DBRS Morningstar Confirms Ratings on All Classes of BX Commercial Mortgage Trust 2021-VOLT

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, issued by BX Commercial Mortgage Trust 2021-VOLT:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (sf)
-- Class HRR at BB (low) (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. The transaction is collateralized by a portfolio of 10 data centre properties across six U.S. states. Unlike the typical commercial property leases where tenants lease space by the square foot (sf), data centre tenants lease power capacity from the operator, which is typically measured in the form of kilowatts (kW) or megawatts (MW). The portfolio collectively has 197.7 MW of built capacity and an additional 22.3 MW of shell capacity for a total physical capacity of 220.0 MW of power.

The interest-only (IO) loan has an initial two-year term, with three one-year extension options available subject to certain minimum debt yield tests and other requirements. Loan proceeds of $3.2 billion along with $2.1 billion of sponsor equity went toward acquiring the properties for a purchase price of $5.3 billion.

The transaction benefits from the experienced institutional sponsorship of The Blackstone Group (Blackstone) and the company’s acquisition of QTS Realty Trust (QTS) in 2021, which represents a strategic, long-term thematic investment in the data centre space for Blackstone, financed via its various permanent capital private equity vehicles. QTS is an experienced data centre operator with a footprint of more than 7.0 million sf of owned mega scale data centre space throughout North America and Europe. A substantial component of the portfolio's value depends on QTS' client roster and extensive industry relationships and technical expertise.

The overall transaction benefits from the portfolio's favourable market position, affordable power rates, desirable efficiency metrics, and strong tenancy profile, which is primarily composed of hyperscale users (power usage greater than 250 kW; representing 60.9% of contracted MW) and hybrid co-location users (power usage 250 kW or below; representing 35.6% of contracted MW), with a smaller proportion of federal and other tenants representing the remaining tenancy. Data centre operators have historically benefitted from high barriers to entry and strong clustering and network effects, which are attributable to the complex IT environments of their tenants. Furthermore, the high upfront capital costs and necessary power infrastructure also make speculative development more difficult than in other industries.

While the portfolio’s historical occupancy has been generally favourable, ranging in the high 90.0% range, the portfolio had a weighted-average lease term of approximately 2.6 years at issuance. According to the sponsor, merger and acquisition activity is one of the primary drivers for reductions in footprint among its tenancy. However, at issuance, DBRS Morningstar noted the approximately 88.0% contract renewal rate across QTS' platform and that larger tenants strongly prefer to scale within existing environments rather than add capacity at a facility with a different provider for various reasons.

According to the YE2021 rent roll, the portfolio was occupying 170.7 MW, or an occupancy rate of 77.6%, with tenants within the content and digital media industry consuming the most power, approximately 49,992 kW across the portfolio. Although the YE2021 occupancy is down from the issuance figure of 93.5%, the year-to-date ended March 31, 2022, financials recorded an occupancy rate of 94.1%, with an annualized consolidated net cash flow (NCF) of $321.2 million, well above the DBRS Morningstar NCF of $270.0 million at issuance. At issuance, DBRS Morningstar valued the portfolio at $3.6 billion, reflecting a moderate loan-to-value ratio of 88.8% based on the mortgage loan.

For more information regarding DBRS Morningstar’s rating approach to data centres, please refer to https://www.dbrsmorningstar.com/research/398379.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

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

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