Morningstar DBRS Assigns Provisional Credit Ratings to BX Commercial Mortgage Trust 2024-GPA3

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-GPA3 (the Certificates) to be issued by BX Commercial Mortgage Trust 2024-GPA3 (the Trust):

-- Class A at (P) AAA (sf)
-- Class B at (P) AA (sf)
-- Class C at (P) A (low) (sf)
-- Class D at (P) BBB (low) (sf)
-- Class HRR at (P) BB (high) (sf)

All trends are Stable.

The collateral for BX 2024-GPA3 (the Trust) includes the borrower's fee-simple interest in 32 student housing properties (or with respect to 2 properties subject to a PILOT lease, the Borrower's leasehold interest and is expected to include, the applicable lessor's fee interest in such properties) totaling 18,502 beds. The largest state representations in the portfolio are Texas, Kentucky, and Virginia. Transaction proceeds of $1.0 billion will be used to refinance $809.8 million of debt across the portfolio and debt for noncollateral, return $115.3 million to the sponsor, and cover remaining closing costs. While this transaction includes a $115.3 million equity distribution to the sponsor, the BX 2024-GPA2 transaction that was recently securitized and used to refinance the combined larger BX 2022-GPA portfolio included an $83.6 million equity injection from the sponsor. The five-year, fully extended loan is IO for the full term.

Blackstone acquired American Campus Communities (ACC), the largest student housing owner, operator, and developer in the country, in August 2022. The various debt transactions used to take ACC private included BX 2022-GPA, which this transaction will be partially refinancing. This transaction will include only 32 of the original 51 properties financed as part of the BX 2022-GPA deal. Comparing the same 32 assets, the portfolio has observed an NOI increase of 35.2% compared with the prior securitization in 2022. There has been continued implementation of revenue generators at the property since the acquisition in 2022, including utility income, upfront leasing fees, parking, and landlord liability insurance, resulting in a total Other Income increase of 72.7% from 2021 to the budgeted figures for the upcoming 2024/2025 school year. Additionally, Blackstone and ACC have driven significant rent growth with an average rent per occupied bed (RPOB) increase from $664 in the 2022/2023 school year to a current RPOD of $755 as of October 2024. They have managed to compress operating expenses over the same period, down from 53.4% in 2021 to 47.9% as of the T-12 reporting period ended May 31, 2024. Occupancy has trailed slightly behind the previous school year. The portfolio is 93.5% occupied as of October 2024 compared with the actual occupancy of 95.8% for the 2023/2024 school year. While the occupancy has shown some decline, there is a 9.9% increase in gross potential income (GPI) year-over-year (YOY) driven by the increased RPOB.

The subject portfolio consists of 32 assets spread across 19 universities in 11 states and has a WA year built of 2005 and an average distance to campus of 0.23 miles. Roughly 38.2% of the assets were built after 2010 and feature modern amenities, including fitness centers, study rooms, club rooms, and pools. Unit interiors feature beds, dressers, kitchen tables, couches, coffee tables, and standard appliance packages. Since 2012, the portfolio has received $161.2 million in capital improvements. All universities, except one (Minnesota State University, Mankato), are represented by either Power 5, Carnegie R1, or Carnegie R2. Approximately 65.4% of the Issuer's UW NCF is derived from universities in Power 5 conferences, including Texas Tech University, Texas A&M University, University of Louisville, University of Kentucky, University of Florida, Florida State University, Iowa State University, University of Illinois Urbana-Champaign, and University of Minnesota. The portfolio has demonstrated consistently strong rent growth and occupancy metrics, as the portfolio has never been below a WA occupancy of 93.6% dating back to 2012.

The universities at which these properties serve have strong enrollment trends and brand recognition. As of the 2023/2024 academic year, the universities represented in the portfolio had an average enrollment of more than 35,000 students and have seen a 8.1% growth in enrollment since 2013. The Power 5 and Carnegie R1 universities have seen a higher growth rate in enrollment historically when compared with the national average. Additionally, new supply in the student housing sector has begun slow post-coronavirus. New supply each year, represented as a percentage of total university enrollment, was 1.7% between 2013 and 2019. Between 2021 and forward 2026 estimates, the new supply is estimated to be 0.5% of university enrollment. The lack of new supply provides the sponsor a strong opportunity to see continued rent growth and low vacancy throughout the loan term.

The portfolio is owned and primarily managed by affiliates of ACC (20 of the 32 properties managed by ACC OP Management LLC; with the remaining 12 properties managed by Abacus Management B LLC), the largest student housing developer and operator in the country, who was acquired by Blackstone in August 2022. ACC was founded in 1993 and currently has more than 3,000 team members and a portfolio of assets spread across 93 campuses. The company was awarded the 2023 National Association of Home Builders Property Management Firm of the Year and was featured in Newsweek's 2022, 2023, and 2024 lists of America's most trusted companies. Since the acquisition, Blackstone has kept ACC involved in the property management because of its strong historical performance and expertise.

Morningstar DBRS has a favorable view on the portfolio, driven by strong historical performance, consistent NOI growth, university representation, and institutional sponsorship and management. The portfolio has a WA occupancy of 96.1% dating back to 2019 (excluding Fall 2020). Between the acquisition in August 2022 and the latest rent roll as of October 2024, the portfolio has observed NOI growth of 35.2% driven by increased rental rates and ancillary income initiatives. In addition to the strong growth and performance metrics, the properties are ideally located on well-established university campuses.

Morningstar DBRS' credit rating on the Certificates addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the credit ratings do not address Spread Maintenance Premiums.

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   
Environmental (E) Factors - Emissions, Effluence, and Waste  
The following Environmental factors were found to be relevant to the credit analysis: There were two properties in the portfolio (Royal Village and Cardinal Towne) backed by collateral with recognized environmental conditions (RECs) in their respective Environmental Site Assessment. The REC at Royal Village relates to the site's former use as a city incinerator in the 1920s. There is inadequate information available regarding the subsequent management of the incinerator ash, which may have contained pollutants such as lead, arsenic, polyaromatic hydrocarbons (PAHs), and dioxins. The REC at Cardinal Towne relates to the former presence of gasoline tanks on the subject property and the lack of information regarding their subsequent removals. The REC also relates to the site's former use as a bus garage, a laundromat, and an incinerator. The ESA for Cardinal Towne noted there was inadequate information regarding the management of materials that may have been released as a result of these former uses.

The probable remediation for the REC at Royal Village was estimated at $863,982, with a low- and high-end range of $497,385 and $1,351,875, respectively. The probable remediation for the REC at Cardinal Towne was estimated at $123,783, with a low- and high-end range of $34,650 and $615,780, respectively. The subject portfolio has environmental liability insurance coverage of $15 million for each pollution condition, with an aggregate coverage of $25 million, which represents an adequate amount of coverage for the aforementioned RECs. Therefore, Morningstar DBRS did not adjust its credit analysis as a result of these environmental factors.
 
There were no Social or Governance factor(s) 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 (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699.

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

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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.

-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.