Morningstar DBRS Confirms Credit Ratings on All Classes of BPR Trust 2021-TY

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-TY issued by BPR Trust 2021-TY as follows:

-- Class A at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at BBB (high) (sf)
-- Class F at BBB (sf)
-- Class HRR at BBB (low) (sf)

All trends are Stable.

The credit rating confirmations and Stable trends reflect the continued performance of the asset as evidenced by strong tenant sales and year-over-year cash flow growth. Although an increase in the floating-rate debt service has resulted in downward pressure on the debt service coverage ratio (DSCR) figure, the credit profile of the transaction remains in line with Morningstar DBRS' expectations at issuance. As a result, the Morningstar DBRS loan-to-value (LTV) sizing benchmarks were not updated as part of this review.

The $425.0 million loan is secured by the borrower's fee-simple and leasehold interest in the in-line space of Tysons Galleria, a 740,244-square-foot (sf) (488,244 collateral sf) Class A super-regional mall located 15 miles west of downtown Washington, in Mclean, Virginia. The noncollateral anchors are Neiman Marcus and Saks Fifth Avenue. A third anchor space formerly occupied by Macy's was redeveloped between 2019 and 2021, with the space converted into a 200,000-sf, three-story, multitenant wing leased to entertainment, restaurant, and retail users. The loan's sponsor, Brookfield Real Estate Income Trust, acquired the space from Macy's in 2019 and invested approximately $120.0 million into its redevelopment. The transaction benefits from experienced sponsorship, as the sponsor is owned by affiliates of Brookfield Asset Management Inc., one of the largest retail real estate companies in the United States. At loan closing, it owned a portfolio of retail properties of more than 200 retail centers totaling more than 155.0 million sf of space.

As of the September 2023 reporting, the mall was 94.5% leased (including the noncollateral tenants), in line with the YE2022 and issuance figures of 92.8% and 95.1%, respectively. The redeveloped Macy's space features four junior anchor and five in-line tenant spaces, which were collectively 99.0% occupied as of the March 2024 rent roll. The annualized September 2023 net cash flow (NCF) figure of $40.4 million surpassed the YE2022 figure of $35.4 million and remains above the Morningstar DBRS NCF of $34.4 million derived at issuance. Because of the floating-rate nature of the loan, annualized debt service as of September 2023 increased by approximately 84.0% since YE2022 and 175.0% from issuance, putting significant downward pressure on the DSCR figure. At issuance, the DSCR was reported at 3.22 times (x). In comparison, the YE2022 figure was 2.04x and the annualized September 2023 figure was 1.26x.

The interest-only (IO) loan matured in September 2023 and the borrower exercised the first of up to three one-year extension options. To hedge its exposure to the current elevated interest rate environment, the borrower is required to purchase new interest rate cap agreement with a 3.0% strike price during each extension period. The servicer has not yet confirmed whether the borrower has requested to exercise the second extension option ahead of the September 2024 maturity date and Morningstar DBRS is awaiting an update.

According to the March 2024 tenant sales report, total in-line tenant sales were reported at $1,759 per square foot (psf), compared with $1,683 psf at YE2022. Total mall sales (excluding noncollateral tenants) were reported at $1,338 psf, a slight decrease from $1,453 psf at YE2022, but above issuance ($1,159 psf) and 2019 pre-pandemic ($1,055 psf) levels.

The subject benefits from its prime location and luxury retail tenants, which draw demand from both the affluent local population and travelers. In addition to the stable occupancy and strong in-line tenant sales, the transaction also benefits from a moderate LTV of 65.4%, based on the As-Is appraised value of $650.0 million derived by the appraiser at issuance. The appraiser also provided a projected As-Stabilized property value of $700.0 million, indicative of an LTV of 60.7%; however, given the current interest rate and property sales environment, the current market value of the subject may have changed. In its original analysis, Morningstar DBRS derived an LTV of 80.4%, which provides a mitigant to any potential property devaluation and upcoming refinance risk.

For this review, Morningstar DBRS maintained the Morningstar DBRS NCF of $34.4 million and a capitalization rate of 6.5% in its analysis, resulting in a Morningstar DBRS value of $528.5 million, which represents a -18.7% haircut from the issuance As-Is appraised value of $650.0 million. The resulting Morningstar DBRS whole-loan LTV is 80.4% compared with the issuer's As-Is figure of 65.4% and As-Stabilized figure of 60.7%. Morningstar DBRS also maintained positive qualitative adjustments totaling 8.0% to reflect the low cash flow volatility, high quality of the asset, and healthy market fundamentals.

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 (January 23, 2024) at https://dbrs.morningstar.com/research/427030 .

Class X-EXT 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 1, 2024; https://dbrs.morningstar.com/research/428798)

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.

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)
North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428799)
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)

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].