Morningstar DBRS Downgrades Credit Ratings on Five Classes of BXHPP Trust 2021-FILM, Assigns Negative Trends to All Classes

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2021-FILM issued by BXHPP Trust 2021-FILM as follows:

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

In addition, Morningstar DBRS confirmed its credit rating on the remaining class as follows:

-- Class A at AAA (sf)

The credit ratings on all classes have been removed from Under Review with Negative Implications, where they were placed on December 12, 2024. All classes have Negative trends.

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, driven by a combination of lower revenue and higher operating expenses. The credit rating downgrades reflect the downward pressure implied by the loan-to-value (LTV) sizing benchmarks following updates to Morningstar DBRS' analysis with this review, additional details of which are outlined below. However, Morningstar DBRS' value analysis suggests that the Class A certificate is generally well insulated against loss, with a credit enhancement level in excess of 52.0%, a primary contributor to Morningstar DBRS' rationale for the credit rating confirmation with this review.

The underlying loan is sponsored by a joint venture between Blackstone Property Partners and Hudson Pacific Properties, L.P. (Hudson Pacific) and is currently scheduled to mature in August 2025, with one 12-month extension option remaining. Morningstar DBRS notes that the near-term maturity date presents elevated refinance risk, particularly as in-place cash flow declines have likely contributed to a deterioration in the portfolio's value since issuance. Various online sources indicate that Hudson Pacific is planning noncore asset sales to shore up its balance sheet in response to a shift in end-user demand for office and studio space that has negatively affected the company's financial performance over the last several quarters. In particular, production in Los Angeles has yet to return to normalcy with studios lowering their content spending, leading to an increase in stage vacancy across the region. In addition, tenant leases totaling approximately 8.0% of the net rentable area (NRA) are operating on a month-to-month basis or are scheduled to expire prior to the loan's fully extended maturity date in August 2026; however, that figure increases to approximately 16.0% through YE2026. Given these factors, Morningstar DBRS notes that the credit view for this transaction could decline in the near-to-moderate term, further supporting the Negative trends assigned with this review.

According to the financial reporting for the trailing six-month period ended September 30, 2024, the portfolio generated $69.5 million of net cash flow (NCF) (annualized), reflecting a debt service coverage ratio of 0.93 times (x), below the YE2023 figure and the Morningstar DBRS figure derived at issuance of $76.6 million and $91.3 million, respectively. Occupancy across the portfolio has declined to 83.2% per the September 2024 rent roll, down from 88.5% at YE2023 and 91.0% at issuance. Operating performance across the office component has remained strong with a historical occupancy rate nearing 100.0%. In contrast, occupancy across the studio component fell to approximately 70.0% as of September 2024, a decline from 83.7% at issuance. Operating expenses have increased as revenue has trended lower placing further downward pressure on cash flows. Morningstar DBRS' underwritten operating expense ratio was approximately 40.0%, in line with the issuer's assumption but considerably below the YE2022 and YE2023 figures of 48.0% and 49.0%, respectively. Although it was previously noted that the increases were attributed to one-time costs that were not expected to recur in the future, the borrower's 2025 budget indicates that expenses are likely to remain elevated, suggesting the most recently reported figures are probably reflective of a sustainable scenario on a go-forward basis.

The largest tenant, which was not named and was referred to as "Confidential Tenant" in Morningstar DBRS' presale report at issuance, occupies 56.7% of NRA, across both the studio and office space. The tenant fully occupies three of the five office buildings within the portfolio, with a lease expiration date in 2031, whereas the lease expiration dates for the studio space range from 2026 to 2028. The tenant has significantly invested in the space and uses the property as its production headquarters. The second- and third-largest tenants include Company 3 (5.8% of NRA) and Streamland Media (5.2% of NRA).

Given the historical trajectory of cash flows and Morningstar DBRS' assessment of the borrower's 2025 budget, the analysis for this review considered a NCF of $75.1 million, which was derived by applying a 2.0% haircut to the most recently reported full year (YE2023) NCF. A blended capitalization rate of 7.5%, derived during the April 2024 review, was applied to that figure, resulting in a Morningstar DBRS value of $1.0 billion, a -22.4% and -44.4% variance from the Morningstar DBRS value and appraised value derived at issuance, respectively. The updated Morningstar DBRS value implies an LTV ratio of 109.9%, compared with the LTV of 85.3% based on the Morningstar DBRS value at issuance. With this credit rating action, Morningstar DBRS removed the positive qualitative adjustment of 3.0% for cash flow volatility, which had historically been considered and maintained positive qualitative adjustments to the LTV sizing benchmarks, totaling 3.5%, to account for property quality and market fundamentals. The consideration of the Morningstar DBRS property value noted above, in addition to the updates made to the LTV sizing benchmarks as part of the removal of the cash flow volatility credit, resulted in significant downward pressure across the capital stack, supporting the credit rating downgrades with this review. Although some reports indicate that there has been increasing interest for stage space in the near-to-moderate term as production companies begin to ramp up activity, Morningstar DBRS does not expect cash flows to fully rebound given the sustained, sizable declines in performance over the past few years.

The credit ratings assigned to Classes A, B, C, D, and E are higher than the results implied by the LTV sizing benchmarks by three or more notches. The variances are warranted given the loan's strong sponsorship, the subject portfolio's desirable location in Hollywood, and the unique composition of office and studio space that effectively forms a creative campus for digital content. In addition, the properties, specifically the studio component, benefit from high barriers to entry with no substantial deliveries of new studio space to the Los Angeles market in more than 10 years.

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

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 (February 28, 2025), https://dbrs.morningstar.com/research/448963.

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 see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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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 (February 28, 2025), https://dbrs.morningstar.com/research/448962

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

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

-- 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

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.