DBRS Morningstar Finalizes Provisional Ratings on BX Commercial Mortgage Trust 2021-IRON

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-IRON issued by BX Commercial Mortgage Trust 2021-IRON:

-- Class A at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class HRR at B (low) (sf)
-- Class X-CP at BBB (sf)
-- Class X-NCP at BBB (sf)

All trends are Stable.

The Class X-CP and X- NCP certificates are interest-only (IO) classes whose balances are notional.

The subject transaction is a sale-leaseback of 14 warehouse properties to Iron Mountain Inc., a publicly traded information management company. The properties in the portfolio are spread across five U.S. states and serve as secure document storage and/or tape storage facilities for Iron Mountain's record retention and storage clients. As a part of the transaction, Iron Mountain signed two brand new, 10-year absolute triple net (NNN) leases covering the properties in the portfolio. DBRS Morningstar has a favorable view on the portfolio's functionality characteristics along with the credit profile of the mortgage loan and the long-term NNN leases. Although the tenant does not carry an investment-grade rating, its legacy business has demonstrated long-term stability, and the firm has begun branching into other value-add service areas including data center offerings to enhance its core records management business.

The entire portfolio consists of functional bulk warehouse product with strong functionality metrics. The properties have a weighted-average (WA) year built of 1990, which is slightly older than other recently analyzed portfolios, but the office square footage is only 5.6%, which is the lowest proportion of office square footage that DBRS Morningstar has seen in securitized transactions. The properties also have strong WA clear heights of approximately 33 feet, which compare favorably with other recently analyzed portfolios.

The portfolio benefits from its position across several strong-performing gateway industrial markets, including the Los Angeles, Inland Empire, Bay Area, Northern New Jersey, Philadelphia, and Washington, D.C./Baltimore markets. Collectively, the portfolio's markets have a WA availability rate of 7.0%, which is below the Q3 2020 national average of approximately 7.6% according to C.B. Richard Ellis Econometric Advisors.

The transaction benefits from strong cash flow stability attributable to the two absolute NNN leases that Iron Mountain (NYSE: IRM) executed as a part of the sale-leaseback transaction with the sponsors. The leases provide for annual escalations of 3.0%, along with the recovery of all operating expenses and capital costs at the properties. There are no termination options during the loan term and Iron Mountain has four successive five-year renewal options.

Iron Mountain has occupied the majority of the properties for almost 20 years (since approximately 2004 on a WA basis), demonstrating the firm's long-term commitment to the portfolio's locations. Additionally, Iron Mountain's annual customer retention rate is approximately 98% and the customer contracts specify maximum monthly withdrawal rates. Approximately half of the customer media stored at Iron Mountain facilities has a storage duration of more than 15 years; the process of systematically emptying a property is estimated to take between one and two years, which reduces the probability that Iron Mountain would vacate in favor of another nearby property.

The DBRS Morningstar loan-to-value ratio on the trust loan is significant at 99.3%. The high leverage point, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

Approximately 52.5% of the portfolio's in-place base rent is attributable to properties located in California, and more than a third of the portfolio's base rent is generated by properties located in the Southern California region. While many Southern California markets continue to be among the best performing industrial markets in the country, the transaction could have elevated exposure if market fundamentals were to deteriorate unexpectedly.

The portfolio is entirely dependent on lease income from Iron Mountain and, unlike other industrial portfolios, the transaction does not benefit from any tenant granularity or diversification across industries. While DBRS Morningstar views it as unlikely that Iron Mountain would elect to vacate at the end of the initial lease term, demising and re-tenanting the entire portfolio would require significant tenant improvement/leasing commission funds. Furthermore, a corporate-level bankruptcy or negative credit event at Iron Mountain could put the mortgage loan at an increased risk of default for nonpayment.

The mortgage loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the unpaid principal balance. DBRS Morningstar considers this structure to be credit negative, particularly at the top of the capital stack. Under a partial pro rata paydown structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments.

The borrower can also release individual properties, subject to customary requirements. However, the prepayment premium for the release of individual assets is 105.0% of the allocated loan amount for the first 30.0% of the original principal balance of the mortgage loan and 110.0% thereafter. DBRS Morningstar considers the release premium to be weaker than a generally credit-neutral standard of 115.0% and, as a result, applied a penalty to the transaction's capital structure to account for the weak deleveraging premium.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-CP and X-NCP are IO certificates that reference a single rated tranche. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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