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

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates 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. Since Morningstar DBRS' last credit rating action in November 2023, there have been no changes to the collateral and the loan continues to exhibit healthy credit metrics, with the YE2023 financial reporting, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with Morningstar DBRS' 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 being 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 is the sole occupant of 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 $232.0 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 second option extending maturity through February 2025 and has not yet exercised the third extension option, however, Morningstar DBRS believes the loan is well positioned to exercise its third extension option. 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. Morningstar DBRS 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. Morningstar DBRS 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 2024 reporting, there have been no property releases, and the trust remains in a pro rata payment schedule.

According to the YE2023 reporting, the portfolio generated a NCF of $19.4 million (a debt service coverage ratio (DSCR) of 1.17 times (x)), compared with the YE2022 figure of $18.7 million (a DSCR of 2.30x) and the Morningstar DBRS figure of $16.3 million (a DSCR of 1.69x) derived at issuance. The decline in the DSCR was primarily driven by a significant increase in debt service obligations, given the loan's floating-rate structure. Performance is expected to remain consistent as occupancy has remained at 100% since issuance.

Morningstar DBRS' credit ratings are based on a value analysis, completed at issuance, that considered a capitalization rate of 7.00%, resulting in a Morningstar DBRS value of $233.5 million and a whole-loan loan-to-value ratio (LTV) of 99.3% for the portfolio compared with the LTV of 54.5% based on the appraised value at issuance of $425.6 million. Morningstar DBRS considers the LTV on the trust debt to be high. When combined with the lack of amortization, the high LTV 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 of 57.0% and an aggregate debt yield of 7.98% or more. As of this review, the servicer confirmed that no additional mezzanine debt had been incurred.

In its analysis, Morningstar DBRS maintained the positive qualitative adjustments to the final LTV sizing benchmarks totalling 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.

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 

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 have 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 have remained a relevant factor since the transaction closed in February 2021. This factor is related to one asset in a seismic zone that has a probable maximum loss in excess of 20%, 10 assets in hurricane-susceptible regions, and six assets in locations designated as Special Wind Areas.

There were no Social or 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 Factors in Credit Ratings (August 13, 2024), at https://dbrs.morningstar.com/research/437781.

Classes 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 Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 01, 2024), https://dbrs.morningstar.com/research/428798.

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.
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 Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

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, 2024), https://dbrs.morningstar.com/research/438283

Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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