DBRS Morningstar Finalizes Ratings on BX Commercial Mortgage Trust 2021-VOLT

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-VOLT issued by BX Commercial Mortgage Trust 2021-VOLT (BX 2021-VOLT):

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at BB (sf)
-- Class HRR at BB (low) (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)

All trends are Stable.

Classes X-CP and X-NCP are interest-only (IO) classes whose balances are notional.

The BX 2021-VOLT transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 10 data center properties across six U.S. states. DBRS Morningstar generally takes a positive view on the credit profile of the overall transaction based on the portfolio's favorable market position, affordable power rates, desirable efficiency metrics, and strong tenancy profile. The subject transaction also represents the first ever multi-tenant data center portfolio to be financed in the public commercial mortgage-backed securities market via a stand-alone securitization. DBRS Morningstar also takes a favorable view on The Blackstone Group's (Blackstone) broader take-private acquisition of QTS Realty Trust, Inc. (QTS) (New York Stock Exchange: QTS), of which the subject portfolio comprises a subset of stabilized assets. The acquisition represents a strategic long-term thematic investment in the data center space for Blackstone, financed via a variety of its permanent capital private equity vehicles.

Data center operators have historically benefited from high barriers to entry caused by 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.

Data center operators benefit from strong clustering and network effects attributable to the complex IT environments of their tenants. The contract renewal rate across QTS’ platform is approximately 88%, and larger tenants strongly prefer to scale within existing environments rather than add capacity at a facility with a different provider for numerous reasons. Furthermore, value-add interconnection revenue from tenant and bandwidth provider cross-connects tends to grow with increasing facility scale.

The portfolio benefits from its significant concentration in the Atlanta market, which has one of the most favorable wholesale power costs in the country. The portfolio's weighted-average (WA) wholesale power costs are approximately $0.03/kilowatt hour (kWh), which compares very favorably with other markets, which can be as high as $0.25/kWh. Furthermore, the portfolio's WA power utilization efficiency (PUE) ratio is 1.45, which indicates a very efficient utilization of power. Typical PUE ratios range from 1.2 to 3.0 depending on the facility.

The portfolio stands to benefit from potential cash flow upside over time attributable to growth in value-add interconnection revenue, which is relatively new for QTS. Unlike the build-out of shell space, this revenue line item requires little additional capital investment and helps contribute to tenant renewal probability. Additionally, DBRS Morningstar views QTS' ongoing expansion into the federal segment to be favorable, given the high barriers to entry attributable to difficult-to-obtain security clearances and premium power rates typically paid by these tenants.

QTS is an experienced data center operator with a footprint of more than 7 million square feet of owned mega-scale data center space throughout North America and Europe. The company has established relationships with significant power users across various industries and has a corporate net promoter score of 88, which is significantly in excess of its peers. Additionally, QTS has a demonstrated commitment to sustainability and environmental, social, and governance (ESG) and is committed to having 100% of the portfolio powered by renewable energy sources by 2025.

However, 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 with tenants. Therefore, the pool of potential buyers may be more limited than other asset types such as warehouse/distribution properties. Furthermore, a substantial component of the portfolio's value is dependent on QTS' client roster and extensive industry relationships and technical expertise.

The portfolio has a WA lease term of approximately 2.6 years, which is significantly shorter than typical lease terms seen in other traditional asset types such as warehouse/distribution properties. Despite impressive renewal rates and significant technical barriers to switching providers, the portfolio does not benefit from the same term structure of leasing as other asset types, therefore highlighting the importance of an experienced operator with knowledgeable sales and leasing staff.

Despite significant upfront capital requirements and other barriers to entry, the data center market has experienced significant new supply over the past few years from experienced operators, which has contributed to an overall decline in rental rates. According to CBRE research, there is approximately 457.8 megawatts of new capacity under construction across the nation's primary data center markets, with the Northern Virginia market accounting for 61% of projected new supply. However, CBRE estimates that more than half of this projected new supply has been pre-leased.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-CP and X-NCP 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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