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

DBRS Limited (Morningstar DBRS) confirmed its credit 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 credit rating confirmations reflect the continued stable performance of the collateral as exhibited by positive growth in net cash flow (NCF) and healthy occupancy figures. In addition, the underlying portfolio benefits from a strong sponsor, which is a joint venture partnership between Blackstone Property Partners and LBA Logistics, as well as tenant granularity across three large American distribution markets.

The loan is secured by a portfolio of 41 industrial properties totaling more than 9 million square feet 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. Morningstar DBRS continues to have a favourable 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.

The interest-only, floating-rate loan had an initial two-year term with three one-year extension options for a fully extended maturity date in October 2026. The loan is currently scheduled to mature in October 2024; however, the servicer noted that the borrower is expected to exercise its second extension option. As per the loan documents, a replacement interest rate cap agreement is required to execute each extension, but the cost to purchase a rate cap has likely increased given the current interest rate environment.

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 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. To date, no properties have been released.

The portfolio benefits from a significant degree of tenant granularity and diversification, with some exposure to investment-grade-rated tenants. The five largest tenants in the portfolio are Ingram Micro Inc (8.9% of net rentable area (NRA)), Walmart (6.3% of NRA), A.P. Express (5.4% of NRA), FedEx Ground Package System Inc. (3.6% of NRA), and East Coast/West Coast Logistics LLC (3.6% of NRA). All of these tenants, with the exception of A.P. Express, have lease terms expiring between 2026 and 2028.

According to the March 2024 reporting, the collateral reported an occupancy rate of 98.4% with an average rental rate of $10.99 per square foot. Based on the YE2023 financials, the loan reported a NCF of $79.3 million, which is an improvement from the YE2022 NCF of $75.5 million and Morningstar DBRS NCF of $74.7 million. Despite the healthy NCF, the YE2023 debt service coverage ratio (DSCR) dropped to 0.99 times (x) compared with the YE2022 DSCR of 2.04x because of an increase in debt service expenses because of the floating-rate nature of the loan; however, some of the volatility is mitigated by the interest rate cap agreement.

At issuance, Morningstar DBRS derived a value of $1.1 billion based on a capitalization rate of 6.5% and Morningstar DBRS NCF of $74.7 million, resulting in a Morningstar DBRS 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. In addition, Morningstar DBRS maintained positive qualitative adjustments to the LTV Sizing Benchmarks totaling 8.5% to account for the portfolio's low cash flow volatility given the tenant granularity, diverse geographic distribution, and overall good property quality.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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 methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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 info-DBRS@morningstar.com

The credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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

-- North American Single-Asset/Single-Borrower Ratings Methodology (July 11, 2024), https://dbrs.morningstar.com/research/436004
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024); https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.