Morningstar DBRS Assigns Provisional Credit Ratings to SWCH Commercial Mortgage Trust 2025-DATA

DBRS Limited (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2025-DATA (the Certificates) to be issued by SWCH Commercial Mortgage Trust 2025-DATA:

-- Class A at (P) AAA (sf)
-- Class B at (P) AA (sf)
-- Class C at (P) AA (low) (sf)
-- Class D at (P) A (sf)
-- Class E at (P) BBB (low) (sf)
-- Class F at (P) BB (low) (sf)
-- Class HRR at (P) B (high) (sf)

All trends are Stable.

SWCH Commercial Mortgage Trust 2025-DATA is a securitization collateralized by the borrower's fee-simple interest in three data center properties in Nevada. Morningstar DBRS generally takes a positive view on the credit profile of the overall transaction based on the portfolio's favorable property quality, affordable power rates, desirable efficiency metrics, and strong redundancy. Switch Ltd. (Switch) held a portfolio of more than 20 operating data center properties in six different metropolitan areas, inclusive of the subject collateral.

Morningstar DBRS' credit rating on the Certificates reflects the low leverage of the transaction, the strong and stable cash flow performance, and a firm legal structure to protect certificateholders' interests. The credit rating also reflects the quality of service provided by the company, the access to key fiber nodes, and technology that can maintain the data centers' relevance into the future.

The data centers backing this financing are generally well-built and benefit from the large national network provided by Switch. Switch is a leader in the technology sector with more than 700 patents and patents pending for design and operations that maintain its high standards and reliability. Switch also uses a modular design that allows for infrastructure upgrades and interchanging with minimal disruption. Finally, Switch has, over the last two decades, developed a large purchasing co-operative for its customers that allows for savings on both connectivity and power, both of which represent key inputs for users.

Data centers, which have existed in various forms for many years, have become a key component of the modern global technology industry. The advent of cloud computing, streaming media, file storage, and artificial intelligence applications has increased the need for these facilities over the last decade in order to manage, store, and transmit data globally. Both hyperscale and co-location data centers have a role in the existing data ecosystem. Hyperscale data centers are designed for large capacity storage and processing of information, whereas co-location centers act as an on-ramp for users to gain access to the wider network, or for information from the network to be routed back to users. Switch operates a large network using third-party and proprietary fiber to provide access to a large number of technology firms. From the standpoint of the physical plants, the data center assets are adequately powered, with some assets in the portfolio exhibiting higher critical IT loads than others. Morningstar DBRS views the data center collateral as strong assets with a strong critical infrastructure, including power and redundancy that is built to accommodate the technology needs of today and the future.

All three properties in the portfolio maintain 2N+1 electrical redundancy, which allows for more certainty around uptime at subject data centers. This is well-above market standard. With 2N+1 electrical redundancy, multiple layers of systems must fail simultaneously to result in service outages and forfeit uptime. The 2N+1 electrical redundancy is more expensive to build out compared with other redundancies, such as N+1 or N+2. RNO 2 property, which accounts for approximately 20% of Morningstar DBRS total revenue, was recently completed in 2023. Overall, the LAS 07, LAS 09, and RNO 02 facilities exhibited Power Usage Effectiveness (PUE) ratios between 1.27 to 1.38 during a 12-month period ended August 30, 2024, which Morningstar DBRS views as highly efficient. According to the Uptime Institute's 2024 Data Center Survey, the average annual PUE across the data center sector was 1.56.

Founded in 2000, Switch is an experienced data center operator owning more than 20 operating properties across six different metropolitan areas. Switch also has more than 700 issued and pending patents that allow Switch facilities to remain state-of-the-art and maintain a competitive advantage over other data center operators. Furthermore, Switch has emphasized commitments to the markets in the portfolio as they are actively constructing additional data centers, such the two Reno, Nevada, campuses that span across thousands of acres. Switch focuses on the construction of highly redundant data centers and has been powered by 100% renewable power since 2016 through the procurement of renewable energy for its facilities or through the purchase of carbon credits. Furthermore, Switch has had Net Zero Scope 1 Emissions since 2021 and Net Zero Scope 2 Emissions since 2016. Switch has also maintained 100% uptime across its facilities and has never experienced a service-level agreement (SLA) breach or provided SLA credit.

The subject portfolio exhibits significantly low historical churn of less than 3.0% per annum, which demonstrates the strong stickiness of tenants at the properties within the portfolio. The portfolio also benefits from hundreds of customers across the three facilities, which can reduce the volatility of revenue. The top five tenants by annualized revenue comprise 40.1% of the Morningstar DBRS revenue, and four of those top five tenants, which comprise 19.5% of the total Morningstar DBRS revenue, are rated investment-grade. Furthermore, eight out of top 10 tenants are rated investment-grade.

Data center operators have historically benefited from high barriers to entry because of the complexity of their operations along with the specialized knowledge required to operate the facilities to extraordinarily high uptime and reliability standards. Furthermore, the high upfront capital costs and necessary power infrastructure make speculative development more difficult than with other property types. The portfolio assets include purpose-built facilities within the vicinity of fiber nodes that would be costly to replicate. The purpose-built facilities have been built across large campuses at high initial construction and ramp-up costs.

Data center operators benefit from strong clustering and network effects attributable to the complex IT environments of their tenants. Larger tenants prefer to scale within the existing environment rather than add capacity at a facility with a different provider. Also, Switch's Reno and Las Vegas campuses, which house the subject data center properties, are connected by the SUPERLOOP, Switch's proprietary 500-mile, multi-terabyte fiber optic network. Furthermore, the portfolio benefits from the Core Co-operative, which is a telecommunications purchasing co-operative operated by Switch at its facilities and allows companies and customers to aggregate their purchasing power of services from carriers and pass on savings to member companies. As a result, members of the co-operative have access to more telecommunication providers at a below market pricing, leading to cost savings. This is a significant selling point for Switch and is a leading reason for lengthy tenant tenure and renewals at Switch facilities.

Switch boasts zero greenhouse gas emissions across its portfolio and use of 100% renewable power to operate its data centers. The assets in the portfolio located in Las Vegas are powered through procured solar power. The portfolio benefits from operating in markets that boast relatively low costs of power, despite primarily operating using renewable energy sources. Furthermore, wholesale power rates in Mountain region of Nevada and Las Vegas $0.0784 per kilowatt hour (kWh) to $0.086/kWh, which is less than the national average of $0.123/kWh.

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 Distribution Amounts and Interest Distribution Amounts for 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, the credit ratings do not address Spread Maintenance Premiums.

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 at (August 13, 2024), 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 Rating and Monitoring Data Center Transactions (November 20, 2024) https://dbrs.morningstar.com/research/443269.

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 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 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 final credit ratings on the above-mentioned securities is 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.

DBRS Limited
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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.

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

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.

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