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

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2021-IRON issued by BX Commercial Mortgage Trust 2021-IRON as follows:

-- Class A at A (low) (sf)
-- Class X-NCP at BBB (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)

All trends are Stable.

The credit rating confirmations reflect the stable performance of the transaction. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in February 2021, the loan continues to exhibit healthy credit metrics, with the servicer-reported financials for the trailing 12 (T-12) month period ended June 30, 2023, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with DBRS Morningstar’s expectations.

The transaction is secured by a portfolio of 14 industrial properties with a combined 2.3 million square feet throughout California, New Jersey, Pennsylvania, Maryland, and Virginia, with the largest concentration in California. The collateral consists of function bulk warehouse products. The portfolio was part of a sale-leaseback to Iron Mountain, Inc. (Iron Mountain) and serves as secure document storage and tape storage facilities for Iron Mountain’s record retention and storage clients. Iron Mountain solely occupies 100% of the net rentable area on two triple-net leases with annual 3.0% rent escalations and lease expiration dates in August 2030 and November 2030, respectively. There are no termination options during the loan term, and Iron Mountain has four successive five-year renewal options available.

The $232 million floating-rate interest-only (IO) loan, along with $194.3 million in sponsor equity from the loan sponsor BREIT Operating Partnership L.P., an affiliate of The Blackstone Group, Inc., funded the $420 million acquisition of the portfolio. The loan had an initial two-year initial term and was structured with five one-year extension options for a fully extended maturity date of February 2028. The borrower exercised its first option extending maturity through February 2024 but has not yet exercised the second extension option; however, DBRS Morningstar expects that the borrower will be able to exercise the extension option as the loan meets the refinancing requirements. Execution of each option is conditional upon, among other things, no events of default and the borrower’s purchase of an interest rate cap agreement for each extension term. DBRS Morningstar notes that the cost to purchase a rate cap has likely increased given the current interest rate environment.

The transaction features a partial pro rata/sequential-pay structure, which allows for pro rata paydowns 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. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premium. As of the November 2023 reporting, there have been no property releases, and the trust remains in a pro rata payment schedule.

According to the financial reporting for the T-12 period ended June 30, 2023, the portfolio generated an NCF of $18.3 million (a debt service coverage ratio (DSCR) of 1.38 times (x)), a slight decline from the YE2022 figure of $18.7 million (a DSCR of 2.69x). The decline in the DSCR was primarily driven by a significant increase in debt service obligations, given the loan’s floating-rate structure. At issuance, DBRS Morningstar derived a NCF of $16.7 million (a DSCR of 2.69x) and applied a capitalization rate of 7.00% to arrive at a value of $233.5 million. This resulted in a DBRS Morningstar loan-to-value (LTV) ratio of 99.3% compared with the LTV of 54.5% based on the appraised value at issuance of $425.6 million. DBRS Morningstar considers the LTV ratio on the trust debt to be high. When combined with the lack of amortization, the high LTV ratio could potentially result in elevated refinance risk and/or loss severities in an event of default. In addition, the sponsor has the right to incur future mezzanine debt on the portfolio subject to a maximum appraisal LTV ratio of 57.0% and an aggregate debt yield of 7.98% or greater. As of this review, the servicer has confirmed that no additional mezzanine debt has been incurred.

In its analysis, DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks totaling 7.5% for cash flow volatility, property quality, and market fundamentals to account for strong cash flow stability attributable to the two absolute triple-net Iron Mountain leases, strong functionality metrics, and positioning across strong-performing gateway industrial markets.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General considerations include the following factors:
(1) Emissions, effluents, and waste
(2) Climate and weather risks

Environmental (E) Factors
Emissions, effluents, and waste were identified as a relevant factor with the current rating actions and has remained a relevant factor since the transaction closed in February 2021. The factor is related to one of the properties, 2300 Newlins Mill Rd (6.3% of the ALA), which developed a sinkhole in a grassy area near the parking lot, as identified at issuance. This particular region of Pennsylvania is prone to forming sinkholes, and the cost of repairing the sinkhole is covered by the 2300 Newlins Mill Rd property’s insurance policy.

Climate and weather risks were identified as a relevant factor with the current rating actions, and this factor has remained relevant since the transaction closed in February 2021. This factor is related to one asset that is in a seismic zone and has a probable maximum loss in excess of 20%, 10 assets that are in hurricane-susceptible regions, and six assets that are in locations designated as Special Wind Areas.

There were no Social or Governance factor(s) 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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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 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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

-- 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

-- 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)

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