BX Commercial Mortgage Trust 2020-VIVA CMBS SASB/LARGE LOAN COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2020-VIVA Presale Report
DBRS Morningstar Contacts Provisional Ratings (as of March 5, 2020) Balance/ DBRS Morningstar DBRS Morningstar DBRS Morningstar DBRS Morningstar Credit-Support Class Notional Amount ($) Provisional Rating DSCR (x) BLTV (%) ELTV (%) Level (%) LEAD ANALYST Offered Certificates Michael Fedorochko Class A (1) 753,102,000 AAA (sf) 7.47 35.94 35.94 45.52 (1) 1,366,670,000 A (high) (sf) - - - - +1 646 560-4551 Class X (1) [email protected] Class B 257,983,000 AA (low) (sf) 5.92 45.40 45.40 31.19 Class C 355,585,000 A (sf) 5.01 53.63 53.63 18.71 Class D 377,720,000 BBB (sf) 4.31 62.37 62.37 5.46 Class E 155,610,000 BBB (low) (sf) 4.07 65.97 65.97 0 ANALYTICAL MANAGER In determining the provisional ratings on each class of securities issued by the trust, DBRS Morningstar analyzed the properties securing the loan as enumerated herein to determine a concluded Greg Haddad net cash flow (NCF) and value based primarily on the direct capitalization approach. For more information on DBRS Morningstar’s approach to analyzing and assigning ratings to single- asset/single-borrower transactions, please refer to DBRS Morningstar’s North American Single Asset/Single-Borrower Ratings Methodology document. +1 646 560-4590 [email protected] (1) The exact aggregate Cut-off Date principal balances of the Senior Trust Notes and the Companion Loan Notes (collectively, the “Senior Notes”) and the Junior Trust Notes are unknown and will be determined at or prior to pricing, however, (i) the aggregate Cut-off Date principal balance of all Senior Notes is expected to be within a range of $1,634,200,000 and $1,942,100,000, (ii) the aggregate Cut-off Date principal balance of the Companion Loan Notes is expected to be within a range of $400,000,000 and $1,000,000,000, (iii) the aggregate Cut-off Date principal balance of the Senior Trust Notes is expected to be within a range of $634,200,000 and $942,100,000, and (iv) the aggregate Cut-off Date principal balance of the Junior Trust Notes is expected to be within HEAD OF NORTH AMERICAN CMBS a range of $1,057,900,000 and $1,365,800,000. As such, the aggregate Cut-off Date principal balances of the Senior Trust Notes, the Companion Loan Notes and the Junior Trust Notes and, accordingly, the Trust Loan, as well as certain of the metrics set forth in this document are subject to change.
Erin Stafford The Senior Trust Notes will back the Class A and may also back a portion of the Class B Certificates. Accordingly, the exact initial Certificate Balance of the Class A and Class B Certificates and the +1 212 548-6394 initial Notional Amount of the Class X Certificates are unknown and will be determined at the time the aggregate Cut-off Date principal balances of the Senior Trust Notes, the Companion Loan Notes and the Junior Trust Notes are determined. The aggregate initial Certificate Balance of the Class A and Class B Certificates and the initial Notional Amount of the Class X Certificates are [email protected] expected to be within the ranges set forth below, in each case subject to a variance of plus or minus 5%.
Class A Expected Range of Initial Certificate Balance - $602,490,000 – $1,232,735,000 Class B Expected Range of Initial Certificate Balance - $257,983,000 – $408,595,000 Class X Expected Range of Notional Amount - $1,366,670,000 – $1,936,670,000 BUSINESS DEVELOPMENT Estimated Closing Date: March 19, 2020 Greg Murdock Solely to the extent and subject to the scope of review enumerated herein, this report and the provisional ratings noted above address certain credit risks and the extent to which the payment +1 301 309-0894 stream of the collateral is adequate to make payments required under the certificates based on information identified as subject to review herein and to the extent provided to Morningstar Credit [email protected] Ratings, LLC, or DBRS, Inc. (collectively, DBRS Morningstar) on the arranger’s website for this transaction as of March 5, 2020. The below analysis further reflects the ratings analysis related to these provisional ratings. Investors should be aware that the proposed transaction and certain documents related thereto are not finalized. Following DBRS Morningstar’s receipt of final information and documentation, and the completion of DBRS Morningstar’s review of such information and documentation, DBRS Morningstar may issue final ratings. Such final ratings may differ WEBSITE from the provisional ratings enumerated herein. The provisional ratings and subsequent surveillance are provided on an arranger- or issuer-paid basis. Ongoing Surveillance Statement www.dbrsmorningstar.com DBRS Morningstar will perform surveillance on the ratings enumerated herein subject to its North American CMBS Surveillance Methodology.
VIEWPOINT This report is an opinion and does not constitute an offer to sell or a solicitation of an offer to buy any securities, and it may not be used or circulated in connection with any such offer or solicitation. DBRS Morningstar publishes its current Form NRSRO and exhibits thereto on its website(s), which may include www.morningstarcreditratings.com and www.dbrsmorningstar.com. DBRS Morningstar maintains internal policies and procedures to manage conflicts, which may include payment structures for ratings.
Transaction Spotlight
Collateral First-priority deed of trust secured by the Mortgage Loan Seller(s) Citi Real Estate Funding Inc., Barclays Capital Real Estate Inc., fee simple interest in the MGM Grand German American Capital Corporation, Societe Generale and Mandalay Bay in Las Vegas, NV Financial Corporation Trust Loan Notional Balance ($) 2,000,000,000 Depositor Citigroup Commercial Mortgage Securities Inc. Structure Sequential-pay REMIC Trustee Wilmington Trust, National Association Morningstar U/W DSCR (x)(1) 4.07 Certificate Administrator and Custodian Citibank, N.A. Morningstar U/W Debt Yield (%)(1) 14.68 Master Servicer KeyBank National Association Morningstar U/W BLTV (%)(2) 65.97 Special Servicer Situs Holdings, LLC Morningstar U/W ELTV (%)(2) 65.97 (1) Current debt service coverage is the current coverage based on the loan payment terms for each loan at the time of securitization. Current DSCR accounts for the fact that certain loans pay interest only for at least a portion of their loan term. Amortizing debt service coverage is calculated using Morningstar’s underwritten NCF and the debt service payment at the time principal amortization begins. This figure represents the DSCR on a look-through basis, not the DSCR on the master lease payment. (2) DBRS Morningstar’s U/W BLTV and ELTV are weighted average ratios based on each loan’s LTV and the related beginning and ending loan amounts.
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Collateral Spotlight ...... 3 Transaction Overview ...... 4 Collateral Summary ...... 9 Market Summary...... 15 Site Inspection Photos ...... 19 DBRS Morningstar Cash Flow Analysis and Valuation ...... 21 Rating Rationale ...... 24 Loan Summary ...... 25 Securitization Trust Summary ...... 30 Reserve Accounts...... 33 Third-Party Reports ...... 33 Scope of Analysis ...... 34 Transaction Servicer and Special Servicer ...... 34 DBRS Morningstar Approach to Collateral Review ...... 35 Methodology ...... 35 S urveillance ...... 35
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Collateral Spotlight
[CAPTION 1] [CAPTION 2] [CAPTION 3]
The Mansion at MGM Grand Rivera at The Delano (Mandalay Bay) High Roller Suite at Mandalay Bay
Source: DBRS Morningstar
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Transaction Overview
The collateral for the BX Commercial Mortgage Trust 2020-VIVA transaction are certain components of a $3 billion first-priority mortgage loan encumbering both the MGM Grand and Mandalay Bay hotels and casinos in Las Vegas, Nevada. The borrower sponsor for the transaction is a joint venture partnership between Blackstone Real Estate Income Trust (49.9%) and MGM Growth Properties (50.1%). Together, BREIT and MGP acquired the MGM Grand and Mandalay Bay resorts in Las Vegas for an aggregate purchase price of $4.6 billion ($471,892/key), and subsequently executed a 30-year NNN master lease with two 10-year renewal options with MGM Lessee II, LLC (MGM Tenant), a wholly owned subsidiary of MGM Resorts International.
Under the terms of the master lease, MGM Tenant is required to make an initial master lease payment of $292 million per annum, with $159 million allocated to MGM Grand and $133 million allocated to Mandalay Bay. The master lease payment escalates by 2.0% per annum in years 2 through 15 of the initial lease term, and then the greater of 2.0% or CPI, with CPI capped at 3.0%, for the remainder of the initial lease term.
The $3 billion whole loan is composed of senior trust notes in the amount of $634.2 million, pari passu senior companion notes in the amount of $1 billion, and junior trust notes in the amount of $1.366 billion. The $1 billion in pari passu senior companion notes will be held back for contribution to future securitizations.
Sources and Uses
Source Amount ($) % of Total Uses Amount ($) % of Total
Mortgage Loan 3,000,000,000 65.0 Acquisition Price 4,600,000,000 99.6 Sponsor Equity 1,617,792,163 35.0 Closing Costs 17,792,163 0.4
Totals 4,617,792,163 100.0 4,617,792,163 100
DBRS Morningstar Perspective
DBRS Morningstar takes a generally positive view on MGP and BREIT’s acquisition of MGM Grand and Mandalay Bay. The transaction represents the second major resort casino sale-leaseback transaction in the past year in Las Vegas. The sale-leaseback strategy allows experienced gaming operators like MGM Resorts International to optimize their capital allocation away from the ownership of real estate while maintaining operational control over their portfolios.
The MGM Grand and Mandalay Bay properties have each benefited from significant capital investment in recent years, which was evident during DBRS Morningstar’s site inspection. The properties continue to be the marquee Las Vegas destinations for large conventions and conferences, and both stand to benefit from a substantial increase in foot traffic as the opening of Allegiant Stadium draws pedestrians toward the southern end of the Vegas Strip on game days and during major events at the stadium.
While the properties together derive a below-average proportion of their revenue from gaming operations, both are still susceptible to the volatility inherent in full-service resort casino operations. Tourism remains the primary driver of Las Vegas’ economy, and a number of macroeconomic or idiosyncratic factors could result in a reduction in domestic or international tourism during the loan term, and thus adversely affect performance at the properties. Despite these risks, DBRS Morningstar believes the loan benefits from favorable credit metrics as well as the operational expertise and expansive guest loyalty program that MGM Resorts International brings to the table. Furthermore, the MGM payment shortfall guarantee provides further assurances to bondholders over the term of the loan.
Strengths
• Leverage Profile and Cash Equity: The $3.00 billion whole loan represents a conservative loan-to-value ratio (LTV) of 65.97% on the DBRS Morningstar concluded value, well below the typical leverage point for most single-asset/single-borrower transactions. There is also no additional debt in the form of a B note or mezzanine debt, and the sponsor is acquiring the property and contributing more than $1.6 billion in cash equity as part the transaction.
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• Location: The MGM Grand and Mandalay Bay properties are strategically located along the southern portion of the Las Vegas Strip. While this was historically a disadvantage from a foot-traffic perspective and the properties were more reliant on group and conference business, the pending completion of the 65,000-seat Allegiant Stadium (home to the Las Vegas Raiders) across the Vegas Freeway from Mandalay Bay stands to fundamentally alter that dynamic by bringing more pedestrian traffic to the southern end of the Strip. Authorities plan to shut down Hacienda Avenue on game days and funnel foot traffic across the Freeway directly in front of Mandalay Bay.
• Significant Ongoing Capital Investment: MGM Resorts has invested a significant amount of capital, nearly $1 billion, into both properties since 2010 in order to maintain and improve their performance. The MGM Grand has received $480 million of investment, including a $144 million rooms renovation, and Mandalay Bay has received $511 million, including an almost $160 million rooms renovation (inclusive of the Delano tower). Furthermore, under the terms of the master lease, MGM is required to invest a minimum of 3.5% of actual net revenues per year from 2020 to 2024 and each five-year period thereafter on a rolling basis.
• Experienced Operator: MGM Resorts International is a global, publicly traded gaming and hospitality firm founded in 1986. MGM is an experienced hotel casino operator with properties in virtually all of the world’s major gaming markets including Las Vegas, Atlantic City, Macau, and many others. The firm has a portfolio of 30 properties and has more than 83,000 employees globally. Furthermore, MGM’s “M life” loyalty program is extensive and provides the company with significant leverage to attract and retain gamblers to its properties around the world.
• MGM Guarantee: The transaction benefits from a guarantee provided by MGM Resorts International (NYSE: MGM), which covers payment and performance of all monetary obligations and certain other obligations of the MGM Tenant under the master lease agreement. In addition to the payment and performance guaranty, MGM has also executed a shortfall guaranty for the benefit of mortgage lender for the mortgage loan. While MGM is not an investment-grade rated entity, the firm had revenues of approximately $12.9 billion and EBITDA of approximately $3 billion in 2019.
• Opening of Allegiant Stadium: The opening of the 65,000-seat Allegiant Stadium represents an opportunity for the properties to draw pedestrian traffic into the casino, restaurants, and retail establishments at both MGM and Mandalay Bay. In addition to serving as the new home of the NFL’s Las Vegas Raiders, the retractable-roof stadium will also play host to a variety of concerts and other events throughout the year. The properties have historically relied on conference and convention business, and have been quite successful doing so, but the opening of the stadium brings new opportunities to attract leisure travelers and capitalize on substantial foot traffic.
• Sponsorship: The borrower sponsors for the transaction are BREIT (49.9%) and MGP (50.1%). The Blackstone Group is a global private equity firm with $571 billion of assets under management and is one of the world’s largest and most experienced property owners. MGP is a real estate investment trust and subsidiary of MGM Resorts International. MGP owns 13 high-quality, mixed-use Las Vegas resorts and metropolitan properties comprising more than 27,400 hotel rooms and leases the properties to MGM on a triple-net basis. Both borrower sponsors have extensive experience owning and managing operationally intensive gaming and hospitality assets.
Concerns
• Gaming and Food and Beverage Revenue Volatility: A substantial component of revenue across the properties is derived from non-room revenue, including gaming revenue (18.0%) and revenue from food and beverage outlets (29.9%). These revenue sources are generally more volatile than rooms revenue; however, the proportion of gaming revenue across both properties is lower than most other properties on the Las Vegas Strip, which generally derive closer to 30% of their revenue from casino operations. Gaming revenue is also disproportionately dependent on the trends and habits of ultra-high-end visitors, as evidenced by the drop in certain casino revenue line items (specifically baccarat), as a result of the recent renovation of the Mansion at MGM.
• Tourism Dependency: Las Vegas hotel and casino performance is largely dependent on the historically volatile domestic and international tourism, convention, and gaming markets. According to the 2018 Las Vegas Visitor Profile Study, more than 80% of visitors to Las Vegas were domestic tourists, while the remaining 20% were international visitors. A variety of domestic or foreign factors, including a macroeconomic slowdown or other unforeseen idiosyncratic events such as Coronavirus Disease (COVID-19), could result in a reduction in tourism and therefore adversely affect revenue at the properties.
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• New Supply and Competition: Two major new properties, Resorts World Las Vegas and the Drew (formerly Fontainebleau Resort) are scheduled to deliver more than 7,100 new rooms to the Strip between 2021 and 2022. Both projects have been delayed but are expected to open for business over the next couple of years. Resorts World will likely compete, to some extent, with both MGM and Mandalay Bay to attract lucrative high-end gamblers, especially from Asia. Occupancy rates are likely to suffer to some degree with the addition of more rooms, but neither property is likely to compete with the steady stream of convention and conference business that MGM Grand and Mandalay Bay attracts.
• Interest-Only Loan Structure: The mortgage loan is interest only through the initial 10-year maturity and therefore does not benefit from deleveraging through amortization. The loan documents provide for an anticipated repayment date (ARD) structure, which could allow for the diversion of excess cash flow to deleverage the mortgage loan during the first and second extension periods. DBRS Morningstar provided minimal credit for the ARD loan structure given the historical volatility of lodging assets.
• Risks Associated with MGM Master Lease: The borrowers have entered into a master lease agreement with an affiliate, MGM Lessee II, LLC (the Master Tenant). While the borrowers and the Master Tenant are not under common control and a true lease opinion was provided, affiliate master lease arrangements may still pose a risk of recharacterization of the master lease as a financing from the borrowers to the Master Tenant. Furthermore, the master lease allows the Master Tenant to obtain leasehold mortgage and/or mezzanine financing. The master lease and loan documents also contain certain restrictions which may affect the lender’s rights and remedies. For example, the master lease restricts certain transfers of the property to designated competitors of the Master Tenant, which could significantly reduce the pool of qualified buyers and therefore reduce liquidity.
• Future Permitted Mezzanine Debt: The borrower has a one-time right to incur future mezzanine debt subject to certain conditions that include, among other things, (i) a maximum LTV of 67.0% based on appraisals ordered by the lender at the time of closing of the mezzanine loan, (ii) a debt service coverage ratio (DSCR) of at least equal to 5.17x, inclusive of the additional mezzanine debt, at the time of closing of the loan, and (iii) an intercreditor agreement reasonably satisfactory to the lender. Rating agency confirmation is not required in connection with the incurrence of a future mezzanine loan.
• Legal and Structural Considerations: DBRS Morningstar identified several legal and structural concerns, including:
• Non-Recourse Carveout Guaranty Cap – The liability of the carve-out guarantor is capped at 10% of the then-outstanding loan amount for bankruptcy events and full recourse is triggered only by such bankruptcy events or if the mortgage or other loan document is deemed a fraudulent conveyance or otherwise deemed void pursuant to any principles limiting the rights of creditors.
• Weak Qualified Transferee Criteria – The qualified transferee provisions allow the borrower to transfer the properties to an entity or person having, among other things, a net worth or market capitalization of at least $750 million exclusive of the property. DBRS Morningstar views this threshold as relatively weak in the context of the size of the mortgage.
• Casino License Risks – The properties operate pursuant to a casino license issued by the Nevada Gaming Control Board. The casino license is non-transferable. Upon a termination of the master lease or a foreclosure of the property, the borrowers or a new owner would be required to obtain a casino license.
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Summary of the Debt Capital Structure
Citi Real Estate Funding Inc., Barclays Capital Real Estate Inc., German American Capital Corporation, and Societe Generale Financial Corporation co-originated the 12-year $3 billion mortgage loan with a 10-year anticipated repayment date that pays fixed-rate interest of 3.5580% on an interest-only basis through the maturity of the loan. The components of the whole mortgage loan being securitized in this transaction include $634.2 million of the Senior Trust Notes and all of the $1.3658 billion in Junior Trust Notes (also known as an “L” note structure). Approximately $1 billion in Senior Notes are being held back for contribution to future securitizations.
DBRS Morningstar Interest Initial Term DBRS Morningstar Master Rent DBRS Morningstar Tier Debt Amount ($) Rate (%) Payment Terms (Months) Look-Through DSCR (x)1 DSCR (x)2 LTV (%)
Senior Trust Notes and 1,634,200,000 3.558 Interest-Only 120 7.47 4.95 35.94 Senior Companion Notes Junior Trust Notes 1,365,800,000 3.558 Interest-Only 120 4.07 2.70 65.97
Total 3,000,000,000 65.97 (1) The cumulative DBRS Morningstar DSCR shown for the loan components represents the DSCR based on the DBRS Morningstar concluded look-through NCF of $440.5 million. (2) The cumulative Master Rent DSCR shown for the loan components represents the DSCR based on the initial master rent payment of $292 million.
This securitization transaction will be subject to the credit risk retention requirements of Section 15G of the Exchange Act, as added by Section 941 of the Dodd- Frank Act. An economic interest in the credit risk of the mortgage loan is expected to be retained as an “eligible vertical interest” in the form of the Combined VRR Interest. Citi Real Estate Funding Inc. is expected to act as retaining sponsor under Regulation RR, and is expected to further offset portions of its risk retention obligation in coordination with Barclays Bank PLC, Deutsche Bank AG, New York Branch, and Societe Generale Financial Corporation based on their pro rata share of the trust loan.
Analytical and Credit Metrics
Metric DBRS Morningstar Arranger Gross Potential Revenue ($) 2,036,428,038 2,106,295,488
Net Operating Income ($) 490,299,381 520,080,353 Replacement Reserves ($) 49,796,837 32,774,592
Net Cash Flow ($) 440,502,544 487,305,761 Variance to Arranger NCF (%) -9.8 N/A
1 Capitalization Rate (%) 9.69 6.64 Concluded Value/Appraised Value ($)2 4,547,189,251 7,352,600,000
Value Per Key ($) 466,474 754,267 Whole Loan DSCR on NCF (x)3 4.07x 4.84x
Whole Loan-to-Value Ratio (%) 65.97 40.8
1 The arranger’s capitalization rate is the arranger’s underwritten net cash flow divided by the appraised value. 2 The appraiser concluded an aggregate appraised value of $7.352 billion on January 10, 2020, including personal property and intangible property attributable to the properties. 3 The current debt service coverage shown is the current coverage based on the loan payment terms for each loan at the time of securitization. Current DSCR accounts for the fact that certain loans pay interest only for at least a portion of their loan term. Amortizing debt service coverage is calculated using DBRS Morningstar’s concluded NCF and the debt service payment at the time principal amortization begins.
Morningstar Rating Characteristics
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Master Lease Structure
The borrowers have entered into a 30 year triple-net master lease agreement with two, ten-year renewal options with MGM Lessee II, LLC (“MGM Tenant”), which is a wholly owned subsidiary of MGM Resorts International. Under the terms of the master lease, MGM Tenant is required to pay an initial lease payment of $292 million per year, with $159 million allocated to the MGM Grand and the remaining $133 million allocated to the Mandalay Bay. A summary of the master lease terms are described below:
Feature Description Initial Term 30 Years Renewal Options (2) 10 Year Renewals Initial Master Rent $292,000,000 Annual Escalations 2.0% per year for years 2 through 15. Thereafter, increasing at the greater of 2% or CPI (capped at 3%) Guarantor MGM Resorts International (NYSE: MGM)
Tenant/Operating Covenants If either (a) (x) EBITDAR to Rent Ratio for the prior four fiscal quarters is less than 1.60x and (y) MGM’s market cap is less than $6.0 billion or (b) (x) MGM is no longer publicly traded and listed on NYSE, AMEX or NASDAQ and (y) the
EBITDAR to Rent Ratio for the prior four fiscal quarters is less than 2.0x, then MGM Tenant will be required to provide one or more letters of credit or fund a cash escrow in an aggregate amount equal to the following year’s rent (taking into account the applicable escalations).
Guaranty Pursuant to the Lease Guaranty (as defined below), MGM has guaranteed the payment of all monetary obligations under the Master Lease and the performance of all terms, conditions and covenants of the non-Landlord parties to the lease documents. There is no continuing net worth requirement with respect to MGM in connection with the Lease Guaranty
Transition Services Agreement No intellectual property is licensed to the Borrowers and the Borrowers have no option to purchase upon expiration of the Master Lease. Furthermore, upon the expiration of the Term or earlier termination of Master Lease, MGM Tenant will be obligated to provide up to 18 months of transition services to permit the continuous and uninterrupted operation of the Property.
Required CapEx Spend MGM Tenant is required to spend 3.5% of net revenues from the Properties during the five year period from January 1, 2020 to December 31, 2024 and each five-year period thereafter on a rolling basis (in aggregate for the Properties), such amount not to be less than 2.5% of the actual net revenue of any individual Property.
MGM Tenant is also required to make monthly deposits into an FF&E Reserve in arrears, in an aggregate amount equal to 1.5% of net revenues from the Properties which may be used for FF&E and on qualifying capital expenditures in satisfaction of the Required CapEx spend.
Master Rent DSCR 2.70x on the $3 billion whole loan
DBRS Morningstar NCF Coverage 1.51x to Master Rent (Initial)
DBRS Morningstar NCF Coverage 1.26x (based on an assumed 2% growth rate) to Master Rent (Year 10)
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Collateral Summary
The BX Commercial Mortgage Trust 2020-VIVA is collateralized by two iconic Las Vegas hotel casinos, MGM Grand and Mandalay Bay. The properties together consist of over 9,700 guest rooms in various configurations, more than 2.9 million sf of convention and meeting space, and over 300,000 square feet of casino space across more than 200 acres of land on either side of the Las Vegas Strip.
Property Description
The collateral consists of the MGM Grand and the Mandalay Bay Resort, 4,998-key and 4,750-key resort hotels and casinos, both located on the Strip in Las Vegas. Built in 1993, the MGM Grand has received $480 million ($96,000/key) in capital improvements since 2010. Of this $480 million, $144 million ($29,412/key) was spent on a rooms renovation in 2012 and $118 million was spent on the expansion of the convention center in 2018. MGM intends to spend a significant amount on capital improvements through 2024. The Mandalay Bay, including the Four Seasons and the Delano, has received a total of approximately $510.6 million (approximately $107,500 per room) of capital investment since 2010.
Rooms Summary MGM Grand Mandalay Bay Delano Four Seasons (1) Rooms 4,274 2,774 45 424 Suites 554 375 1,044 Luxury/High Roller Suites 170 60 28 Total 4,998 3,209 1,117 424 (1) Four Seasons has a mix of 424 rooms and suites
MGM Grand
The MGM Grand covers 102 acres, and has 4,274 normal guest rooms, 554 suites, 88 luxury suites, 51 Skyloft suites and 30 mansions, making it the third largest hotel in the world by number of keys. The MGM Grand is a recipient of the prestigious AAA Four Diamond award. The property contains approximately 170,000 sf of casino space, 748,000 sf of meeting space, 18 food and beverage establishments, a 23,000 sf spa, four swimming pools and approximately 42,000 sf of retail space, featuring 31 retailers.
The Resort also features premium entertainment offerings, including a Cirque du Soleil production, the David Copperfield theater, Hakkasan nightclub and MGM Grand Garden Arena, which can seat more than 16,000 people and features concerts, awards shows, sporting events and more. The arena has hosted many famous concerts and events, including the Floyd Mayweather vs. Manny Pacquiao fight in 2015. The space is also extremely adaptable, and was recently converted into a competitive Olympic-size swimming pool configuration for a competitive swimming event.
Historical RevPAR Performance
Source: DBRS Morningstar and Term Sheet
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MGM Grand Revenue Mixture 2015 2016 2017 2018 2019 Hotel ($ million) 279.5 293.4 302.5 303.7 313.2 Casino ($ million) 314.5 306.7 318.4 365.7 257.9 F&B ($ million) 301.6 297.5 307.5 316.0 346.0 Other ($ million) 265.8 247.5 251.3 240.7 244.7 Total 1,161.4 1,145.1 1,179.7 1,226.1 1,161.8
The gaming floor at MGM spans over 177,000 sf and includes approximately 1,553 slots and 128 table games including traditional games such as black jack, poker, craps, baccarat, and roulette. Gaming revenue at the MGM Grand accounted for approximately 22% of revenue in 2019, which is lower than it has been historically at the property. This was due in part to a decline in baccarat revenue, which is likely at least partially attributable to the renovation of The Mansion at MGM.
MGM Grand Food & Beverage Summary
The MGM Grand property features numerous notable, high-profile dining options including three-Michelin star winning French restaurant L'Atlelier de Joel Robuchon and the popular Cantonese restaurant and nightclub Hakkasan. The chart below highlights some of the marquee food and beverage establishments at the MGM, the type of fare offered, and approximate seating capacity.
Name Description NRA (SF) Capacity Tom Colicchio's Craftsteak Upscale venue offering steak, seafood, wine and spirits 11,693 --- Joel Robuchon at the Mansion Upscale; French fine dining 3,114 70 L'Atlelier de Joel Robuchon Gourmet French tapas 1,234 65 MGM Buffet Brunch and dinner options 2,188 635 Morimoto Upscale; Modern Japanese food and cocktails 8,414 244 Wolfgang Puck Renowned Chef Wolfgang Puck's classic comfort food 8,553 --- Emeril's New Orleans Fish House Modern New Orleans cuisine 10,082 --- Bonanno's New York Pizzeria Casual pizza offering by the slice or pie 1,943 --- Hakkasan(1) Upscale restaurant, bar and club offering Cantonese cuisine 19,000 300
(1) Capacity of 300 is only the main restaurant floor occupancy, total occupancy including the nightclub is 4,000.
Mandalay Bay
The Mandalay Bay Resort is a full-service resort and casino that was built in 2003 and has also been awarded the prestigious AAA Four Diamond award. The Mandalay Bay spans 102 acres and is one of the premier meeting event spaces in the world, with more than 2.1 million SF of meeting and convention space, making it the fifth largest convention space in the U.S. The trade show hall at Mandalay Bay is over 1 million square feet and can play host to conventions and trade shows that attract in excess of 60,000 people.
The property is located immediately across Allegiant Stadium, which will be home to the Las Vegas Raiders July 2020 onwards. Within the Mandalay Bay, there is a Four Seasons hotel and the Delano, an all-suite tower, each with its own restaurants, pools, spa, and lobby. The property also contains 135,000 sf of casino space, 17 restaurants, a 30,000-sf spa, 10 swimming pools, and 54,000 sf of retail space. The hotel also has several entertainment options including Cirque du Soleil’s Michael Jackson “One” show that been in occupancy since 2013, a 12,000-person special events arena, a shark reef aquarium, and Mandalay Bay’s day parties along its pools and beach areas.
The property has benefitted from $510 million in capital improvements since 2010, including undergoing a $159 million renovation to its rooms from 2010 through 2016. MGM expects to invest significant capital the property through 2024.
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Historical RevPAR Performance
Source: DBRS Morningstar and Term Sheet
Mandalay Bay Revenue Mixture 2015 2016 2017 2018 2019 Hotel ($ million) 296.7 318.2 319.2 315.7 322.2 Casino ($ million) 147.3 131.6 141.3 126.3 121.6 F&B ($ million) 276.4 301.5 301.4 288.8 283.5 Other ($ million) 215.0 218.2 220.3 234.6 217.1 Total 935.4 969.5 982.3 965.4 944.4
The gaming space at Mandalay Bay is slightly smaller than MGM Grand and features more than 1,200 slot machines and approximately 71 table games across 155,000 sf of casino floor. Gaming revenue at Mandalay Bay represents a much smaller percentage of total revenue at the property as compared to MGM. Only about 13% of total revenue was from casino operations in 2019, owing to the property’s larger emphasis on convention and conference business as well as its location further south on the Las Vegas Strip, which has historically limited the amount of transit foot traffic that benefits casinos further north.
Mandalay Bay Food & Beverage Summary
The Mandalay Bay property, like MGM Grand, features an eclectic mix of high end and casual dining establishments, including creations by well-known chefs such as Michael Mina, Wolfgang Puck, and others. The table below highlights many of the marquee food and beverage outlets:
Name Description NRA (SF) Capacity Bayside Buffet A wide selection of food, including crab legs and prime rib in a tropical setting 19,403 525 Mizuya Sushi rolls and sashimi in a contemporary dining room 14,643 65 Aureole New American fare in Mandalay Bay featuring a 4-story wine tower 13,349 473 Libertine Social Cool, upscale gastropub with New American dishes and cocktails 10,178 253 Strip Steak Michael Mina's flagship steak restaurant in Las Vegas 8,632 258 Fleur by Hubert Keller Chef Hubert Keller offers small plates and handcrafted cocktails 7,316 204 Noodle Shop Authentic Cantonese and Mandarin dishes seated under massive Chinese lanterns 3,166 161 Charlie Palmer Steak at Four Seasons Steakhouse in an upscale setting 11,920 --- Lupo by Wolfgang Puck Wolfgang Puck's first Italian restaurant specializing in tableside service 11,246 --- KUMI Modern Japanese menu with a Korean American twist 10,514 --- Burger Back Chef Hubert Keller's burger bar 5,044 ---
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Meeting Space Summary
Both the MGM Grand and Mandalay Bay properties benefit from substantial convention and meeting space – nearly 3 million sf across both properties – which provides the capacity to host multiple, large-scale conventions or trade shows simultaneously. The convention and trade show business is a substantial demand driver for the food and beverage outlets, with attendees flocking to the restaurants and bars during the lunch and dinner hours. The table below highlights the primary conference and meeting space across both the MGM and Mandalay Bay properties, with the vast majority of the space (more than 2 million sf) being located at Mandalay Bay.
Venue Name Size (SF) Venue MGM Grand Conference Center and Meeting Space 313,733 MGM Grand Ballrooms 316,267 MGM Grand MGM Grand Garden Arena 118,325 MGM Grand MGM Total 748,325
Arena 82,888 Mandalay Bay Ballroom 294,086 Mandalay Bay Meeting Rooms 762,883 Mandalay Bay Tradeshow Hall 1,043,031 Mandalay Bay Mandalay Bay Total 2,182,888
Grand Total 2,931,213
Historical Capital Expenditures
MGM Resorts International has invested approximately $480 million and $511 million into the MGM Grand and Mandalay Bay properties, respectively. MGM’s recent investments include $144 million on rooms renovations at MGM Grand that took place between 2010 and 2013, $118.9 million on a convention center expansion and renovation at MGM Grand completed in December 2018, and approximately $159.7 million on rooms renovations at Mandalay Bay including the Delano that took place from 2012 to 2016.
Sponsor’s Capital Expenditures – MGM Grand (2010–2019)
Source: Term Sheet
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Sponsor’s Capital Expenditures – Mandalay Bay (2010–2019)
Source: Term Sheet
As part of the master lease agreement, MGM will be required to maintain minimum levels of investment in the properties over time. MGM has agreed to a minimum aggregate capital investment of 3.5% of actual yearly net revenues from 2020 through 2024, and then each five-year period thereafter on a rolling basis. MGM must also fund a monthly capex reserve equal to 1.5% of actual net revenues, which it can use for FF&E expenditures and on certain qualifying capital expenditures.
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Property Site Visit
DBRS Morningstar toured the MGM Grand and Mandalay Bay properties with members of the management team on the morning and afternoon of Tuesday, January 28, 2020. Based on our tour of the assets, we concluded the property quality to be excellent.
During the tour, representatives from MGM discussed the details of daily operations at each of the resorts, as well as a history of the assets and a detailed accounting of recent capital investments. At the time of the visit, the conference and convention space was being heavily used by attendees of a major national trade show and guests were actively using both properties.
The MGM Grand property is located just east of the intersection of Las Vegas Boulevard and Tropicana Avenue, and is diagonally across the street from the Aria and Park MGM. The Cosmopolitan and Bellagio are located to the north, and resort casinos such as Tropicana, Luxor, and Excalibur are located to the south. The property’s distinctive turquoise and glass façade along with its massive signage make it hard to miss, although the property is somewhat set back from the Strip.
The MGM Grand property is sprawling and includes a massive conference center, the MGM Grand Garden arena, and a large casino floor that was busy with activity during the time of the tour. Although MGM Grand is one of the older casino properties in Las Vegas, the majority of the public space was in good condition. The highlight of the MGM property, in addition to the MGM Garden Arena, is likely the Mansion at MGM, which features several opulent “villa” residences for some of MGM’s most important gaming clients. The Mansion recently underwent a significant renovation and affords high rollers both privacy and luxury. Guests can enter the Mansion through a private porte cochere and can essentially stay, dine, and gamble without ever interacting with the general public. The Mansion is a major asset in terms of attracting and retaining the most high-profile gaming clients, and the butler and concierge staff were busy greeting clients during the time of the tour. DBRS Morningstar also toured a variety of different rooms at the MGM Grand, most of which were in good condition.
The food and beverage and amenity spaces at the property were generally in good condition, with several of the major establishments having been recently renovated. The well-known Wet Republic Ultra Pool was closed at the time of our site inspection given the winter season. The MGM Grand Conference center has also received significant capital improvements, and MGM is continuing to make upgrades including the addition of a new Starbucks location.
The Mandalay Bay is located further south along the western side of the Las Vegas Strip, just south of Luxor and Excalibur. The property is effectively the southern bookend of the Strip, which as previously noted, resulted in less foot traffic and transient business. The complex is massive and includes the Mandalay Bay Convention Center, the Mandalay Bay tower, as well as the separate Delano hotel tower on the northern edge of the parcel. The property benefits from good visibility as well as its distinctive golden façade.
Like the MGM Grand, the Mandalay Bay property is extensive and features multiple different components, each with their own target demographic and look and feel. For example, the main triangle-shaped Mandalay Bay tower features an array of standard guestrooms and suites, in addition to a totally separate Four Seasons Hotel Las Vegas located on certain floors of the tower. The Four Seasons component has its own spa and amenity package reserved for the exclusive use of guests staying at that hotel. At the opposite end of the property is the all-suite Delano tower, which like the Four Seasons, also has its own amenity package. DBRS Morningstar toured a wide array of guestrooms at the Mandalay Bay, Four Seasons, and Delano offerings and all were in good condition at the time of the tour. Each has its own distinctive style and décor targeted towards a specific demographic.
The conference and meeting room space at Mandalay Bay is expansive, and there was a large industry conference with over 60,000 attendees being held at the property at the time of the site tour. Conference attendees packed the food and beverage outlets at both the lunch and dinner hours. The 1 million sf Mandalay Bay Convention Center provided thousands of vendors with ample space to showcase their products and services. Like MGM Grand, the Mandalay Bay property has its own take on a pool amenity, known at the property as “Mandalay Bay Beach.” The beach amenity includes a large wave machine that simulates an ocean environment, complete with a large sandy artificial shoreline.
Generally speaking, both properties showed well and were busy with guest activity. The approximately $500 million in capital investments made over the past few years across both properties was evident during the tour, and the borrower sponsor has ongoing plans to make additional improvements. There was minimal deferred maintenance evident during the time of the tour, and the offerings at both properties are generally consistent with full-service resort casinos in Las Vegas at similar ADR points.
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Market Summary
Both the MGM Grand and Mandalay Bay properties are located along the southern portion of the Las Vegas Strip in Las Vegas, Nevada. The Las Vegas MSA is among the top 30 MSAs in the country and has a population of approximately 2.2 million people and over 800,000 households. The median household income for the MSA is approximately $57,000 and the unemployment rate is about 3.5% as of December 2019. The regional economy is inextricably linked to the tourism and hospitality sectors, although the economy has continued to diversify. Still, each of the top five largest employers in the MSA are gaming operators including MGM Resorts International (54,000 employees), Caesars (27,000 employees), Station Casinos (13,000 employees), Wynn Resorts (11,000 employees), and Boyd Gaming (9,300 employees). Large non-gaming employers include Walmart (6,400 employees), Valley Health System (5,200 employees), and Sears Holding (2,800 employees).
Source: FRED (Federal Reserve)
Las Vegas Tourism Trends
McCarran International Airport Trends
Las Vegas has been one of the premier international tourism destinations for more than 20 years. The number of passengers that deplane at McCarran International Airport has decreased from its peak of over 21 million people in 2007 but has been exhibiting consistent growth since 2015. The number of people that have deplaned at McCarran airport has increased over 9% since 2015.
Given the lack of additional expansion capacity at McCarran, local authorities have contemplated the creation of a second airport that would be known as Ivanpah Valley Airport, which would potentially be located in the Ivanpah Valley of the Mojave Desert (part of Clark County). The Ivanpah Valley Airport would serve as a “relief airport” to relieve passenger congestion in and out of McCarran. The project was initially contemplated in 2000 and has been put on hold several times and construction has not yet begun.
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Historical Tourism Volume
Las Vegas welcomed approximately 42.5 million tourists and visitors to the city in 2019, which is the second highest number of tourists in history with the exception of 2016. Tourism numbers have steadily grown from their tough in 2009, and the city has experienced an approximately 14% increase in tourism volume since 2010.
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Trip Expenditures
Of the visitors that come to Las Vegas, foreign ones tend to spend the most on local transportation and food and drink. Foreign visitors spend on average, $111.59 on local transportation and $356.03 on food and drink, which represents an approximately 41% increase on local transportation expenditure and 13% increase on food and drink compared with the general average. Las Vegas also exhibits approximately 20% of its visitors coming from Southern California, which is a major region of visitors for the area. Visitors from Southern California tend to spend less than the average visitor to Las Vegas on both transportation and food and drink, per the chart below.
Competitive Set
The primary competitive set for both the MGM Grand and Mandalay Bay casinos are other major resort casinos nearby that generally cater to a similar clientele, including The Mirage, New York New York, Luxor, Caesars, Planet Hollywood, and The Venetian. All of the aforementioned properties were deemed to have a 100% competitive quotient with MGM Grand and Mandalay as determined by the appraiser.
Source: Appraisal
Competitive Set Occupancy, ADR, and RevPAR
Both MGM Grand and Mandalay Bay have generally performed in-line with their comp set, although Mandalay Bay has historically had higher RevPAR penetration rates, which have exceeded 100% for each of the last three years. MGM has historically had an occupancy rate that hovers around the low 90% range, where Mandalay Bay has been slightly lower. From an ADR perspective, Mandalay Bay has generally slightly outperformed its comp set while MGM Grand has generally performed in-line with the comp set over the past three years. Room renovations at both properties have also enabled MGM Resorts International to push rate.
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The following table summarizes the performance of the MGM Grand and Mandalay Bay relative to their comp set over the past three years from an occupancy, ADR, and RevPAR perspective. At the MGM Grand, RevPAR has steadily grown from approximately $112 at the depths of the recession in 2009 to a figure of approximately $174 at present. Comparatively, RevPAR at the Mandalay Bay property has grown less as a percentage, from approximately $142 in 2009 to a figure of around $189 today.
Performance At A Glance OCCUPANCY (%) ADR RevPAR Mandalay Bay Year Property Comp Set Index Property Comp Set Index Property Comp Set Index 2019 90% 94% 96.6% $ 209.92 $ 190.09 108.8% $ 188.93 $ 178.15 105.1% 2018 90% 93% 97.4% $ 204.00 $ 183.94 109.2% $ 184.01 $ 171.13 106.4% 2017 90% 92% 98.0% $ 206.28 $ 164.06 113.2% $ 185.40 $ 164.06 110.9% MGM Year Property Comp Set Index Property Comp Set Index Property Comp Set Index 2019 93% 93% 99.3% $ 187.66 $ 185.85 97.3% $ 173.59 $ 172.97 96.6% 2018 93% 92% 100.4% $ 182.00 $ 190.71 97.4% $ 169.26 $ 174.53 97.8% 2017 92% 92% 100.2% $ 182.00 $ 175.61 100.0% $ 167.44 $ 161.31 100.2% Mandalay Bay 2019 vs. STLY (2018) 2019 vs. STLY (2018) 2019 vs. STLY (2018) 2019 0% 1% -0.8% $ 5.92 $ 6.15 -0.4% $ 4.92 $ 7.02 -1.3% MGM 2019 vs. STLY (2018) 2019 vs. STLY (2018) 2019 vs. STLY (2018) 2019 0% 1% 1.9% $ 5.66 $ 5.60 -0.1% $ 4.33 $ 7.75 -1.2%
New Supply
As mentioned earlier in this report, two major new properties, Resorts World Las Vegas and the Drew (formerly Fontainebleau Resort) are scheduled to deliver more than 7,100 new rooms to the Strip between 2021 and 2022. Both projects have been besieged by delays but are expected to open for business over the next couple of years. The projects will also be located at the northern end of the Las Vegas Strip, far away from the subject properties, north of the Wynn/Encore properties.
Resorts World will likely compete, to some extent, with both MGM and Mandalay Bay to attract lucrative high-end gamblers, especially from Asia. Occupancy rates are likely to suffer to some degree with the addition of more rooms, but neither property is likely to be directly competitive with either MGM or Mandalay Bay and neither is likely to offer as much convention or conference space as is available at both MGM and Mandalay Bay.
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Site Inspection Photos .
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DBRS Morningstar Cash Flow Analysis and Valuation
DBRS Morningstar analyzed the properties’ historical cash flow, occupancy levels, operating expenses, fixed expenses, and capital costs. DBRS Morningstar’s revenue and expenses estimates, as well as our analytical approach, are discussed below.
DBRS Morningstar Estimate of Net Cash Flow
Total Revenue
DBRS Morningstar’s total and all income line items were underwritten to the a TTM percentage of departmental revenue based on a concluded aggregate ADR of $190 and a concluded aggregate occupancy of 91%.
Departmental Expense
DBRS Morningstar underwrote departmental expense line items based on the TTM percentage of departmental expense against the DBRS Morningstar concluded departmental revenue line items enumerated above.
Undistributed Expenses
DBRS Morningstar concluded undistributed expenses to a TTM percentage of total revenue for each line item.
Management Fee and Fixed Expenses
DBRS Morningstar underwrote management fees to 3% of EGI.
DBRS Morningstar underwrote real estate taxes to the TTM figure plus an inflation factor.
DBRS Morningstar underwrote the insurance premium to the TTM figure plus an inflation factor.
Replacement Reserves and TI/LCs
DBRS Morningstar concluded an aggregate FF&E reserve figure of 2.4% of total revenue. DBRS Morningstar conducted an FF&E analysis to determine, in the context of the properties, a required FF&E spend figure and took into consideration the contractual FF&E spending required by MGM Tenant under the master lease agreement.
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The table below presents a summary of DBRS Morningstar’s conclusions versus the arranger’s underwriting and recent historical cash flows.
DBRS Adjusted UW Morningstar 2017 ($) 2018 ($) 2019 ($) UW ($) ($) Underwriting ($)
Hotel Revenue 621,671,255 619,356,266 635,408,160 635,408,160 635,408,160 614,331,180 Casino Revenue 459,676,698 492,001,712 379,532,959 379,532,959 406,556,318 366,943,557 F&B Revenue 608,876,978 604,859,218 629,566,379 629,566,379 629,566,379 608,683,175 Other Revenue 471,735,234 475,323,334 461,787,990 461,787,990 461,787,990 446,470,125
Total Revenue 2,161,960,165 2,191,540,530 2,106,295,488 2,106,295,488 2,133,318,847 2,036,428,038
Hotel Expense 249,304,637 255,303,612 265,201,312 265,201,312 262,801,312 256,404,379 Casino Expense 229,109,011 226,996,812 223,320,361 223,320,361 220,720,361 215,912,652 F&B Expense 433,970,578 437,033,184 449,487,794 449,487,794 436,187,794 434,577,936 Other Expense 322,504,168 316,078,620 304,747,043 304,747,043 303,147,043 300,101,097
Total Departmental Expense 1,234,888,394 1,235,412,228 1,242,756,510 1,242,756,510 1,222,856,510 1,206,996,064
Total Departmental Income 927,071,771 956,128,302 863,538,978 863,538,978 910,462,337 829,431,974
Property Maintenance 110,391,779 118,282,787 120,945,670 103,270,469 101,570,469 116,933,809 Property Administration( 96,773,953 92,956,808 94,191,491 126,766,300 116,466,300 91,067,086 Marketing & Advertising 39,688,930 45,724,651 42,793,494 28,082,648 27,782,648 41,374,001
Total Undistributed Expenses 246,854,662 256,964,246 257,930,655 258,119,417 245,819,417 249,374,896
Management Fee 53,171,104 56,764,258 57,698,013 57,698,013 57,698,013 61,092,841 Income before fixed charges 627,046,005 642,399,798 547,910,310 547,721,548 606,944,907 518,964,237
Real Estate Taxes 15,852,622 17,309,476 18,640,693 18,451,931 18,451,931 19,199,914 Insurance 6,156,171 7,796,135 9,189,264 9,189,264 9,189,264 9,464,942 Total Fixed & Other Expenses 22,008,793 25,105,611 27,829,957 27,641,195 27,641,195 28,664,856
EBITDAR 605,037,212 617,294,187 520,080,353 520,080,353 579,303,712 490,299,381
FF&E Reserve 0 0 0 32,774,592 33,179,942 49,796,837 Net Cash Flow 605,037,212 617,294,187 520,080,353 487,305,761 546,123,770 440,502,544
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DBRS Morningstar Valuation
DBRS Morningstar’s concluded blended capitalization rate for the properties was 9.69%, which resulted in a value of $4.55 billion, or $466,744 per key.
DBRS Morningstar determined a blended capitalization rate by assigning a different capitalization rate to each of the six primary revenue sources at the property: hotel rooms revenue, food and beverage revenue, casino revenue, retail revenue, entertainment revenue, and other revenue. The capitalization rates used for the casino and entertainment components were the highest and exceeded 10%.
The appraiser concluded an aggregate appraised value of $7.35 billion on January 10, 2020, including personal property and intangible property attributable to the properties. The DBRS Morningstar concluded value is approximately 38.2% below the appraiser’s concluded value.
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Ratings Rationale
DBRS Morningstar’s provisional ratings for BX Commercial Mortgage Trust 2020-VIVA reflect our analysis of the sustainable cash flow and value for the properties securing the loan held by the trust, the presence of loan structural features such as lack of amortization, partial pro rata pay structure (if applicable), and qualitative factors such as our opinion of the quality of the underlying collateral properties, the current and expected performance of the real estate markets in which the properties are located, and the current and future state of the macroeconomic environment and its potential impact on the performance of commercial properties.
The BX 2020-VIVA transaction is supported by the payment stream from a master lease associated with the MGM Grand and Mandalay Bay hotels and casinos in Las Vegas. DBRS Morningstar determined the provisional ratings for each class of certificates by analyzing the cash flow generated by the properties, giving consideration to the quality and location of the properties, the fundamentals of the property’s real estate market, and legal and structural features of the mortgage loan. DBRS Morningstar’s analysis of the properties’ operations, based on information provided on the arranger’s website as of March 2, 2020, yielded an NCF of $440.5 million. DBRS Morningstar’s concluded NCF is 9.8% less than the issuer’s underwritten NCF. The DBRS Morningstar NCF resulted in an interest-only DSCR of 2.72x on the whole mortgage on a look-through basis assuming a fixed mortgage rate of 3.50%. DBRS Morningstar valued the collateral at $4.55 billion based on the concluded NCF and a blended capitalization rate of 9.69%. Morningstar’s valuation resulted in an LTV ratio of 65.97% on the $3 billion whole loan.
DBRS Morningstar determined the ratings on each class of certificates by performing quantitative and qualitative collateral, structural, and legal analysis. This analysis incorporates DBRS Morningstar’s North American Single-Asset/Single-Borrower Ratings Methodology and the DBRS Morningstar LTV Sizing tool. DBRS Morningstar determined its concluded sustainable NCF and sustainable value of the underlying property by applying its North American Commercial Real Estate Property Analysis Criteria. DBRS Morningstar’s maximum LTV thresholds at each rating category were based on the transaction’s sequential-pay waterfall, the underlying property type, lack of amortization (full-term interest only), borrower, trust LTV, the presence of additional mezzanine debt, limited property type and geographic diversity, and other factors relevant to the credit analysis. DBRS Morningstar determined its provisional ratings on the interest-only Class X certificate based on the lowest rating of the applicable reference obligation, which we may or may not elect to notch up one rating, as per our updated approach to rating interest-only certificates. Please refer to the updated DBRS Morningstar combined methodology entitled Rating North American CMBS Interest-Only Certificates on the DBRS Morningstar website, www.dbrsmorningstar.com.
We increased our maximum LTV thresholds to account for these positive factors:
• Cash Flow Volatility: Both properties, MGM Grand and Mandalay Bay, have exhibited strong NCF growth, with a 24% increase since 2013. The property is also undergoing a rooms renovation, and renovated rooms are generating an increase in ADR of approximately $10. Additionally, the demand segmentation at the property is more heavily weighted toward group and conference business, which typically exhibits slightly less volatility than transient visitor business. As a result, we elected to increase our LTV thresholds by 2.25% to account for cash flow volatility.
• Property Quality: The sponsor has invested approximately $1 billion since 2010 to maintain the asset’s competitive profile and the property is currently undergoing a significant rooms renovation, with a substantial amount of capex expected through 2024 across both MGM and Mandalay Bay. The sponsor has also invested significant capex into various food and beverage outlets across the property. DBRS Morningstar’s extensive site inspection of both the MGM and Mandalay Bay facilities reinforced our positive view on the asset’s property quality, even compared with other recently analyzed marquee hotel casino properties in Las Vegas. As a result, we elected to increase our LTV thresholds by 2.25% to account for property quality.
• Market/Location: The Las Vegas Strip has traditionally had higher occupancy rates compared with the rest of the country, and average occupancy in 2018 was 90.3%. The two new hotels scheduled for delivery in 2020 and 2023 have experienced delays and are generally targeting a higher ADR customer than MGM and Mandalay Bay. Las Vegas hotel ADR is still 2% below the 2007 peak over a decade later, and continues to diversify away from gaming revenue and toward hotel and entertainment. The property also stands to benefit from its location at the southern end of the Vegas strip, historically a less desirable location, with the opening of the 65,000-seat Allegiant Stadium directly across the Las Vegas Freeway from Mandalay Bay. As a result, we elected to increase our LTV thresholds by 2.5% to account for market/location.
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Loan Summary
General Loan Terms
Citi Real Estate Funding Inc. (CREFI), Barclays Capital Real Estate Inc. (BCREI), Deutsche Bank AG, New York Branch (DBNY) and Societe Generale Financial Corporation originated the 12-year, 10-year anticipated repayment date maturity mortgage loan that pays fixed-rate interest of 3.5580% on an interest-only basis through the maturity of the loan.
Borrowers and Sponsors
The borrowers, Mandalay PropCo, LLC and MGM Grand PropCo, LLC, are special-purpose limited liability companies, which are subsidiaries of the joint venture partnership (MGP BREIT Venture 1 LLC) formed between BREIT Operating Partnership L.P. and MGM Growth Properties Operating Partnership LP.
The limited non-recourse carveout guarantors under the Mortgage Loan are MGM Growth Properties Operating Partnership LP (MGP OP) and BREIT Operating Partnership L.P. (BREIT OP), on a several basis in proportion to each Guarantor’s Liability Percentage. Liability Percentage means, initially, (i) with respect to BREIT OP, forty-nine and nine-tenths percent (49.9%) and (ii) with respect to MGP OP, fifty and one-tenths percent (50.1%). The guarantors are guaranteeing certain non-recourse carveout obligations under the mortgage loan.
Co-lender Agreement
Per the offering documents, the mortgage loan will be evidenced by eight pari passu senior notes (“Senior Notes”) and four pari passu junior notes (“Junior Notes”) junior to the Senior Notes. Generally, all payments made on the Senior Notes are allocated among the Senior Notes pro rata and pari passu and all payments made on the Junior Notes are allocated among the Junior Notes pro rata and pari passu. Four of the Senior Notes (the “Trust Senior Notes”) and the Junior Notes are expected to be deposited into the trust and support payments on the certificates. The remaining Senior Notes (collectively, the “Companion Loan”) are not expected to be included in the trust and, we are assuming may be securitized in one or more rated transactions on or prior to the closing date of this transaction. The Companion Loan is expected to be senior to the Junior Notes and pari passu with the Trust Senior Notes.
The presence of additional debt introduces risks, including: - Reduced borrower skin-in-the-game that may remove incentives to maintain or improve the competitiveness of the property resulting in lower income streams. - The presence of additional debt could increase the difficulty of refinancing the mortgage loan at the maturity date. - More complicated servicing arrangements, as the master and special servicer under the trust and servicing agreement will perform lead servicing for the Trust Senior Notes and the Junior Notes along with servicing the Companion Loan.
The mortgage loan is expected to be lead serviced under the trust and servicing agreement for this transaction. The lead servicer typically makes all property protection advances for the entire loan while the servicer for each trust containing a note typically makes any principal and interest advances related to solely the note(s) in the related trust. As lead servicer for the loan, the master servicer, special servicer and/or trustee will be obligated to make property advances on the loan. Depending on costs, expenses and/or non-recoverable advances related to the loan, the master servicer, special servicer and/or trustee may be required to request and collect the pro rata portion of such amounts from the Companion Loan holder(s). If such amounts are not collected, losses (not allocable to the portion of the loan deposited into the trust) could affect certificateholders.
The draft co-lender agreement contains (i) certain consent and/or consultation rights among the note holders and (ii) certain transfer restrictions and requirements related to the notes (including the Companion Loan) that could impact a sale of the notes. The co-lender agreement also contains payment allocations of amounts received on the loan among the noteholders. Under a typical waterfall, the senior notes receive interest, pro rata principal (and full principal paydown to zero post-event of default) and realized loss reimbursements prior to the junior notes receiving interest, pro rata principal (and full principal paydown to zero post-event of default) and realized loss reimbursements. In this transaction, there may be certain deviations from such typical waterfall. For example, at all times (including pre-event of default), the Senior Notes are expected to be entitled to full principal paydown from principal proceeds prior to the Junior Notes receiving any principal. Also, since the Junior Notes are in the trust, the Junior Notes are expected to be entitled to receive interest payments from all proceeds after the Senior Notes receive interest. The interest payable to the Junior Notes is not expected to be available to make any payments of principal to the Senior Notes (even post-event of default). Additionally, the waterfall may not provide for reimbursement to the noteholders of realized losses. Such deviations may result in, among other things, (a) less principal allocable to the Junior Notes pre-event of default, (b) a faster principal paydown of the Senior Notes pre-event of default (including the Companion Loans) if principal proceeds are received, (c) less proceeds allocated to the Senior Notes as the
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interest payment to the Junior Notes will not be applied to principal amounts on the Senior Notes and (d) no recovery of realized losses by noteholders to the extent incurred. As the Trust Senior Notes and the Junior Notes are included in the trust and support payments on the certificates, to the extent these waterfall priorities adversely impact recoveries or payments to certificateholders, the ratings may be impacted. In general, in the case of loans with additional debt in the form of one or more junior notes, there is an increased likelihood of default on the corresponding senior note(s). As previously described, while the junior note holders entered into the co-lender agreement with the holder of the senior notes to generally subordinate certain payments and allocate certain rights, it is not certain, upon a borrower bankruptcy, the impact of the junior notes on the senior note holders’ rights in such bankruptcy. This may expose the senior notes to higher losses.
In addition, DBRS Morningstar has assumed that at any time the Junior Notes and Trust Senior Notes are outstanding and certificates are rated, the Trust Senior Notes will not be sold separately or otherwise outside of the trust while any Junior Notes remain in the trust and vice versa. If this assumption is not true, the ratings may be impacted. While not preferred, the co-lender agreement does not preclude transfers of Companion Loan notes post-event of default to borrower or borrower affiliates. If such transfer occurs, the ratings may be impacted.
Anticipated Repayment Date
The mortgage loan is structured with an anticipated repayment date (an “ARD Date”) that is prior to the actual loan maturity date. If the loan is not paid in full on the ARD Date, the loan documents contain provisions requiring payment by borrower of additional interest in excess of the loan’s regular interest rate (the “Excess Interest”) and, if the Excess Interest is not paid as it accrues on each monthly payment date after the ARD Date, the addition of the accrued interest to the outstanding principal balance of the loan (the “Accrued Interest”). DBRS Morningstar is assuming (i) no principal and interest advancing under the trust and servicing agreement will include amounts for Excess Interest or Accrued Interest, (ii) during an event of default, lender may apply all proceeds to rated principal and interest on the loan before any allocations to Excess Interest or Accrued Interest, and (iii) the servicer and special servicer will be permitted under the trust and servicing agreement to waive Excess Interest and/or Accrued Interest. If these assumptions are not true, the ratings may be impacted.
Master Lease
Per the loan documents, offering documents and/or information from arranger, the borrowers have entered into a master lease (“Master Lease”) with an affiliate, MGM Lessee II, LLC (the “Master Tenant”). An affiliate master lease arrangement may pose a risk of recharacterization of the Master Lease as a financing from the borrower(s) to the Master Tenant. To mitigate such risk (x) per arranger, the borrowers and the Master Tenant are not under common control and (y) a true lease opinion was provided. While not preferred, the true lease opinion does not include rating agency reliance. Despite any mitigants, if a recharacterization occurs or other adverse impact related to such master lease structure, delays, increased costs and expenses and/or limitations on rights or remedies and/or enforcement by the lender (or servicer) with respect to the mortgage loan collateral may result and impact recoveries and remedies and ultimately, the ratings.
The borrowers and Master Tenant are provided various rights related to the Master Lease. For example, the borrowers are permitted to amend the Master Lease to provide for certain cross-defaults between the Master Lease and other leases between affiliates of the borrowers and the Master Tenant. As a mitigant, the loan documents restrict the borrowers from terminating the Master Lease as a result of such a cross-default without the consent of the lender and rating agency confirmation. DBRS Morningstar has assumed any such cross-defaults will not have an adverse impact on the Master Lease or the use, value or operation of the property, the borrowers or the loan. With respect to the Master Tenant, the Master Lease allows Master Tenant to obtain leasehold mortgage and/or mezzanine financing. Per the arranger, there is currently no such leasehold financing in place.
The Master Lease and loan documents also contain certain restrictions which may impact lender’s rights and remedies. For example, the Master Lease restricts certain transfers of the property to designated competitors of the Master Tenant. DBRS Morningstar has assumed that such restrictions will not impact the lender’s remedies or ability to sell the property following a foreclosure. In addition, the loan documents restrict the lender from exercising certain remedies during an event of default under the loan (including acceleration, application of lender-controlled funds in lender’s discretion, receivership and foreclosure) if the following are satisfied: (x) the event of default under the loan is caused by a breach or default under the Master Lease, (y) borrower is diligently and expeditiously proceeding to cure a non-monetary default, and (z) the time periods for borrower’s cure of such Master Tenant default have not expired. With respect to non-monetary defaults under the Master Lease, borrower may exercise cure rights for up to 365 days. If such restrictions and delays on lender’s rights and remedies during a loan event of default adversely impacts lender’s workout, enforcement and other rights and remedies or the use, value or operation of the property, the ratings may be impacted. DBRS Morningstar has assumed lender is not subject to restrictions on advancing, declaring an event of default and/or preserving lender’s claims and rights during any cure periods. If this assumption is not true, the ratings may be impacted.
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Casino Revenue
A certain portion of the revenue from the properties generated by the Master Tenant relates to casino operations at the properties. Per the offering documents, the Master Tenant has a license to operate the casino (the “Casino License”). The Casino License is non-transferable. Upon a termination of the Master Lease or a foreclosure of the property, the borrowers or a new owner would be required to obtain a casino license. If the Casino License terminates or there is a loss of such casino revenues, whether due to termination, a lack of assignability of the Casino License, or otherwise, the ratings may be impacted.
SPE and Bankruptcy Remoteness
The borrowers are required under the loan documents (and their organizational documents) to maintain themselves as special purpose entities generally limited in their activities to ownership and operation of the applicable mortgaged property. The loan documents (and borrowers’ organizational documents) also include limitations on the borrowers’ ability to incur additional indebtedness and additional covenants regarding the borrower’s separateness from other entities. While the borrowers are generally limited in incurring additional indebtedness, the loan allows for broader and/or higher thresholds of permitted debt than may be customary or preferred for transactions of this type and size. For example, (a) certain categories of permitted debt, such as certain capital expenditures, taxes, insurance premiums, gaming deposits and indemnification obligations, are not subject to any cap and (b) the trade payable percentage cap is based off the allocated loan amount for each property instead of the outstanding balance of the loan. The borrowers are also required to have independent directors (or independent managers) whose consent is required for certain bankruptcy matters. Although the loan documents (and borrowers’ organizational documents) require the borrowers to comply with certain covenants relating to the borrowers’ separateness, and the borrowers make certain representations regarding their previous existence, the borrowers existed prior to the origination of the loan. In addition, the following guaranties were provided (A) guaranty of recourse obligations by MGM Growth Properties Operating Partnership LP and BREIT Operating Partnership L.P. in favor of lender, (B) guaranty of lease documents by MGM Resorts International in favor of borrowers (including guaranty of rent and other obligations of tenant under the master lease), and (C) shortfall collection/deficiency guaranty by MGM Resorts International in favor of lender which includes a guaranty of collection of the loan after lender has exhausted various other remedies (items (A)-(C), collectively “Guaranties”). While (i) pre-existing entities present a higher risk than newly formed single purpose entities and (ii) such Guaranties may increase consolidation risk, a nonconsolidation opinion relating to the borrowers and considering such Guaranties was provided. During the term of the loan, borrowers are permitted to provide additional guarantees and/or letters of credit in lieu of cash deposits without delivery of a new nonconsolidation opinion so long as the amount of the guarantee and such letters of credit, in the aggregate, do not exceed 15% of the outstanding principal balance of the loan.
DBRS Morningstar is assuming (i) the borrowers currently own only the applicable mortgaged property, (ii) there are no outstanding liabilities relating to any borrower’s previous activities and/or previously owned property(ies) and/or other interests and/or financing(s), (iii) any agreements or arrangement with affiliates are on customary, commercially reasonable and arm’s length terms, and (iv) any guaranties and guarantied obligations, individually or in the aggregate, are not (and will not be) factors resulting in a consolidation of borrowers. If (x) such assumptions are not true and/or (y) despite mitigants, liabilities, recourse, obligations, claims, costs or expenses, indemnities or other issues arise due to borrower’s prior existence and/or prior activities or agreements or arrangements with affiliates on other than arm’s length terms and/or (z) guaranties and/or related items result in consolidation of any borrower, the ratings may be impacted.
While single purpose entity borrowers are intended to lessen the possibility that such entity’s financial condition would be adversely impacted by factors unrelated to the mortgaged property and the mortgage loan, there is no assurance that such entity will not nonetheless become part of a bankruptcy proceeding. Any related bankruptcy proceeding(s) may impact the ratings.
Permitted Mezzanine Debt
The intercreditor agreement may also provide certain mezzanine lender rights, including, without limitation, cure rights, purchase option and certain consent and/or consultation rights. The consent, cure, purchase option and/or other rights of the mezzanine lender may limit and/or delay the trust’s workout of the senior mortgage loan, remedies, the timing for modifications of the loan and a sale of the loan. Such risks may impact the ratings of the certificates. If any future mezzanine debt adversely impacts the mortgage loan or any certificates, the ratings may be impacted.
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The loan documents permit future mezzanine debt subject to certain conditions in the loan documents, including LTV and DSCR requirements as set forth in the loan documents. Any future permitted mezzanine debt may pose risks such as reduced borrower equity that may diminish incentives to maintain or improve the competitiveness of the property. While the holder of such mezzanine loan and the trust (as holder of the senior loan) are expected to enter into an intercreditor agreement to subordinate payments and allocate certain rights, it is not certain, upon a borrower bankruptcy, the impact of such debt on the trust (as senior loan holder) rights in such bankruptcy.
Partial Releases
Borrowers may obtain a release of an individual property subject to certain conditions in the loan documents including satisfaction of certain debt service coverage requirements and payment of applicable release amounts generally in the amount of 105% of such property’s allocated loan amount (which increases to 110% once the original principal balance of the loan has been reduced to $2,250,000,000.00). The debt service coverage test may not have to be satisfied in connection with certain sales to a third-party in an arms-length transaction and certain releases to cure an event of default under the loan documents, each as further described in the loan documents.
Purchase Options and Rights of First Refusal
Certain parties, such as property manager and/or franchisors, may have a purchase right, purchase option, right of first refusal and/or right of first offer with respect to the related property or portion(s) thereof. Such rights may impede a refinance, foreclosure, sale and/or marketability of the loan and/or property. DBRS Morningstar has assumed any purchase price is sufficient to avoid shortfalls to the trust. If this assumption is not true, the ratings may be impacted.
Cash Management
The loan documents require establishment of a lockbox account as an eligible account under lender control. For so long as the Master Lease remains in place, Borrowers are required to cause the Master Tenant to deposit all rent and other revenues (other than certain indemnification reimbursements from the Master Tenant to the borrowers as further described in the loan documents) when due to the borrowers under the Master Lease to the lockbox account. If the borrowers receive such amounts directly, they are required to deposit such amounts into the lockbox account within one business day of receipt.
If the property is not subject to the Master Lease or a permitted replacement of the Master Lease as described in the loan documents, and the borrowers enter into a management agreement that is not with a brand manager (consisting of certain specified hotel brands as further described in the loan documents) or a qualified casino operator (as further described in the loan documents), borrowers are required to cause such manager to deposit all rent and other revenues attributable to the property into the lockbox account (or, if received directly, no less than two times per week). If, instead, the borrowers enter into a management agreement with a brand manager or a qualified casino operator, borrowers are required to cause the brand manager or qualified casino operator to deposit amounts to be paid to the borrowers under the related management agreement into the lockbox account. In such cases, the brand manager or qualified casino operator is permitted to retain, among other amounts, operating expenses. Allowing the brand manager or qualified casino operator to deposit and retain certain amounts instead of depositing them into lender-controlled accounts may reduce amounts available to lender and delay remittance of amounts into lender-controlled accounts.
Prior to certain triggering events described in the loan documents, funds in the lockbox account are disbursed to an account designated by borrower. During such triggering events, funds in the lockbox account are swept to a cash management account, which is required to be an eligible account under lender control, at least twice per week. During such triggering events, funds in the cash management account are applied pursuant to the waterfall in the loan documents. Following the ARD Date, funds in the excess cash flow reserve are applied to Excess Interest before being applied to the outstanding principal balance of the loan. Such allocation may result in a slower paydown of the outstanding principal balance of the loan than transactions requiring full principal pay down prior to payment of excess interest amounts.
During an event of default under the mortgage loan, lender has discretion over the application of amounts in the cash management account and the lockbox account if (x) certain remedies specified in the loan documents are being pursued, and/or (y) there is a judicially imposed devise (such as an injunction) preventing lender from exercising remedies. During an event of default without the occurrence of (x) and/or (y), lender does not have full discretion to apply funds in the cash management account or lockbox account and is required to first apply funds towards certain amounts including taxes, insurance payments, cash management bank fees, and hotel taxes and custodial funds as described in the loan documents. DBRS Morningstar generally prefers lender access to, and discretion over application of, all funds upon any event of default.
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As noted above, manager(s) may be permitted to retain or apply certain cash flows prior to remittance of certain amounts to lender-controlled account(s) and/or remit funds less than daily to lender-controlled accounts. In addition, while not preferred, even after an event of default (but prior to certain foreclosure and similar proceedings described in the loan documents), lender does not have full discretion over the application of all funds. The (i) disbursement or availability of certain funds to parties other than lender such as manager(s), (ii) lack of lender discretion over such funds, (iii) delay of deposit of funds into lender-controlled accounts and/or (iv) lack of lender discretion over application of funds post-event of default, may, individually or in the aggregate, result in the leakage of funds, delays in application of funds and/or a reduction in funds available for payment on the loan. Depending on the extent of leakage, delays or reductions in funds, the ratings may be impacted.
Loan Documents
DBRS Morningstar is assuming that any necessary loan amounts, notes, components, rates and/or spreads will be created, configured and/or modified as described in the offering documents. DBRS Morningstar is assuming that (i) the lender will not exercise any right to change loan payment dates or interest accrual periods and (ii) no resizing of the mortgage loan (or any portion(s) thereof) into one or more mezzanine loan(s) or similar resizing and/or reconfiguration will occur.
Borrower Representations and Warranties
The borrowers’ representations and warranties contained in the loan agreement may be subject to various exceptions, carveouts and scheduled items per the loan agreement. We have assumed that excepted items, carveouts and scheduled items are not health or safety concerns and do not individually or in the aggregate have a material adverse impact on the use, value or operation of the collateral, or borrowers or on borrowers’ obligations under the loan documents.
Property Management, Casino Operation and Franchises
Per the loan agreement, if the properties are not subject to the Master Lease or a permitted replacement of the Master Lease as described in the loan documents, the borrowers are required to enter one or more property management agreement(s), casino operation agreement(s) and/or franchise agreement(s) for the operation of the properties and assign such agreements as additional collateral for the loan, as further described in the loan documents. With regards to any management agreement entered by the borrowers, lender has rights to require replacement of manager (i) if the manger is in a bankruptcy or other insolvency proceeding, (ii) if the management agreement is not with a brand manager and there is an event of default under the loan, or (iii) if the management agreement is with a brand manager, and (x) there is an event of default under the loan and the related management agreement and (y) the borrowers have the right to terminate such brand manager under the related management agreement. With regards to a casino operation agreement entered by the borrowers, lender has the right to require replacement of the casino operator if there is an event of default under the loan documents and the borrowers have a right to terminate the casino operator under the related casino operation agreement. With regards to any franchise agreement entered by the borrowers, lender has rights to require replacement of the franchise if (i) the franchisor is in a bankruptcy or other insolvency proceeding or (ii) if the franchise agreement can be terminated without a fee, there is an event of default under the loan documents. DBRS Morningstar is assuming that any management agreement (including brand management agreements), casino operation agreements and franchise agreements will provide borrowers with rights to terminate the applicable manager, operator or franchisor for defaults by the applicable party under the applicable agreement.
DBRS Morningstar prefers that lender have rights to replace (or cause replacement) of any manager, operator or franchisor upon any loan event of default, any event of default under the applicable management, operator or franchise agreement or if the related manager, operator or franchisor fails to make timely payments into lender-controlled accounts, where applicable. Limitations on lender rights to terminate and replace (or cause termination and replacement of) the manager, operator or franchisor are not preferred, in particular where manager, operator or franchisor is permitted to control, retain, delay and/or apply various proceeds. If such limitations impede lender’s ability to replace the manager, operator or franchisor and/or access cash flows, the ratings may be impacted.
REAs
The property (or portions thereof) may be subject to recorded easement agreements and covenants ("REAs”) that benefit the property (or portions thereof). We assume such REAs or equivalent agreement(s) will remain in place to the extent necessary and/or desirable for the use and/or operation of the property.
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Casualty and/or Condemnation Proceeds
Certain casualty and/or condemnation proceeds may be disbursed and/or applied in accordance with the Master Lease, sublease(s), management agreement(s), REA(s) and/or other property documents. DBRS Morningstar is assuming that any such disbursement and/or application will be used for restoration of the applicable property or otherwise in a customary manner as would be acceptable to a prudent lender. In addition, DBRS Morningstar is assuming that the lender may apply casualty and/or condemnation proceeds (that are not being made available for restoration or returned to the borrower as excess proceeds pursuant to the loan documents) toward payment of the loan. If such assumptions are not true, the ratings may be impacted.
Insurer Requirements
Under the loan documents, the borrowers are permitted to cause a portion of the insurance to be provided by insurance companies that do not satisfy customary rating requirements for similar transactions. Such insurers are required to satisfy minimum rating requirements from Best’s Insurance Reports only instead of rated insurers typically required for similar transactions. DBRS Morningstar has assumed any insurer carriers perform under any policies as and when required and have sufficient resources and funds. If such assumption is not true, the ratings may be impacted. The Master Tenant may maintain insurance to satisfy borrower’s obligations under the loan documents.
Terrorism Risk Insurance Act
DBRS Morningstar’s rating analysis for the transaction does not consider terrorism insurance (or lack thereof) and related risks related to the property, loan and/or borrowers. Securitization Trust Summary
Priority of Payments on Trust Certificates
The priority of payments on the trust certificates follows a sequential-pay structure. The following is a brief synopsis of this priority:
Distributions in respect of principal and interest on each Class of Offered Regular Certificates will be made on each Distribution Date solely from the Available Funds (i.e., the portion of the Aggregate Available Funds allocable to the Offered Regular Certificates) in the Distribution Account to each holder of record of an Offered Regular Certificate at the close of business on the related Record Date. Such distributions will be made to each such Class of Offered Regular Certificates in the following priority:
(i) with respect to payments in respect of interest on the Classes of Offered Regular Certificates on any Distribution Date, first, to the Class A and Class X Certificates, pro rata, based on the interest entitlement of each such Class of Certificates with respect to such Distribution Date (or, in the case of interest at the Pass-Through Rate Adjustment Percentage, the Class A Certificates only), then to the Class B, Class C, Class D and Class E, in that order, in each case until the interest payable to each such Class is paid in full; and
(ii) with respect to payments in respect of principal on, or any Realized Losses reimbursable to, the Classes of Offered Principal Balance Certificates on any Distribution Date, to the Class A, Class B, Class C, Class D and Class E Certificates, in that order, in each case until the principal payable or the Realized Losses reimbursable to each such Class is paid or reimbursed in full; provided, that the foregoing order in clauses (i) and (ii) is subject to a waterfall which provides that, on each Distribution Date, each Class of Offered Principal Balance Certificates gets paid, first, interest at the related Standard Pass-Through Rate (or, in the case of the Class X Certificates, the applicable Pass-Through Rate), principal in reduction of the related Standard Certificate Balance and Standard Realized Loss reimbursement, in that order, and second, interest at the related Pass-Through Rate Adjustment Percentage, principal in reduction of the related Negative Amortization Amount and Adjusted Realized Loss reimbursements, in that order, in each case to which it is entitled for such Distribution Date prior to any payments of interest, principal or Realized Loss reimbursement being made to any more subordinated Class or Classes of Offered Principal Balance Certificates.
In addition, “Sequential Order” means, when used with respect to the Trust Loan: (i) with respect to payments of interest allocated to the Trust Loan on any Payment Date, first, pro rata, to the Senior Trust Notes and, then, pro rata, to the Junior Trust Notes; and (ii) with respect to payments of principal allocated to the Trust Loan on any Payment Date, first, pro rata, to the Senior Trust Notes and, then, pro rata, to the Junior Trust Notes, in each case under clauses (i) and (ii), until the principal or interest payable to each such Trust Loan Note is paid in full.
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Allocation of Losses on Trust Certificates
Any applicable Realized Losses on the Trust Loan will be allocated to the respective Classes of the Offered Principal Balance Certificates, in Reverse Sequential Order, in each case until the Certificate Balance of the subject Class has been reduced to zero. The Notional Amount of the Class X Certificates will be reduced by the amount of Realized Losses allocated to the Corresponding Stripped Classes. “Reverse Sequential Order” means, with respect to the allocation of Realized Losses to the respective Classes of Offered Principal Balance Certificates on any Distribution Date, to the Class E, Class D, Class C, Class B and Class A Certificates, in that order, until such Realized Loss is allocated in full.
Rated Final Distribution Date
The rated final distribution date of each class of certificates is the distribution date in March 2044. DBRS Morningstar’s ratings on the certificates address the likelihood of the timely receipt by holders of all payments of interest to which they are entitled on each distribution date and the ultimate receipt by holders of all payments of principal to which they are entitled on or before the rated final distribution date.
Trust Structural Features/Concerns
Repurchase Obligation
The loan seller(s) may be required to repurchase the trust loan from the trust due to a material breach of a representation or warranty or document defect. Alternatively, in this transaction the loan seller(s) may make a loss of value payment to the trust to compensate for losses directly related to such material breach or document defect. However, there is no assurance that (i) the holder of such repurchase obligation will have sufficient assets at such time to fulfill its obligation to repurchase the loan or make such loss of value payment or (ii) remedies related to such holders’ breach or defect will be exercised by the trust or enforced, whether due to limitations under applicable laws, such as the related statute of limitations, or otherwise. Also, such loss of value payment may not provide certificateholders with a remedy equivalent or comparable to such a repurchase.
In addition, due to the existence of multiple loan sellers, each of which may be required to cure or repurchase only it’s pro rata portion of the trust loan, increased enforcement costs and/or delays in enforcement may result. In addition, if one seller repurchases and another seller does not, it is possible a portion of the loan may be held outside of the trust while the remainder remains in the trust. While the documents contain provisions to handle such circumstances, there could be delays and/or issues related to administering an asset partially owned outside of the trust.
DBRS Morningstar has assumed that following the securitization, the trust will timely receive from the loan sellers all documents necessary to monitor, service and enforce the loan.
Lack of Emergency Advances
The trust and servicing agreement may not permit any advancing of non-recoverable advances by the servicer in emergency situations (i.e. to avoid a lapse in insurance coverage). Instead, no advancing for such items is permitted unless such advance is recoverable.
Subservicing
While we prefer the special servicer to perform workouts, foreclosures, enforcement actions and modifications of the loan, the trust and servicing agreement may allow the special servicer to delegate performance of such obligations and duties to a subservicer. As a mitigant, the trust and servicing agreement does require the special servicer to remain obligated and liable for performing such obligations and duties under the trust and servicing agreement despite such delegation.
Operating Advisor
This transaction does not utilize the concept of an operating advisor which has been used in certain transactions to monitor the performance of the special servicer and provide certain oversight with respect to the special servicer. However, the master servicer and special servicer are required to perform servicing in accordance with the servicing standard.
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Controlling Class/Controlling Class Representative
Certain certificate class(es) enumerated in the trust and servicing agreement have consent and/or consultation rights at certain times under the trust and servicing agreement. The controlling class may appoint a controlling class representative to exercise such rights as the consenting party and/or consulting party. Generally, all consent and consultation rights of the any consenting party, consulting party, controlling class, controlling class representative or noteholder are subject to a servicing override.
Additional debtholders, if any, may also have rights with respect to certain matters that may be in addition to or instead of the rights of the controlling class, the controlling class representative, the consenting party or the consulting party. DBRS Morningstar assumes that any consulting holder, controlling class, controlling class representative, additional debtholder, consenting party and/or consulting party (or other applicable party) consent and/or consultation rights and rights with respect to information, such as workout information, are cut off any time the consulting holder, controlling class, controlling class representative, additional debtholder, consenting party and/or consulting party (or other applicable party) is the borrower or a borrower affiliate.
Replacement of Special Servicer
In addition and/or subject to the rights of any additional debtholder(s) to replace the special servicer, the special servicer may be terminated and replaced, as described in the trust and servicing agreement, including, with or without cause, by certain certificateholders or their designees as described in the trust and servicing agreement.
Limited Rating Agency Confirmation/Notice
Rating agency confirmation may have certain timing restrictions and/or not be required or permitted under the loan documents over certain material loan amendments, modifications, borrower requests and/or material amendments to the trust and servicing agreement, co-lender agreement or loan purchase agreement(s). In addition, rating agency confirmation may be requested by, and/or notice of such items may be provided to, the rating agency after such items are effectuated. Because the rating agency may obtain knowledge of these various items later, surveillance activities and any related rating adjustments may occur later than if rating agency confirmation and/or prior notice of such items was provided.
Conflicts of Interest
There are and/or may be various conflicts of interest among and between various parties to the transaction. However, the special servicer and master servicer are required to service the asset without regard to such conflicts. DBRS Morningstar’s analysis assumes the various parties comply with their duties.
Rights of Additional Debtholders
Pursuant to the terms of the co-lender agreement, the applicable additional debtholder(s) may have certain consent and/or consultation rights with respect to the loan. These rights may impact the special servicer’s workout strategy and/or the timing for modifications on the loan and a sale of the loan. In addition, such rights may create conflicts of interest with respect to the special servicer. However, the special servicer is required to act in accordance with the servicing standard without regard to such conflicts.
DBRS Morningstar assumes that any additional debtholder or other applicable party consent or consultation rights and rights with respect to information, such as workout information, are cut off any time the additional debtholder or other applicable party is a borrower or a borrower affiliate.
Payment of Certain Fees
Certain agreements, such as the co-lender agreement, loan purchase agreement and/or the loan documents, may include a cap on the payment of, or no requirement to pay during certain periods of time, certain special servicing, liquidation and/or workout fees by the party required to pay such amounts in connection with exercising purchase, indemnity and/or other rights and/or obligations. Under such circumstances, if actual fees payable to the servicer(s) exceed any cap or limitations in the related agreement, depending on the impact of such unreimbursed fees, the ratings may be impacted.
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As described in the trust and servicing agreement and/or offering documents, this transaction contains provisions intended to comply with risk retention regulations, including a VRR interest, VRR certificates and transfer restrictions related thereto, as described in the trust and servicing agreement and/or offering documents. The holder(s) of the VRR interest, VRR certificates and/or the Risk Retention Consultation Party(ies) selected by the holder(s) of the VRR interest and/or the VRR certificates pursuant to the trust and servicing agreement may be entitled to certain consultation rights subject to the trust and servicing agreement. However, we have assumed all such rights are subject to a servicing override. In addition, DBRS Morningstar has assumed any consent and/or consultation rights and access to certain information are cut off at any time the holder of such rights or party exercising such rights is a borrower or a borrower affiliate.
Impact from Coronavirus Disease
While it is too soon to gauge the long-term impact to property cash flow and valuations for hotels from the Coronavirus Disease (COVID-19), given the immediate effects that have been observed thus far in cancelled meetings and conventions, personal travel disruptions, and travel restrictions in place for some countries, DBRS Morningstar believes there is the potential for a significant longer-term impact. Because of the nature of advance booking cancellations, daily bookings, and reliance on tourism, it is unknown how prepared operators are to weather these disruptions. For more information on the sensitivity of DBRS Morningstar’s ratings to fluctuations in property net cash flow, please see the BX 2020-VIVA rating sensitivity analysis published on www.dbrsmorningstar.com.
Reserve Accounts
There are no upfront reserve accounts being funded. For so long as the properties are subject to the master lease agreement with MGM Resorts International, there are no ongoing reserves required under the mortgage loan documents. Third-Party Reports
Appraisals
As part of its analysis, DBRS Morningstar reviewed the appraisal reports prepared by Newmark Knight Frank for 3799 South Las Vegas Boulevard (MGM Grand) and 3950 South Las Vegas Boulevard (Mandalay Bay). The aggregate as-is appraised value, inclusive of personal and intangible values attributable to both assets, was concluded to be $7,352,600,000 on a combined basis as of January 10, 2020. The aggregate as-is appraised value solely attributable to the real property at both the MGM Grand and Mandalay Bay excluding personal and intangible property was $4.6 billion.
On a combined basis, the properties cover approximately 226 acres of land adjacent to the Las Vegas Strip. The appraiser concluded a combined land value of approximately $2.52 billion, or about $11.2 million per acre.
Property Condition
DBRS Morningstar also reviewed the property condition reports prepared by EMG as a part of our analysis. The engineer identified de minimis immediate repairs in the amount of $30,000 at the MGM Grand Property, and did not identify any immediate repairs at Mandalay Bay. EMG concluded a replacement reserve figure of $1,342/key per year on an escalated basis at MGM Grand, and $1,515/key per year on an escalated basis at Mandalay Bay.
Environmental and Seismic
DBRS Morningstar also reviewed the Phase I Environmental Assessments prepared by EMG for both properties as a part of analysis. The Phase I ESA found no evidence of any recognized environmental conditions (RECs) at the MGM Grand property, but did identify a historical REC at Mandalay Bay. The historical REC at Mandalay Bay regarding three underground storage tanks (USTs) associated with the former Hacienda Hotel on the northern portion of the property. The summary of the historic REC from the Phase I assessment for Mandalay Bay:
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Three underground storage tanks (USTs) associated with the former Hacienda Hotel were historically located in the north portion of the Project. One 1,000-gallon gasoline UST was installed at the Project in 1958 and one 500-gallon diesel UST was installed in 1976. Both tanks were removed on January 10, 1997, and soil samples detected total petroleum hydrocarbons (TPH) as diesel (TPH-d) at 2,400 milligrams per kilogram (mg/kg) and TPH as gasoline (TPH-g) at 5,700 mg/kg. The third orphan UST was discovered adjacent to the gasoline UST during excavation and was removed on January 27, 1997. Soil samples from beneath this tank contained TPH at 6,400 mg/kg. Because the TPH concentrations exceeded the Nevada Department of Environmental Protection (NDEP) remedial action level of 100 mg/kg, approximately 335 tons of soil was removed in January 1997. Soil was excavated to a depth of approximately 8 feet below ground surface (bgs) due to the presence of a thick and continuous caliche zone. Subsequent samples detected TPH-d at 5,100 mg/kg at the base of the diesel UST excavation and at 1,100 mg/kg in a soil sample collected in the caliche zone. TPH was below laboratory detection limits or the NDEP action level in five additional samples collected along the perimeter of the remedial excavation area. Residual concentrations of naphthalene (22 mg/kg), ethylbenzene (14 mg/kg), xylenes (140 mg/kg), and toluene (7.2 mg/kg) were also detected. Benzene was not detected in the remaining soil/caliche at concentrations above the reporting limit of 0.1mg/kg. It was determined that residual contamination was limited to just beneath the removed USTs. In addition, analytical data suggested that the caliche zone restricted the potential downward movement of the contaminants. Additional investigation was conducted in 2005 including two groundwater samples from the north adjacent Luxor property, approximately 150 feet from the former USTs. TPH-diesel was detected just above reporting limits of .25 milligrams per liter (mg/l) at 0.3 mg/l. No volatile organic compounds (VOCs) were detected and regulatory closure was issued by the NDEP on October 26, 2005. No required property use restrictions, activity and use limitations, institutional controls, or engineering controls were identified in the closure letter. Based on the current regulatory status, the lack of required property use restrictions or controls, time elapsed since tank removal allowing for continued natural degradation of residual impact, and redevelopment activities, the release from the former USTs at the Project represents a historic recognized environmental condition. No further action or investigation appears warranted at this time.
Source: Phase I Environmental Assessment – 3950 South Las Vegas Boulevard, Las Vegas, NV Scope of Analysis
Morningstar utilized external legal counsel to perform a legal review of certain items in the transaction relevant to Morningstar's ratings analysis. In this transaction, such counsel solely reviewed the following materials available on the arranger website as of March 4, 2020 (except as otherwise specified in this paragraph): (i) the March 3, 2020 provided draft preliminary offering circular, (ii) the February 10, 2020 posted draft trust and servicing agreement, (iii) the February 19, 2020 posted draft trust loan purchase agreement, (iv) loan agreement dated as of February 14, 2020, (v) deed of trust, assignment of leases and rents, security agreement and fixture filing dated February 14, 2020 made by Mandalay Propco, LLC (and we are assuming that the other deed of trust is on the same form, subject to ministerial changes such as names and property description), (vi) promissory note A-1 dated February 14, 2020 (and we are assuming that the other promissory notes will on the same form subject to ministerial changes, such as amounts and names), (vii) the February 27, 2020 posted draft co-lender agreement, (viii) February 11, 2020 provided draft amended and restated limited liability company agreement of Mandalay PropCo, LLC (and we are assuming the organizational documents for all the mortgage borrowers are on the same form (subject only to ministerial items such as names)), (ix) opinion of Locke Lord LLP dated February 14, 2020 regarding true lease, (x) opinion of Berger Harris LLP dated February 14, 2020 regarding nonconsolidation, (xi) opinions of Berger Harris LLP dated February 14, 2020 regarding authority to file bankruptcy and DE LLC matters, and (xii) opinion of Simpson Thacher & Bartlett LLP dated February 14, 2020 regarding enforceability and other matters.
In addition, we assume that any transfer of any originator of a loan to a seller will either be a true sale or an open market transfer, and legal counsel intends to review the following documents upon posting of such documents on the arranger website prior to issuance of the final ratings: (i) true sale opinion(s) for the sale of the loan from the sellers to the depositor and from the depositor to the securitization trust, (ii) corporate and enforceability opinions of the depositor and loan sellers and the general deal level opinion related to certain tax matters, and (iii) versions of the documents enumerated in the preceding paragraph posted as of the date of issuance of final ratings. Unless enumerated on the prior list, no external legal counsel review was performed or is expected to be performed with respect to any documents. Therefore, leases, including ground leases and subleases, hedges and related documents, condominium documents, contribution and/or allocation agreements, management agreements, estoppels, title reports, insurance contracts, environmental assessments, guarantees, indemnities, liens or related searches, financial statements, rent rolls, surveys, financing statements, easement agreements, intercreditor or subordination agreements (except as expressly enumerated in the preceding paragraph), among others, were not reviewed by external legal counsel. As legal review of title policies was not performed, Morningstar has assumed such policies do not contain any judgments, tax liens, or other issues that would materially adversely affect any borrower, property owner, property or the mortgagee's lien and security interest in any collateral for any loan. As legal review of local law opinions was not performed, Morningstar has assumed that local law opinion(s) were provided for all relevant jurisdictions, on customary forms and with rating agency reliance. Transaction Servicer and Special Servicer
For this transaction, Key Bank National Association is acting as the master servicer and Situs Holdings, LLC is acting as the special servicer.
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DBRS Morningstar Approach to Collateral Review
DBRS Morningstar uses a bottom-up analytical approach to rating CMBS issuances that begins with a review and analysis of the loan collateral in the trust based on information provided on the arranger’s website and subject to the review enumerated herein. The primary goal of DBRS Morningstar’s loan and property analysis is to determine each property’s sustainable NCF and sustainable value. DBRS Morningstar defines NCF as net operating income net of capital expenditures (including capital repairs, tenant improvements, and leasing commissions). Sustainable NCF is the cash flow that DBRS Morningstar believes a property reasonably can be expected to generate over the life of a loan; it is not necessarily synonymous with stabilized NCF.
For more information regarding our approach to underwriting and value the collateral supporting the loan(s), please refer to DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria at the following web address: www.dbrsmorningstar.com.
Methodology
The following are the methodologies DBRS Morningstar applied to assign ratings to this transaction. These methodologies can be found on www.dbrsmorningstar.com under the heading Methodologies & Criteria. Alternatively, please contact [email protected] or contact the primary analysts whose information is listed in this report.
– North American Single Asset/Single-Borrower Ratings Methodology – DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria – Rating North American CMBS Interest-Only Certificates – Interest Rate Stresses for U.S. Structured Finance Transactions
Surveillance
DBRS Morningstar will perform surveillance subject to its North American CMBS Surveillance Methodology.
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BX Commercial Mortgage Trust 2020-VIVA COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2020-VIVA
TERMS OF USE
The DBRS group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(CRA, NRSRO affiliate, DRO affiliate). Morningstar Credit Ratings, LLC is a NRSRO affiliate of DBRS, Inc.
For more information on regulatory registrations, recognitions and approvals of the DBRS group of companies and Morningstar Credit Ratings, LLC, please see: http://www.dbrs.com/research/highlights.pdf.
The DBRS group and Morningstar Credit Ratings, LLC are wholly-owned subsidiaries of Morningstar, Inc.
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