DBRS Morningstar Finalizes Provisional Ratings on BX Commercial Mortgage Trust 2021-CIP

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

-- Class A at AAA (sf)
-- Class A-1 at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The BX 2021-CIP single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple and leasehold interests in a portfolio of 101 industrial properties totaling more than 15.2 million square feet across 23 markets and 15 states in some of the nation’s core midwestern and coastal industrial markets. BREIT Operating Partnership L.P. (Blackstone) recently acquired the subject portfolio from affiliates of Cabot Properties, a private real estate investor, developer, and operator of logistics properties based in Boston, for a purchase price of approximately $2.3 billion.

DBRS Morningstar continues to take a favorable view on the long-term growth and stability of the warehouse and logistics sector, despite the uncertainties and risks that the ongoing Coronavirus Disease (COVID-19) pandemic has created across all commercial real estate asset classes. Increased consumer reliance on e-commerce and home delivery during the pandemic has only accelerated pre-pandemic consumer trends, and DBRS Morningstar believes that retail’s loss generally continues to be industrial’s gain. The portfolio exhibits strong functionality metrics, with weighted-average (WA) clear heights of approximately 29.8 feet and a portfolio WA year built of 2007. Given the recent acquisition, Blackstone was unable to provide a leasing spread analysis for the portfolio; however, representative new and renewal leasing spreads have averaged 19.9% and 17.2%, respectively, from Q2 2019 through Q3 2021 for industrial assets that Blackstone owns in the same markets. With approximately 189 unique tenants, the portfolio also benefits from significant tenant granularity and industry diversification that protects it from significant net operating income volatility.

No single tenant comprises more than 4.1% of the DBRS Morningstar concluded in-place base rent. Investment-grade (IG)-rated tenants account for approximately 25.2% of the DBRS Morningstar concluded in-place base rent, including 10 tenants who qualified for long-term credit tenant (LTCT) treatment in the DBRS Morningstar net cash flow (NCF) based on long-dated lease maturity, providing further cash flow stability.

The majority of the portfolio consists of functional bulk warehouse product with strong functionality metrics and comparatively low proportions of office square footage. The portfolio has a WA year built of 2007, which is among the newest in DBRS Morningstar's competitive set of industrial portfolios, and benefits from strong WA clear heights of 29.8 feet along with a low proportion of office space at only 6.4%.

Approximately 25.2% of the portfolio's in-place base rent is derived from leases to IG tenants, which is a very favorable proportion relative to other recently-analyzed industrial portfolios. IG tenants include Amazon and its subsidiaries (7.0% of net rentable area (NRA); Moody's: A1/S&P: AA), Nike, Inc. (2.8% NRA; Moody's: A1/S&P: AA-), PepsiCo (1.0% NRA; Moodys: A1/S&P: A+), and McKesson (0.9% NRA; Moody's: Baa2/S&P: BBB+), among various others. Approximately 10 IG tenants qualified for LTCT treatment in the DBRS Morningstar NCF.

The portfolio benefits from locations across numerous strong-performing coastal gateway and midwestern industrial markets, including markets in Chicago, Indianapolis, Baltimore, New Jersey/New York City, Los Angeles, and Inland Empire in California. The portfolio's markets have a WA availability rate of approximately 5.74%, which is below the Q3 2021 national average availability rate of 6.0% for industrial properties, according to CBRE EA.

There are four speculative development properties in the portfolio, collectively representing 1.4% of total NRA, that are vacant and to which DBRS Morningstar attributed no cash flow. All four properties are located in the highly desirable Inland Empire infill market in California, where available land is scarce, new supply is minimal, and market rents are high. Therefore, DBRS Morningstar believes there is embedded upside from leasing these properties, which should not be an issue given the extremely tight market vacancy rate of approximately 1.8%.

The DBRS Morningstar loan-to-value on the trust loan is the highest among recently analyzed industrial portfolios, at 153.55%. Typically, lenders consider shifting the burden of extremely high mortgage leverage to a subordinate mezzanine loan secured by a pledge of the borrower's equity. However, in the subject transaction, the leverage is entirely attributable to mortgage debt secured by the trust collateral. The very high leverage nature of the transaction, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

In addition to the high leverage, the subject transaction has a low DBRS Morningstar debt yield of 4.4% and a debt service coverage ratio (DSCR) of 1.77 times (x) at an assumed Libor rate of 0.10%. The DBRS Morningstar DSCR also declines below 1.0x to 0.89x at the Libor cap of 2.5%. DBRS Morningstar views the low debt yield as indicative of both the competitive lending environment and continuing cap rate compression and value growth in the industrial sector.

The Guarantor under the mortgage loan has executed a construction guaranty in an amount not to exceed $20,000,998 for all outstanding costs associated with the four development properties located in the Inland Empire market that are still under construction. DBRS Morningstar views the guaranty structure of outstanding construction obligations as credit negative compared to an upfront cash reserve, but did not penalize the transaction because no pro forma cash flow or value was attributed to the development properties.

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.

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.

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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