Morningstar DBRS Takes Rating Actions on Five Data Center Transactions

On January 23, 2024, Morningstar DBRS finalized its “Rating and Monitoring Data Center Transactions” methodology (the Methodology). The Methodology presents the criteria for which global data center transaction credit ratings are assigned and/or monitored. A more detailed explanation of the Methodology can be found in the press release “Morningstar DBRS Publishes Final Rating and Monitoring Data Center Transactions Methodology” at https://dbrs.morningstar.com/research/427034.

As a result of the application of the Methodology, inclusive of consideration for updated transaction performance data, DBRS Inc. (Morningstar DBRS) took rating actions on 32 classes in five data center transactions. Of the 32 classes, Morningstar DBRS confirmed its credit ratings on 30 classes and upgraded two classes in the J.P. Morgan Chase Commercial Mortgage Securities Trust 2022-DATA transaction. All trends are Stable. The credit rating confirmations reflect the generally stable performance of the underlying collateral, which is performing in line with Morningstar DBRS’ expectations. The credit ratings upgrades reflect an increase in the Morningstar DBRS sustainable value of the underlying collateral and strong tenant performance, which are further detailed below.

Morningstar DBRS determined its Periodic net cash flow (NCF) of the underlying properties by applying the methodology. Morningstar DBRS typically makes adjustments to the property rental stream to account for vacancies, market rents, other income, reimbursable expenses per the lease terms, and any other relevant items. To estimate the collaterals’ normalized revenue stream, the Morningstar DBRS analysis included a review of lease terms along with third-party market reports, appraisal data, property condition assessment, environmental site assessment, and relevant market data provided at the time of initial rating.

Morningstar DBRS determined the credit ratings on each class of certificates by performing quantitative and qualitative collateral, structural, and legal analyses. For this analysis, Morningstar DBRS relied on structural and legal analyses conducted at issuance. This analysis incorporates the Morningstar DBRS “Rating and Monitoring Data Center Transactions” methodology and the Morningstar DBRS Data Center - Base LTV Sizing Benchmarks. Morningstar DBRS determined the net present value (NPV) of the underlying properties by applying its “Rating and Monitoring Data Center Transactions” methodology.

BX Commercial Mortgage Trust 2021-VOLT
The property-level Base Year NCF was determined assuming the in-place lease rates at issuance. Reimbursements were based on the in-place levels in the issuer rent rolls, which equated to approximately $236 per kilowatt (kW). Expenses were concluded in line with the trailing 12 months ended July 31, 2021, plus expenses for booked-but-not-billed expenses, which were above the historical levels. For the NPV calculation, Morningstar DBRS inflated the contractual rent revenues by 2.0% per annum. Other revenue items are concluded at a 2.0% annual increase. The vacancy rate of 7.31% was determined from the unleased power capacity in the rent roll. The operating expenses were inflated by 3.0% per annum from the base year, which is consistent with historical levels of inflation. The management fee was concluded at the contractual rate of 3.5%.

In order to conclude an NPV, Morningstar DBRS computed a Periodic NCF through the maturity year of 2026 and a reversion value projected in 2026. The reversion value was concluded at 7.50%. While the portfolio of assets includes superior facilities in Northern Virginia, it also includes older facilities and some co-location facilities in other markets. Therefore, the concluded cap rate is higher than in other hyperscale data center transactions. The discount rate of 9.0% represents a spread of 150 basis points over the cap rate and is consistent with observations of the spreads presented in data center appraisals. The resulting value of $3.66 billion represents a 30.9% variance to the appraised value at issuance.

Morningstar DBRS applied a total of 6.0% of qualitative adjustments. A 2.0% credit was applied to the loan-to-value (LTV) Sizing Benchmarks for Power Availability. While the bulk of the properties are in the strong Northern Virginia market, several properties are in less robust markets, which accounts for the lower credit applied than in comparable transactions. For similar reasons, a 2.0% credit was applied for connectivity and for the capacity in Northern Virginia, with less credit applied to the properties in other markets. Finally, a 2.0% credit was applied for the N+1 redundancy throughout the portfolio, which is configurable to 2N in the key Virginia and Atlanta facilities. No data on renewable resources was presented; however, during the site inspection, the borrower representative indicated that the sponsor acquired carbon offsets as part of meeting its climate goals.

J.P. Morgan Chase Commercial Mortgage Securities Trust 2022-DATA
In Morningstar DBRS’ analysis of the Base Year NCF, rental revenue is based on the in-place executed triple net (NNN) lease to Google LLC (Google). Reimbursements reflect a full recovery of operating expenses at the property because of the absolute NNN nature of the lease. Morningstar DBRS applied a 5% general vacancy rate because Google’s lease has an initial expiration in 2029 with a termination option commencing in March 2024 and does not qualify for long-term credit tenant (LTCT) treatment. Morningstar DBRS assumed that Google would not terminate its lease in 2024 for two reasons. First, the second phase of the property was delivered in 2021 when the capacity was still ramping up and Google would be responsible for a termination fee equal to the present value of all remaining lease payments through 2029 should it exercise the option. Expenses in Morningstar DBRS’s Base Year NCF were based on an overall expense load of $8.50 per kW per month, consistent with comparable properties, inclusive of a 3.0% management fee. All expenses are fully reimbursable by the tenant. Stabilized leasing costs of $2.89 per square foot were applied in addition to replacement reserves of $4.00 per kW per month. For the purposes of the NPV, the periodic cash flows through the loan maturity date incorporate contractual rent steps of 2.25%, a vacancy factor of 5.0%, and expense inflation of 3.0% per year. In the NPV analysis, tenant improvement/leasing commission was taken in the year of the lease rollover at a 75% renewal probability.

Upon concluding Periodic NCFs one year beyond the loan maturity, Morningstar DBRS used a reversionary cap rate of 7.00% and a discount rate of 8.25%. Morningstar DBRS increased the cap rate to 7.00% from the cap rate of 6.75% at issuance because of the change in the interest rate environment and sustainable market cap rates. This resulted in a Morningstar DBRS reversion value of $447.7 million and NPV of $388.7 million, which is greater than the Morningstar DBRS value of $341.6 million at issuance. The increase in valuation from issuance in 2022 is due to the additional cash flow generated by the contractual annual rent steps to loan maturity in the NPV analysis versus the single year of incremental rent credit applied at issuance.

Morningstar DBRS applied 7.00% of total qualitative adjustments. Morningstar DBRS applied a 3.00% benefit to the LTV Sizing Benchmarks because of the 46.6 megawatt (MW) hyperscale power capabilities and availability. Given the property’s location in Northern Virginia, the largest data center market globally, it benefits from the most connected market in the world. As a result, Morningstar DBRS applied a 3.00% benefit to the LTV Sizing Benchmarks for connectivity. No explicit information related to renewable power contracts at the collateral was provided. As a result, Morningstar DBRS did not give benefit to the LTV Sizing Benchmarks for renewable energy. The collateral is configured with an N+1 redundancy, which represents a single backup component added to support a single failure. This level of redundancy is considered standard for a hyperscale data center. As a result, Morningstar DBRS applied a 1.00% benefit to the LTV Sizing Benchmarks for redundancy. Morningstar DBRS also penalized LTV Sizing Benchmarks by 0.50% for the lack of a warm body guarantor.

Following the increase in sustainable value and tenant performance, Morningstar DBRS upgraded the credit ratings on Class E to BB (high) (sf) from BB (sf) and Class HRR to BB (sf) from BB (low) (sf).

DC Commercial Mortgage Trust 2023-DC
In Morningstar DBRS’ NPV analysis, rental revenue for the Base Year NCF is based on the in-place leases in the rent roll. Reimbursements reflect a full recovery of utilities and partial recovery of other expenses as leases exhibited a modified gross structure. Morningstar DBRS applied a 7.0% vacancy reflecting the in-place level. Expenses in Morningstar DBRS’ cash flow were based on an overall expense load of $64.75 per kW per month inclusive of a 1.5% management fee. Leasing costs ranging from $0.21 to $0.98 per kW were applied in addition to replacement reserves of $4.00 per kW per month.

In developing the NPV, future cash flows in the NPV analysis through the loan term incorporate contractual rent steps of 2.00%, a vacancy factor of 7.00%, and expense inflation of 3.00% per year. Upon concluding the Periodic NCF to loan maturity, Morningstar DBRS utilized a reversionary cap rate of 7.50% and a discount rate of 9.00%. Morningstar DBRS maintained the cap rate of 7.50% from issuance. This resulted in a Morningstar DBRS reversion value of $1.375 billion and NPV of $1.185 billion, which is 0.95% higher than the Morningstar DBRS value of $1.174 billion at issuance.

Morningstar DBRS applied 7.25% of total qualitative adjustments. Morningstar DBRS applied 2.50% benefit to the LTV Sizing Benchmarks because of the 104.0 MW hyperscale power capabilities and availability across three properties. Given the property’s location in Northern Virginia, the largest data center market globally, the property benefits from the most connected market in the world. As a result, Morningstar DBRS applied a 2.75% benefit to the LTV Sizing Benchmarks for connectivity. No explicit information related to renewable power contracts at the collateral was provided. As a result, Morningstar DBRS did not give benefit to the LTV Sizing Benchmarks for renewable energy. The collateral is configured with an N+2 redundancy, which represents two backup components added to support a single failure. This level of redundancy is considered above standard for a hyperscale data center. As a result, Morningstar DBRS applied a 2.00% benefit to the LTV Sizing Benchmarks for redundancy. Morningstar DBRS also penalized the LTV Sizing Benchmarks by 0.50% for the lack of a warm body guarantor.

BX Commercial Mortgage Trust 2023-VLT2
The transaction consists of two multitenant data centers and two fee-simple assets. The leased fee assets include a long-term lease to Microsoft to construct a data center, while the second asset is adjacent to an existing campus owned by the sponsor and leased to the developer of a retail and office property. In the Base Year NCF analysis, the rental revenue was based on the in-place rents for the fee-simple assets and leased fee assets. For the fee-simple assets, the reimbursements reflect a full recovery of power costs and partial recovery of other expenses as leases included modified gross structures. Morningstar DBRS applied a vacancy stress of 8.5% to the rental revenue based on in-place levels. Expenses were concluded at an overall expense load of $61.47 per kW per month inclusive of a 3.00% management fee. Total leasing costs of $1.12 kW per month were applied in addition to replacement reserves of $4.00 per kW per month. The future cash flows in the NPV analysis for the fee-simple assets through the loan term incorporate rent steps of 2.00%, a vacancy factor of 8.5%, and expense inflation of 3.0% per year. For the leased-fee assets, reimbursements reflect a near-full recovery of expense costs excluding a 1.0% management fee. Morningstar DBRS did not apply a vacancy stress, leasing costs, or capital expenditure (capex) costs given the leased-fee nature of the assets.

Upon concluding the Periodic NCFs to loan maturity, Morningstar DBRS used a reversionary cap rate of 7.25% and a discount rate of 8.25% for the fee-simple assets and a 5.50% reversionary capitalization rate and 5.50% discount rate for the leased-fee assets. This resulted in a total Morningstar DBRS reversion value of $954.6 million and NPV of $846.8 million, which is 0.74% higher than the Morningstar DBRS value of $840.6 billion at issuance.

Morningstar DBRS applied 7.00% of total qualitative adjustments. Morningstar DBRS applied a 3.00% benefit to the LTV Sizing Benchmarks because of the 80.5 MW hyperscale power capabilities and availability across the two fee-simple properties in Northern Virginia. Given the property’s location in Northern Virginia, the largest data center market globally, it benefits from the most connected market in the world. As a result, Morningstar DBRS applied a 3.00% benefit to the LTV Sizing Benchmarks for connectivity. No explicit information related to renewable power contracts at the collateral was provided. As a result, Morningstar DBRS did not give benefit to the LTV Sizing Benchmarks for renewable energy. The collateral is configured with an N+1 redundancy, which represents a single backup component added to support a single failure. This level of redundancy is considered standard for a hyperscale data center. As a result, Morningstar DBRS applied a 1.00% benefit to the LTV Sizing Benchmarks for redundancy.

Morningstar DBRS penalized the LTV Sizing Benchmarks because of the partial pro rata/sequential-pay structure that allows for pro rata paydowns for the first 30.00% of the unpaid principal balance. The penalty was applied to account for the nature of certain prepayments. Morningstar DBRS also penalized the LTV Sizing Benchmarks for a weak deleveraging premium.

BX Commercial Mortgage Trust 2023-VLT3
In the Morningstar DBRS analysis of the Base Year NCF, rental revenue was based on the in-place executed NNN lease for the AAA-rated single tenant. The tenant qualified for LTCT treatment per the Methodology and, as such, no vacancy adjustment or capex was concluded. Because of the absolute-NNN lease structure, all expenses are fully reimbursable by the tenant and included in the effective gross income. For the NPV analysis, Morningstar DBRS used Periodic NCFs through the Anticipated Repayment Date plus one year. Morningstar DBRS used a reversionary cap rate of 7.25% and a discount rate of 8.00%. This resulted in a Morningstar DBRS reversion value of $713.9 million and NPV of $667.7 million, which is largely consistent with Morningstar DBRS issuance valuation of $673.5 million. The minor decrease in valuation from the 2023 issuance value was the result of a slight decline in rent-step credit because of the application of the discount rate during the lease term to the anticipated repayment date (ARD). At issuance, the Morningstar DBRS cash flow incorporated a straight-line rent credit without an NPV analysis.

Morningstar DBRS applied 6.25% of total qualitative adjustments. As a result of the total capacity load of 42 MW and its density, Morningstar DBRS applied a 3.00% benefit to the LTV Sizing Benchmarks for power. Given the property’s location in Phoenix, the collateral enjoys low latency to the West Coast. As a result, Morningstar DBRS applied a 2.0% benefit to the LTV Sizing Benchmarks for connectivity. No explicit information related to renewable power contracts at the collateral was provided. As a result, Morningstar DBRS did not give benefit to the LTV Sizing Benchmarks for renewable energy. The collateral is configured with an N+1 redundancy, which represents a single backup component added to support a single failure. This level of redundancy is considered standard for a hyperscale data center. As a result, Morningstar DBRS applied a 1.00% benefit to the LTV Sizing Benchmarks for redundancy. This transaction incorporated an anticipated repayment structure, which Morningstar DBRS views as credit positive as the soft maturity and full cash flow sweep allows for deleveraging of the loan if not repaid at the ARD. Hence, Morningstar DBRS adjusted its LTV Sizing Benchmarks by approximately 2.5% for the five-year ARD structure, assuming some paydown from the cash flow sweeps in the post-ARD period. Morningstar DBRS also penalized the LTV Sizing Benchmarks by 0.50% for the lack of a warm body guarantor and weak qualified transferee criteria.

A summary of the credit rating actions, along with the credit rating action for each class, can be found by clicking the following link: https://dbrs.morningstar.com/research/429904.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024), at https://dbrs.morningstar.com/research/427030.

Classes that are interest-only (IO) certificates 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodologies are the North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798 and Rating and Monitoring Data Center Transactions (January 23, 2024), https://dbrs.morningstar.com/research/427033.

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

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.

Morningstar DBRS 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.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799)

Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

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