Morningstar DBRS Places All Classes of BXHPP Trust 2021-FILM Under Review With Negative Implications

DBRS Limited (Morningstar DBRS) placed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-FILM issued by BXHPP Trust 2021-FILM Under Review with Negative Implications as follows:

-- Class A rated AAA (sf)
-- Class B rated AA (low) (sf)
-- Class X-NCP rated A (sf)
-- Class C rated A (low) (sf)
-- Class D rated BBB (low) (sf)
-- Class E rated BB (sf)

There are no trends for these credit rating actions.

The transaction is secured by the borrower's fee-simple and/or leasehold interests in five Class A office properties, totaling 967,000 square feet (sf), and three studio facilities, totaling approximately 1.3 million sf, in Los Angeles.

The office and studio components collectively form a creative campus for digital content, providing synergistic value to tenants. At issuance, Morningstar DBRS noted that the properties (specifically the studio component) have historically benefited from high barriers to entry, largely because of the high cost of land in the Hollywood submarket, which is economically unattractive for new construction. However, despite these aspects, which Morningstar DBRS previously expected to contribute to cash flow stability over the loan term, operating performance across the collateral portfolio has consistently remained below issuance expectations. Additional details are outlined below.

The loan is sponsored by a joint venture between Blackstone Property Partners and Hudson Pacific Properties, L.P. The interest-only (IO), floating-rate loan had an initial two-year term with three one-year extension options. The loan is currently scheduled to mature in August 2025; however, the sponsor has one extension option remaining. Morningstar DBRS notes that the near-term maturity date presents elevated refinance risk, particularly as in-place cash flow declines could have contributed to a deterioration in the portfolio's value since issuance.

According to the financial reporting for the trailing six-month period ended June 30, 2024, the portfolio generated $76.8 million of net cash flow (NCF) (annualized), reflecting a debt service coverage ratio of 1.03 times, in line with the YE2023 figure of $76.6 million but considerably below the issuance and Morningstar DBRS figures of $99.6 million and $91.3 million, respectively. The decline in cash flow has been driven by a combination of lower revenue and higher operating expenses. It was previously noted that the variance between in-place revenue and the Issuer's underwritten figure was the result of a combination of factors, including rent abatements and the inclusion of future rent steps, as well as letters of intent from two tenants committed to studio spaces. It was also noted that expense increases were attributed to one-time costs that were not expected to recur in the future. However, income and expenses have yet to normalize even as the full year's rent for new and abated tenants is reflected in the most recent financial reporting.

As of June 2024, the portfolio was 80.2% occupied, down from 88.5% at YE2023. Although the office component remains well occupied, occupancy across the studio component has declined to approximately 77.0%. Following Hollywood's dual labor strike in 2023, return to production has been slow, leading to stage vacancy across the region. The servicer noted that there has been increasing interest for stage space in the near to moderate term as production companies begin to ramp up activity; however, studio leases are generally short-term in nature (typically six to 12 months), resulting in frequent tenant turnover from year to year. The largest tenant occupies 56.7% of net rentable area, across both the studio and office space. The tenant has significantly invested in the space and uses the property as its production headquarters.

With this credit rating action, Morningstar DBRS considered a stressed value scenario, applying a blended capitalization rate of 7.5% (derived during the April 2024 review) to the in-place NCF. That analysis suggests a sizable as-is value decline for the subject portfolio, resulting in significant downward pressure across the capital stack and supporting the Under Review with Negative Implications designation with this review. In order to derive a sustainable cash flow for the subject portfolio on a go-forward basis, Morningstar DBRS has requested additional information from the servicer to further clarify the drivers behind the variance in revenue and the elevated operating expenses.

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 (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 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 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 note that a risk sensitivity analysis was not conducted considering the deal was placed Under Review with Negative Implications.

These credit ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period.

DBRS Limited
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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 (September 19, 2024), https://dbrs.morningstar.com/research/439699

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.