Morningstar DBRS Downgrades Credit Ratings on Four Classes of BX Trust 2019-IMC

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-IMC issued by BX Trust 2019-IMC as follows:

-- Class E to A (sf) from AA (low) (sf)
-- Class F to BBB (low) (sf) from A (low) (sf)
-- Class G to B (high) (sf) from BB (high) (sf)
-- Class HRR to B (low) (sf) from BB (sf)

Morningstar DBRS also confirmed its credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AAA (sf)
-- Class D at AAA (sf)
-- Class X-NCP at AAA (sf)

All trends are Stable.

The credit rating downgrades reflect the increased credit risk as exhibited in the downward pressure in the loan-to-value (LTV) sizing benchmarks following updates to the analysis with this review. The updates to the Morningstar DBRS Net Cash Flow and the LTV sizing benchmarks were made to reflect the significant decline in cash flow for the collateral portfolio in the servicer’s updated calculations, which were made available with the April 2024 remittance report. According to the servicer, the reporting reflected significant declines in performance after Blackstone (the borrower), reported a YE2023 net cash flow (NCF) figure of $111.5 million and restated the underlying collateral’s YE2022 NCF to $106.9 million, a reduction of more than 35% from the previously reported YE2022 NCF figure of $170.3 million. The credit rating confirmations reflect the continued stable outlook on the senior portion of the trust debt, further bolstered by the increased credit support that has resulted from a principal paydown of $175.0 million, reducing the transaction balance by 15.2%, since the last credit rating action.

At its last review, Morningstar DBRS upgraded its credit ratings on Classes C, D, E, F, G, and HRR to reflect the significant year-over-year growth in NCF since issuance. At the time of the last review, the servicer reported financials for the trailing 12 months (T-12) ended March 31, 2023 (Q1 2023 NCF), reflecting NCF and debt service coverage ratio (DSCR) figures of $186.9 million and 2.41 times (x), respectively, an improvement of 9.7% from the YE2022 NCF figure of $170.3 million. The Q1 2023 NCF also represented a significant uptick of 20.6% from the YE2021 NCF figure of $155.0 million and 44.2% over the Morningstar DBRS NCF derived in 2020. The portfolio is composed of a multitude of short-term leases, only one of which has a lease term that extends beyond 12 months. The financial statements, as presented at the time, reflected steady year-over-year NCF increases between 8.0% and 10.0% every year since issuance, with the exception of the period from YE2020 to YE2021, when the sector suffered from compression because of the effects of the coronavirus (COVID-19) pandemic. To evaluate the potential for upgrades given the consistent and sustained significant improvement in collateral performance in the prior review, Morningstar DBRS considered a stressed scenario by applying a conservative 20% haircut to the Q1 2023 NCF, resulting in a stressed Morningstar DBRS value of $1.42 billion (LTV of 80.7%) supporting the credit rating upgrades.

According to the servicer, the borrower previously submitted consolidated financials, which included properties that were not collateral for the securitized loan. As previously mentioned, in April 2024, the borrower restated its YE2022 NCF to $106.9 million and reported a YE2023 NCF of $111.5 million, both of which represent significant declines from historical operating performance and the previously reported figures. The servicer has also confirmed that, while the financials for YE2021 have not been restated, those reported figures also represent consolidated financials that include collateral that is not part of the transaction. The NCF decrease since issuance has been driven in large part by significant increases to operating expenses, specifically advertising and marketing as well as payroll and benefits. In addition, the servicer noted that there have been fluctuations in occupancy that have also contributed to slight decreases in revenue since issuance. For this review, Morningstar DBRS derived an NCF of $109.3 million, which is based on a haircut to the YE2023 figure, resulting in a Morningstar DBRS value of $1.04 billion, based on a capitalization rate of 10.5%, and yields a Morningstar DBRS LTV of 93.7%, supporting the credit rating downgrades. The loan, which had an original final maturity in April 2024, was recently modified, extending the loan term by 26 months to June 2026, and received principal paydown of $175.0 million, mitigating the impact of the restated financial statements for the senior certificates.

The collateral for the first-mortgage loan is a portfolio of 16 properties comprising 9.6 million square feet (sf) of premier showroom space situated across two campuses (or markets) in High Point, North Carolina, and Las Vegas. The collateral represents 88.0% and 92.7% of the Class A trade show and showroom space in the High Point and Las Vegas markets, respectively, with the allocated loan balance split between the 13 High Point properties (50.1%) and the three Las Vegas properties (49.9%).

Each market holds biannual home and furnishings trade shows, staggered so that an event occurs once every quarter throughout the year, with the spring and fall events held in High Point and the summer and winter events held in Las Vegas. The High Point market is convenient for its proximity to manufacturers, while the Las Vegas market serves as a regional hub for buyers in the western U.S. The quarterly events are positioned as business-to-business trade shows focused on the home furnishings and decor as well as gift industries. The events provide an efficient channel for buyers to access and view products in the highly fragmented industries with thousands of manufacturers and more than 60,000 commercial buyers attending each event. The attendance and pre-registration figures provided for the 2022 and early 2023 events demonstrate demand had begun to rebound from the impacts of the COVID-19 with attendance figures surging year-over-year indicating a continued demand for the in-person trade shows, which is the most important demand driver for the collateral.

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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Class X-NCP is an interest-only (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 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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, 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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799

-- 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 (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- 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 (April 15, 2024), https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance

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