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-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 as illustrated by the strong net cash flow (NCF) reported. The loan is secured by a portfolio of 10 data center properties across six U.S. states. Unlike typical commercial property leases where tenants lease space by the square foot (sf), data center tenants lease power capacity from the operator, which is typically measured in the form of kilowatts (kW) or megawatts (MW). As noted at issuance, 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.

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 interest-only (IO) loan is on the servicer’s watchlist because of its upcoming maturity in September 2023; however, the loan includes three, one-year extension options. A condition to exercise the option includes purchasing a replacement interest rate cap agreement, which have become more costly in the last year.

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 center space for Blackstone, financed via its various permanent capital private equity vehicles. QTS is an experienced data center operator with a footprint of more than 7.0 million sf of owned mega scale data center 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 also benefits from the portfolio's favorable 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 colocation 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 center operators have historically benefited 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 favorable, hovering 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 March 2023 rent roll, the portfolio was occupying 179.4 MW, representing an occupancy rate of 81.6%, with tenants within the cloud and IT industry consuming the most power of approximately 54,400 kW across the portfolio. In comparison, the portfolio occupied 170.7 MW at YE2021, representing an occupancy rate of 77.6%. Although the March 2023 occupancy remains below the issuance figure of 93.5%, it is trending in the positive direction. In addition, occupancy is likely to increase to more than 85.0% as new leases are executed in the near term According to the financials for the trailing 12 months ended March 31, 2023, the loan reported an NCF of $293.9 million, a decrease from the YE2022 NCF of $300.3 million but above the DBRS Morningstar NCF of $270.0 million derived at issuance. At issuance, DBRS Morningstar valued the portfolio at $3.6 billion, reflecting a 24.2% haircut from the as-is value at issuance of $4.8 billion and 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 centers, please refer to https://www.dbrsmorningstar.com/research/398379.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784.

Class X-NCP is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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