Morningstar DBRS Assigns Provisional Credit Ratings to DATA Trust 2024-CTR2

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-CTR2 (the Certificates) to be issued by DATA Trust 2024-CTR2 (DATA 2024-CTR2):
-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (high) (sf)
-- Class HRR at AA (high) (sf)

DATA 2024-CTR2 is collateralized by the borrower's fee simple interest in one hyperscale data center property located in Elk Grove, Illinois. The borrower is Digital Elk Grove 2, LLC. The borrower will be wholly owned, indirectly, by Digital Realty Trust, L.P (DLR). Upon origination, GI TC Elk Grove LLC, which is controlled by TechCore, LLC (GI Partners), will be admitted as a member of the joint venture that indirectly wholly owns the borrower. The primary purpose of the loan is to finance a recapitalization of DLR's indirect interest in the property, where by GI Partners will acquire a 75.0% indirect interest in the borrower and DLR will retain a 25.0% indirect interest in the borrower. Digital Realty originally acquired the property through its merger with Dupont Fabros in 2017 and has operated the asset since the merger. The subject is part of a larger DLR and GIP campus in which Digital Realty operates two other hyperscale data centers known as CH1 and CH3, which were securitized in the DATA 2023-CTR transaction (not rated by Morningstar DBRS). All of the assets for this campus have their own contract services and management agreements. Each asset has its own property manager, engineer, and security teams. In the event the sponsorship sells an asset, the asset will have reciprocal agreements for these items.

The subject data center was completed in 2015 and is fully occupied by three investment-grade tenants, including Confidential Tenant 1, an American software maker accounting for 36.3% of base rent; Confidential Tenant 2, an American technology hardware designer and manufacturer accounting for 31.7% of base rent; and Confidential Tenant 3, an American software maker accounting for 31.3% of base rent. DBRS, Inc. (Morningstar DBRS) takes a positive view on the credit profile of the overall transaction based on its strong credit tenancy profile, strong data center operator, favorable market composition, affordable power rates, and desirable efficiency metrics.

From the standpoint of the physical buildout, the subject data center is powered with 26.8 MW of critical IT load and features N+2 redundancy for the uninterruptible power supply (UPS), 19 generators, two substations, and N+1 redundancy for the cooling and heat rejection systems. Morningstar DBRS views the subject data center as strong asset with strong critical infrastructure, including power and redundancy that is built to accommodate future technology needs.

Trust debt of $185.0 million ($6,904 per kilowatt (kW), $564 psf) represents an 50.0% LTV on the Morningstar DBRS value of $369.8 million ($13,799 per kW), which is relatively modest when compared with other more leveraged single-asset/single-borrower transactions. The Morningstar DBRS value equates to a 20.1% reduction to the appraiser's stabilized value of $463.0 million.

All of the power is leased to three investment-grade tenants, representing 99.3% of the total rent. The largest tenant at the property is Confidential Tenant 1 (36.3% of base rent), an American software maker; followed by Confidential Tenant 2 (31.7%), an American technology hardware designer and manufacturer; and Confidential Tenant 3 (31.3%), an American software maker. According to DLR, typical tenant investment is approximately $2.0 million per rented MW for incremental tenant-specific infrastructure build-outs. Tenant IT equipment generally costs approximately 10.0x to 20.0x the typical underlying infrastructure cost of the data center.

Built in 2015, the subject is a LEED silver, hyperscale data center featuring N+2 uninterruptible power supplies (UPS), room cooling and heat rejection systems redundancy of N+1, 19 generators, two substations, fiber and building entry, maximum floor loading between 250 lbs psf and 400 lbs psf, and 24-hour onsite security personnel with biometric access to all spaces. The property is strategically located with proximity to multiple fiber providers and two utility substations. The subject has direct connectivity to DLR's 350 Cermak Road facility, a 1.1 million sf carrier hotel, and the 600 South Federal Street carrier hotel, allowing for low latency connectivity to both coasts. According to the sponsor, typical tenant investment is approximately $2.0 million per rented MW for incremental customer-specific infrastructure build-outs,

Data center operators have historically benefited from high barriers to entry due to the complexity of their operations along with the specialized knowledge required to operate the facilities to extraordinarily demanding uptime and reliability standards. Furthermore, the high upfront capital costs and necessary power infrastructure also make speculative development more difficult than in other industries. Lastly, new supply is expected to be constrained as Commonwealth Edison (ComEd), the largest electricity utility in Illinois, has expressed concern with delivering new power in the amounts required by potential new data center supply, according to the appraiser.

The subject is located in Elk Grove Village, just outside Chicago O'Hare International Airport, approximately 23 mi northwest of downtown Chicago. Chicago is considered the fourth largest data center market in the U.S. and is the primary connectivity hub of the Midwest. Market demand is driven by financial services needing network-dense low latency connectivity to both the east and west coasts. As a result, the Chicago market is tight due to a lack of available land and power constraints, which is reflected in a significant net absorption of 385.7 MW in 2023, according to Jones Lang LaSalle's North America Data Center Report for H2 2023. As of YE 2023, Chicago reported a power rate of $0.069 per kWh, which is low compared with other primary data center markets of Northern Virginia ($0.075 per kWh), Northern California ($0.146), and Dallas ($0.064), per Jones Lang LaSalle. The subject currently pays approximately $0.095 per kWh.

The collateral has a WA power utilization efficiency (PUE) ratio of 1.20, which indicates a very efficient delivery of power to critical IT infrastructure. Typical PUE ratios range from 1.2 to 3.0, depending on the facility. According to the Uptime Institute's 2023 Data Center Survey, the average annual PUE across all data centers was 1.58.

The subject will be owned by a joint venture consisting of Digital Realty (25%) and GI Partners (75%). Digital Realty (NYSE: DLR) is one of the largest data center operators in the world, with a portfolio of more than 310 owned and operated data centers across 50 MSAs and 28 countries. Furthermore, DLR is the largest owner/operator of data centers in the Chicago market with a market share of 43%, based on current IT power. GI Partners is a private investment firm with offices in San Francisco, New York, Dallas, Chicago, Greenwich, Scottsdale, and London. GI Partners has over $40.0 billion in assets under management and invests on behalf of institutional investors around the world through its private Equity, real estate and data infrastructure strategies. As part of the transaction GI Partners contributed $202.5 of cash equity to acquire a 75.0% ownership interest in the property.

100% of the leases will rollover during the loan term, with the highest concentration of rollovers in 2027 (31.3% of base rent) and 2032 (26.7%). The current leases have an average remaining lease term of 4.5 years. The subject reported 100% occupancy for the last five years of operations. Adjacent DLR properties reported 90% average occupancy at CH1 and 94% at CH3, the newest delivery. The Chicago data center market reported its lowest vacancy rate of approximately 4.1% at YE 2023.

According to the appraiser, approximately 1.4 million sf, comprising 226 MW, is under construction in Chicago with an additional 5.4 million sf (350 MW) in various planning stages. As of H2 2023, the Chicago data center market reported a vacancy of 4.1% by MW. The subject has reported 100% occupancy for the last five years. According to the appraiser, new supply in Elk Grove Village is expected to be restrained due to the ability of ComEd to supply sufficient power utilities to new data centers. ComEd estimates that obtaining sufficient power availability in some submarkets of Chicago may not occur until 2025 to 2028. Furthermore, nearly all of the new data center supply is preleased.

Data center properties require specialized operational knowledge and expertise in order to operate to extremely high uptime and reliability standards set forth in various service-level agreements (SLAs) with tenants. Therefore, the pool of potential buyers may be more limited than other asset types such as warehouse/distribution properties. Digital Realty currently owns and operates more than 310 data centers across more than 40.0 million sf of rentable space. Digital Realty is the largest owner-operator in Chicago with an in-place IT capacity of more than 160.0 MW across 10 data centers and 3.4 million sf.

Morningstar DBRS views data center properties as significantly more capital intensive than traditional property types, with capital needs typically above and beyond the identifiable shell building repairs captured by a typical engineering report. For example, data center properties typically have dedicated on-site utility substations, complex closed loop and evaporative cooling systems, and substantial UPS and backup generator systems that must be proactively maintained and replaced to ensure the absolute highest level of uptime and reliability. A property condition report recommended ongoing capital expenditures of $0.02 psf. Morningstar DBRS accounts for the higher capital costs by applying $4.00 per kW per hour ($3.92 psf) in its NCF and NPV analysis.

Morningstar DBRS' credit rating on the Certificates addresses the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the Principal Amount, and/or the Interest Distribution Amount for the rated classes.

Morningstar DBRS' credit rating does not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, any Yield Maintenance Premium.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (January 23, 2024) https://dbrs.morningstar.com/research/427030

Class X is an interest-only (IO) certificate 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 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 US dollars unless otherwise noted.

The principal methodology is 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.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS' methodology, Morningstar DBRS used the data file outlined in the independent accountant's report in its analysis to determine the credit ratings referenced herein.

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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned securities are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower.

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://dbrs.morningstar.com/about/methodologies.

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

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

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

Legal Criteria for U.S. Structured Finance (April 15, 2024)
https://dbrs.morningstar.com/research/431205

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