BPR Trust 2021-NRD -- Moody's assigns provisional ratings to seven CMBS classes of BPR Trust 2021-NRD

Rating Action: Moody's assigns provisional ratings to seven CMBS classes of BPR Trust 2021-NRDGlobal Credit Research - 09 Dec 2021New York, December 09, 2021 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to seven classes of CMBS securities, issued by BPR Trust 2021-NRD, Commercial Mortgage Pass-Through Certificates, Series 2021-NRD: Cl. A, Assigned (P)Aaa (sf) Cl. B, Assigned (P)Aa3 (sf) Cl. C, Assigned (P)A3 (sf) Cl. D, Assigned (P)Baa3 (sf) Cl. E, Assigned (P)Ba3 (sf) Cl. F, Assigned (P)B3 (sf) Cl. X-CP*, Assigned (P)Aaa (sf)*Reflects Interest-Only ClassRATINGS RATIONALEThe certificates are collateralized by a single, $275.0 MM floating-rate, interest only loan secured by the borrower's fee interests in Northridge Fashion Center, a regional shopping center located in Northridge, CA. The collateral for the loan consists of a 882,117 square foot ("SF") portion of the 1.44 MM ("MM") SF two-story, enclosed mall. Our ratings are based on the credit quality of the loans and the strength of the securitization structure.Moody's approach to rating this transaction involved the application of both our Large Loan and Single Asset/Single Borrower CMBS methodology and our IO Rating methodology. The rating approach for securities backed by a single loan compares the credit risk inherent in the underlying collateral with the credit protection offered by the structure. The structure's credit enhancement is quantified by the maximum deterioration in property value that the securities are able to withstand under various stress scenarios without causing an increase in the expected loss for various rating levels. In assigning single borrower ratings, we also consider a range of qualitative issues as well as the transaction's structural and legal aspects.Northridge Fashion Center is 20 miles northwest of downtown Los Angeles, in Northridge, CA. The collateral for the loan consists of a 882,117 SF portion of the 1.44 MM SF two-story, enclosed mall on 47.4 acres of land.The property's non-collateral anchors include Macy's (189,650 SF), Macy's Men & Home (185,200 SF), and JCPenney (181,660 SF). Collateral anchors include Curacao (97,847 SF, 11.1% of total net rentable area ("NRA"), 3.0% of base rent), AMC (51,000 SF, 5.8% of NRA, 3.4% of base rent), Dick's Sporting Goods (50,272 SF, 5.7% of total NRA, 3.3% of base rent), and Gold's Gym (39,202 SF, 4.4% of total NRA, 2.8% of base rent). The property includes over 100 in-line retailers. Some notable, in-line tenants include Porto's Bakery Cafe (17,668 SF, 2.0% of total NRA, 2.0% of base rent), Victoria's Secret (10,180 SF, 1.2% of total NRA, 2.6% of base rent), and Apple (7,652 SF, 0.9% of total NRA, 1.4% of base rent).As of September 1, 2021, the collateral component of the mall reported an occupancy rate of 94.3% (96.5% including non-collateral anchor tenants). The collateral property has a four-year average historical occupancy rate of 97.8% (98.9% in 2017; 98.4% in 2018; 98.2% in 2019; and 95.6% in 2020). In terms of in-line space, the property has a four-year average historical occupancy rate of 93.1% (96.9% in 2017; 95.3% in 2018; 92.5% in 2019; and 87.8% in 2020).The coronavirus crisis dramatically reduced sales and occupancy levels as the property was closed for two 3-month periods in 2020. Comparable 2020 in-line sales and the corresponding occupancy cost ratio (excl. Apple, jewelry, food court) averaged $295 PSF and 26.7%, respectively. Including all tenants less than 10,000 SF, the in-line sales and occupancy cost ratio were $352 PSF and 22.2%, respectively. Of note, Apple implemented a number of strict social distancing protocols at its stores nationwide (i.e. reduced capacity, temperature checks, reduced staff, etc.), which negatively affected sales.Occupancy rates at the property also declined to new lows due to the fallout from the coronavirus pandemic as well as increasing bankruptcies and store closures throughout the retail industry. Occupancy (excl. anchors) fell to 87.8% in 2020 from 92.5% in 2019. The NOI at the property correspondingly decreased to $26.5 MM during 2020 by approximately 31.6% from $32.9 MM. For the TTM ending August 2021, NOI further declined $22.5 MM.Separately, the tenant's negotiating power appears to have strengthened in recent years as gross lease structures have become more common. The property's expense recover ratio has steadily declined over the past four years -- from 114.6% (2017), to 109.5% (2018), to 101.2% (2019), to 96.4% (2020), to 81.9% (TTM August 2021). However, Brookfield believes that most future leases will be structured on a net bases as many of the property's gross leases were executed during the pandemic. The property's low occupancy cost ratio of 14% also supports rental increase potential.The property's performance has improved in certain respects since re-opening in October 2020. For the TTM ended October 2021 ("TTM October 2021"), comparable in-line sales and occupancy costs improved to $477 PSF (excl. Apple, jewelry, food court). The occupancy rate (incl. non-collateral anchors) also rebounded to 96.5% as of September 1, 2021. Rent collections as a percent of gross rent averaged 93.0% from April 2020 to September 2021, albeit showing its lowest collection in September 2021 (91.2% collected).The property has been expanded and renovated numerous times since its development in 1971. Most recently, the borrower spent $54 million in an extensive redevelopment, which included the purchase of a formerly occupied Sears-owned box that closed in January 2020. The capital investment also included the addition of Dick's Sporting Goods, Curacao, Blaze Pizza and Gold's Gym. Porto's Bakery and Café will backfill a former Sears auto space. The redevelopment of the former department store and auto center outparcel is nearing completion with both Curacao and Dick's Sporting Goods having taken possession of their space. All spaces are likely to be occupied by the end of Q1 2022. Separately, AMC Theaters recently executed a 10-year lease commencing May 1, 2022, that backfills a space formerly occupied by Pacific Theaters. They are currently building out their space at their own expense and it is likely to open during Q1 2022.The credit risk of loans is determined primarily by two factors: 1) Moody's assessment of the probability of default, which is largely driven by each loan's DSCR, and 2) Moody's assessment of the severity of loss upon a default, which is largely driven by each loan's loan-to-value ratio ("Moody's LTV" or "MLTV"). As described in the CMBS methodology used to rate this transaction, we make various adjustments to the MLTV. We adjust the MLTV for each loan using a value that reflects capitalization ("cap") rates that are between our sustainable cap rates and market cap rates. We also use an adjusted loan balance that reflects each loan's amortization profile.The Moody's first-mortgage DSCR is 2.23x and Moody's first-mortgage stressed DSCR at a 9.25% constant is 0.94x. Moody's DSCR is based on our stabilized net cash flow.Moody's LTV ratio for the first mortgage balance of $275.0 MM is 115.1%. Moody's LTV Ratio is based on our Moody's Value. We did not adjust Moody's value to reflect the current interest rate environment as part of our analysis for this transaction.Moody's also grades properties on a scale of 0 to 5 (best to worst) and considers those grades when assessing the likelihood of debt payment. The factors considered include property age, quality of construction, location, market, and tenancy. The property's quality grade is 3.25.Notable strengths of the transaction include: the property's location, the demographics in its trade area, its historical occupancy, the recent redevelopment and leasing momentum, its pre-coronavirus in-line sales performance, and its institutional quality sponsorship with retail experience.Notable concerns of the transaction include: the effects of the coronavirus pandemic, recent decline in operating performance, tenant rollover, lack of asset diversification, floating-rate mortgage loan profile and certain credit negative legal features.The principal methodology used in rating all classes except interest-only classes was "Large Loan and Single Asset/Single Borrower Commercial Mortgage-Backed Securitizations Methodology" published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1250766. The methodologies used in rating interest-only classes were "Large Loan and Single Asset/Single Borrower Commercial Mortgage-Backed Securitizations Methodology" published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1250766 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179. Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.Moody's approach for single borrower and large loan multi-borrower transactions evaluates credit enhancement levels based on an aggregation of adjusted loan level proceeds derived from our Moody's loan level LTV ratios. Major adjustments to determining proceeds include leverage, loan structure, and property type. These aggregated proceeds are then further adjusted for any pooling benefits associated with loan level diversity, other concentrations and correlations.Moody's analysis considers the following inputs to calculate the proposed IO rating based on the published methodology: original and current bond ratings and credit estimates; original and current bond balances grossed up for losses for all bonds the IO(s) reference(s) within the transaction; and IO type corresponding to an IO type as defined in the published methodology.Factors that would lead to an upgrade or downgrade of the ratings:The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than Moody's had previously anticipated. Factors that may cause an upgrade of the ratings include significant loan pay downs or amortization, an increase in the pool's share of defeasance or overall improved pool performance. Factors that may cause a downgrade of the ratings include a decline in the overall performance of the pool, loan concentration, increased expected losses from specially serviced and troubled loans or interest shortfalls.Today's action reflects the coronavirus pandemic's residual impact on the ongoing performance of commercial real estate as the US economy continues on the path toward normalization. Economic activity will continue to strengthen in 2021 because of several factors, including the rollout of vaccines, growing household consumption and an accommodative central bank policy. However, specific sectors and individual businesses will remain weakened by extended pandemic related restrictions.We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1313389.The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Shand Evans Vice President - Senior Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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