Morningstar DBRS Takes Credit Rating Actions on Eight Data Center Transactions

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all 39 classes across eight data center transactions. All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transactions, which have remained in line with Morningstar DBRS' expectations. Of these eight data center transactions, four were reviewed as part of Morningstar DBRS' last bulk credit rating action, published on March 20, 2024, when Morningstar DBRS finalized the "Rating and Monitoring Data Center Transactions" methodology. Since then, six additional data center transactions have closed and are being reviewed as part of the current credit rating action, with the exception of Switch ABS Issuer, LLC, Series (Switch) 2024-1 and Switch 2024-2. Within the eight transactions, all of the underlying loans, which are interest only (IO), are current on their debt service payments as of the February 2025 reporting, with no loans on the servicer's watchlist nor in special servicing. Two loans (within BX Commercial Mortgage Trust (BX) 2021-VOLT and BX 2023-VLT3) are set to mature in the second half of 2025 and both have one-year extension options available to which Morningstar DBRS remains cautiously optimistic about its execution.

The full list of the credit ratings on the classes in these eight transactions can be found at the end of this press release.

The eight transactions are secured by 29 data center properties located in various states across the U.S., with prevalent concentration in Northern Virginia, Texas, and Georgia, among others. The majority of the loans are secured by hyperscale data centers, which require power usage greater than five megawatt and are designed for large capacity storage and processing of information. Only one loan, within CONE Trust 2024-DFW1, is collateralized by a co-location center, which typically acts as an on-ramp for users to gain access to a wider network, or for information from the network to be routed back to users. Five transactions are backed by portfolios that consist of three to 10 data center properties. Individual property releases are permitted via release premiums ranging from 105.0% to 115.0% on various portions of the allocated loan amount across these transactions. In general, Morningstar DBRS applies a penalty to the loan-to-value ratio (LTV) Sizing Benchmarks of the portfolio transactions that have release premiums below the Morningstar DBRS credit-neutral standard of 115.0%. To date, there have been no property releases reported. Additional penalties were also applied to account for the lack of warm body guarantors for applicable transactions.

At large, Morningstar DBRS takes a positive view on the credit profile of the subject transactions based on the centers' strong property qualities, experienced operators, high historical occupancy rates with investment-grade tenant exposure, desirable efficiency metrics, and stable redundancy. There are three loans secured by single tenant data center properties (within BX 2023-VLT3, JPMCC Mortgage Securities Trust 2022-DATA, Compass Datacenters Issuer II LLC (Compass) 2024-1 and Compass 2024-2), that are each occupied by an investment-grade tenant on a long-term lease. Although these tenants have termination options available, they are subject to conservative termination penalties, including termination fees and/or cash flow sweep triggers. As such, Morningstar DBRS believes these tenants are materially motivated to remain at their respective data centers during their initial lease terms. To date, Morningstar DBRS has not received any updates regarding the execution of the termination options.

Given the stable performance of the underlying properties over the past year, per the most recent financials that Morningstar DBRS has on file, as well as the recent vintage of the transactions that closed in 2024, Morningstar DBRS maintained its analytical approach from the prior credit rating actions, which incorporated the Morningstar DBRS "Rating and Monitoring Data Center Transactions" methodology and the Morningstar DBRS Data Center - Base LTV Sizing Benchmarks. The Morningstar DBRS net present values (NPVs) for the underlying properties were determined based on the Morningstar DBRS Periodic net cash flows (NCFs) that were projected for each year through the loans' respective expected maturity dates. Reversionary cap rates ranging from 7.0% to 7.50% were then applied, to reflect the location, data center type, and the current interest rate environment, while discount rates ranging from 7.75% to 9.0% were assumed, to derive the Morningstar DBRS reversion values and NPVs. The resulting LTVs for the subject transactions ranged between 50.0% and 90.1%. Additionally, Morningstar DBRS maintained the net positive qualitative adjustments to the LTV sizing benchmarks for all of the transactions, which ranged between 5.5% and 7.0%, to reflect the centers' strong power capabilities, stable connectivity, varying levels of redundancy, and/or the credit-positive deal structure. Morningstar DBRS did not give benefit to the LTV Sizing Benchmarks regarding renewable energy for any of the subject transactions. For more information on the approach and analysis conducted, please refer to the press release of the last data center bulk credit rating action, as mentioned above, and the provisional press releases of the individual transactions that closed in 2024.

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

Classes that are IO certificates 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 U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (February 28, 2025), https://dbrs.morningstar.com/research/448963

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 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 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.

-- Rating and Monitoring Data Center Transactions (November 20, 2024), https://dbrs.morningstar.com/research/443269
-- North American Single-Asset/Single-Borrower Ratings Methodology (February 28, 2025), https://dbrs.morningstar.com/research/448962
-- 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
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

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.