DBRS Morningstar Confirms Ratings on All Classes of BX 2021-PAC

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates issued by BX 2021-PAC as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in October 2021, the loan continues to exhibit healthy credit metrics, with the servicer reported financials for YE2022 and Q1 2023 reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with issuance.

The loan is secured by the borrower’s fee-simple and leasehold interests in a portfolio of 41 industrial properties totaling more than 9 million square feet (sf) across six markets and three states in some of the most densely populated areas in the U.S. The portfolio is largely concentrated in California and the Western U.S., with infill core assets located in leading gateway distribution markets. The sponsor is a joint venture partnership between Blackstone Property Partners (99.0% of ownership) and LBA Logistics, which maintains 1.0% of ownership and controls the day-to-day operations. DBRS Morningstar continues have a favorable view on the long-term growth and stability of the warehouse and logistics sector, despite the general macroeconomic headwinds affecting most commercial real estate asset classes.

Loan proceeds of $1.2 billion repaid $676.4 million of existing debt, funded $10.9 million in upfront reserves, and returned $495.4 million of equity to the sponsor. Based on the issuance value of $2.3 billion, the sponsor will have $893.2 million of unencumbered equity remaining in the transaction. The upfront reserve of $10.9 million is earmarked for outstanding free rents, unfunded tenant improvement allowances, and leasing costs during the loan term. As of the August 2023 reporting, there was approximately $5.6 million remaining across all reserve accounts. The transaction features a partial pro rata structure for the first 30.0% of the original principal balance, where individual properties may be released from the trust at a price of 105.0% of the allocated loan amount (ALA). Proceeds are applied sequentially for the remaining 70.0% of the pool balance with the release price increasing to 110.0% of the ALA. The release provisions also require the pool to maintain a minimum debt yield of 6.7% after each property release.

The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan is currently scheduled to mature in October 2023; however, the servicer noted that the borrower is expected to exercise its first extension option. As of the date of this press release, confirmation has yet to be received. In addition, a replacement interest rate cap agreement is required as part of each extension, but the cost to purchase a rate cap has likely increased given the current interest rate environment.

At issuance, it was noted that the portfolio benefits from a significant degree of tenant granularity and diversification as no tenant comprises more than 8.9% of the portfolio’s net rentable area (NRA) or more than 5.0% of total base rent. In addition, 16.8% of the base rent is derived from investment-grade-rated tenants. The majority of the portfolio consists of functional bulk warehouse space with strong functionality metrics and comparatively low proportions of office square footage, totaling 9.4% of NRA. The five largest tenants in the portfolio are Ingram Micro, Inc. (8.9% of NRA); Walmart (6.3% of NRA); Hand Air Express (5.4% of NRA); FedEx Ground Package System Inc (3.6% of NRA); and East Coast/West Coast Logistics (3.6% of NRA). All of these tenants, with the exception of Hand Air Express, have lease terms ending between 2026 and 2028, past the loan’s initial maturity date.

Historically, the portfolio has reported strong weighted-average occupancy rates at or above 95.0% since 2018. According to the March 2023 rent roll, the collateral reported an occupancy rate of 95.2% with an average rental rate of $9.77 per square foot. The portfolio generated NCF of $75.5 million (debt service coverage ratio (DSCR) of 2.04 times (x)) and $76.9 million (DSCR of 1.07x) as of YE2022 and Q1 2023 (annualized), respectively, slightly lower than $77.6 million (DSCR of 4.12x) at issuance. The decline in the DSCR was primarily driven by an increase in debt service obligations, given the loan’s floating-rate structure. At issuance, DBRS Morningstar derived a value of $1.1 billion based on a capitalization rate of 6.5% and DBRS Morningstar NCF of $74.7 million, resulting in a DBRS Morningstar loan-to-value ratio (LTV) of 104.4% compared with the LTV of 52.9% based on the appraised value at issuance of $2.3 billion.

ENVIRONMENTAL, SOCIAL, 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 at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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 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
DBRS Tower, 181 University Avenue, Suite 700
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)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

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 (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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].