Morningstar DBRS Upgrades Credit Ratings on Three Classes of Two BX Commercial Mortgage Trust Transactions, Confirms Credit Ratings on Remaining Three Transactions

DBRS Limited (Morningstar DBRS) upgraded three credit ratings of the Commercial Mortgage Pass-Through Certificates (the Certificates) on two BX Commercial Mortgage Trust transactions as follows:

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

BX Commercial Mortgage Trust 2020-VIV2:
-- Class C to A (high) (sf) from A (sf)

In addition, Morningstar DBRS confirmed all credit ratings on the following remaining BX Commercial Mortgage Trust transactions:

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 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 Morningstar DBRS website at https://dbrs.morningstar.com/research/386158.

The credit rating upgrades and Stable trends reflect the collateral's strong rebound in performance since the pandemic. Based on the most recent financials, the properties achieved a YE2023 net cash flow (NCF) that surpassed Morningstar DBRS' expectations as a result of the continued recovery of the hospitality market in Las Vegas. Per the year-to-date through May 2024 Las Vegas Convention and Visitors Authority (LVCVA) Executive Summary report, there was a 4.2% year-over-year (YOY) increase in total visitor volume, and a 6.5% increase in revenue per available room. Morningstar DBRS considered a stressed cash flow scenario to evaluate the potential for credit rating upgrades, as further described below.

According to the June 2024 consolidated financials, cash flows for the YE2022, YE2021, and YE2020 periods were reported at $675.3 million, $468.3 million, and -$62.3 million, respectively. When comparing these to the servicer's analysis as of July 2023, consolidated NCFs of $280.6 million, $37.7 million, and -$354.1 million were reported at that time for the same periods, respectively. The servicer confirmed that the analysis was updated to reflect the exclusion of straight-line expenses which were previously included. The servicer reported a YE2023 NCF of $639.0 million (reflecting a debt service coverage ratio (DSCR) of 5.91 times (x)), representing a decline from the prior year but still a marked improvement from the Morningstar DBRS stabilized NCF of $440.5 million derived at issuance. The consolidated occupancy remains stable at 92.2% as of YE2023, up from a low of 73.1% at YE2021 over the past three years.

According to the most recent servicer site inspections that were completed in early 2024, both properties are in excellent condition, with $94.7 million of planned or ongoing capital projects in place for the MGM property. This includes the remodeling of the property's main tower that is scheduled to commence at the end of 2024, at an estimated cost of $82.0 million. There are no capital projects planned or currently underway for the Mandalay property. The properties are located along the southern portion of the Las Vegas Strip within walking distance of the Allegiant Stadium, home of the National Football League's Las Vegas Raiders. On aggregate, the properties feature more than 2.9 million square feet of meeting space and has historically relied on convention business as a key source of revenue. Per the YTD through May 2024 LVCVA report, convention attendance for the Las Vegas attendance totaled 2.8 million (6.7 million annualized), in comparison with 3.2 million as of YTD through June 2023 (6.4 million annualized) and 6.7 million as of YE2019.

With this review, Morningstar DBRS updated its cash flow analysis to reflect the sustained cash flow growth since issuance. To test the durability of the ratings and to evaluate the potential for credit rating upgrades given significant cash flow growth, Morningstar DBRS utilized a stressed scenario, which was based on a 20% stress to the YE2023 NCF. Morningstar DBRS maintained a 9.69% capitalization rate, which is at the middle of the range of Morningstar DBRS cap rate ranges for lodging properties. The resulting Morningstar DBRS stressed value is $5.3 billion, a positive 16.0% variance from Morningstar DBRS' value of $ 4.5 billion at issuance. Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks for this credit rating analysis, totaling 7.0% to account for the collateral's historical performance, high quality, irreplaceable location, and high barriers to entry. The resulting Morningstar DBRS all-in LTV is 56.9%. Overall, Morningstar DBRS expects continued stable performance for the properties given the strong market rebound as the Las Vegas tourism industry returns to pre-pandemic normalcy and the continued capital expenditures that have been invested to the collateral.

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). As part of the master lease, which serves as collateral, the MGM/Mandalay Tenant is required to make an initial master lease payment of $292 million per year, providing additional protection for bondholders. The payment is subject to a 2.0% escalation through the 15th year of the lease, and by the greater of 2.0% and CPI (capped at 3.0%) for the remainder of the lease term. MGM Resorts also provides a shortfall guaranty and a payment and performance guaranty that covers the monetary obligations of MGM/Mandalay, among others. As noted at last review, the original sponsor, Blackstone Real Estate Income Trust sold 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 4.3% variance from the Morningstar DBRS concluded value of $5.3 billion.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030)

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 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 ratings assigned to Classes D and E are lower than the results implied by the LTV-sizing benchmarks by three or more notches. These variances are warranted given performance fluctuations reported over the past several years. While the YE2023 NCF is below the YE2022 NCF, Morningstar DBRS believes this does not reflect a sustained decline in property performance, and overall performance has trended positively since issuance. Morningstar DBRS continues to hold the view that the collateral will be able maintain stable performance in the long term given the strong Las Vegas hospitality market, the property's high quality, irreplaceable location, and continued sponsor commitment.

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 info-DBRS@morningstar.com.

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 (July 11, 2024; https://dbrs.morningstar.com/research/436004)

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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)

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 info-DBRS@morningstar.com.