclusive of properties that have been released. Although occupancy and cash flow remain healthy, the loan’s DSCR has declined from the issuance figure of 1.83x, primarily because of an increase in debt service obligations given the floating-rate nature of the loan. However, the borrower is required to purchase an interest rate cap agreement in conjunction with each extension option in order to maintain a minimum DSCR of 1.10x, thereby mitigating some of the risk of further debt service increases.

In the analysis for this review, the Morningstar DBRS NCF was updated to exclude the 104 released properties, resulting in an NCF of $278.8 million. A conservative haircut of 20% was applied to that figure to evaluate the potential for upgrades, given the significant paydown, resulting in a stressed Morningstar DBRS NCF of $223.0 million. A capitalization rate of 6.75% applied at issuance was maintained, yielding an updated Morningstar DBRS value of $3.3 billion, a variance of -49.8% from the issuance appraised value of $6.6 billion for the remaining 302 properties in the portfolio. The Morningstar DBRS value implies a loan-to-value ratio (LTV) of 104.0%, compared with the LTV of 52.3% on the issuance appraised value for the remaining collateral and the Morningstar DBRS LTV at issuance of 103.6%. Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this credit rating analysis, totaling 8.0%, to account for cash flow volatility, property quality, and market fundamentals. Based on the LTV sizing benchmarks from the stressed analysis, the credit rating upgrades were warranted.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/416784 (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023),
https://dbrs.morningstar.com/research/422174

-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023), https://dbrs.morningstar.com/research/415687

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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

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