DBRS Morningstar Confirms Ratings on All Classes of BX 2021-PAC

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates issued by BX 2021-PAC as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The transaction is collateralized by the borrower’s fee-simple and leasehold interests in a portfolio of 41 industrial properties totalling more than nine million square feet (sf) across six markets and three states in some of the most densely populated areas in the U.S. The portfolio is largely concentrated in California and the Western U.S., with infill core assets located in leading gateway distribution markets. The sponsor is a joint venture partnership between Blackstone Property Partners (99% of ownership) and LBA Logistics, which maintains 1% of ownership and controls the day-to-day operations. The two-year, floating rate, interest-only (IO) loan has an initial maturity date in October 2023 and is structured with three one-year extension options. Loan proceeds of $1.2 billion repaid $676.4 million of existing debt, funded $10.9 million in upfront reserves, and returned $495.4 million of equity to the sponsor. Based on the issuance value of $2.3 billion, the sponsor will have $893.2 million of unencumbered equity remaining in the transaction. The upfront reserve of $10.9 million is earmarked for certain outstanding free rents, unfunded tenant improvement allowances, and leasing costs during the loan term.

At issuance, it was noted that the portfolio benefits from a significant degree of tenant granularity and diversification as no tenant comprises more than 8.9% of the portfolio’s net rentable area (NRA) or more than 5.0% of total base rent. In addition, approximately 17% of the base rent is derived from investment-grade-rated tenants. The majority of the portfolio consists of functional bulk warehouse space with strong functionality metrics and comparatively low proportions of office square footage, totalling 9.4% of NRA. The five largest tenants in the portfolio are Ingram Micro, Inc. (8.9% of NRA); Walmart (6.3% of NRA); Hand Air Express (5.4% of NRA), FedEx Ground Package System Inc (3.6% of NRA) and East Coast/West Coast Logistics (3.6% of NRA). All of these tenants, with the exception of Hand Air Express, have lease terms ending between 2026 and 2028, past the loan’s initial maturity date.

Historically, the portfolio has reported strong weighted-average occupancy rates at or above 95% since 2018. According to the June 2022 rent roll, the collateral reported an occupancy rate of 98.0% with an average rental rate of $9.60 per square foot. Considering this transaction is newer in vintage, there is limited financial reporting at this time. At issuance, the DBRS Morningstar net cash flow (NCF) was $74.7 million, which was a -3.8% variance from the issuer’s NCF. The transaction features a partial pro rata structure for the first 30% of the original principal balance, where individual properties may be released from the trust at a price of 105% of the allocated loan amount (ALA). Proceeds are applied sequentially for the remaining 70% of the pool balance with the release price increasing to 110% of the ALA. The release provisions also require the pool to maintain a minimum debt yield of 6.7% after each property release.

The portfolio benefits from locations across numerous strong performing West Coast gateway industrial markets, including Los Angeles, Orange County, and Inland Empire in California, as well as Seattle. DBRS Morningstar continues to believe that functional bulk warehouse product and last-mile delivery facilities near major population centres will outperform other property subtypes, and maintains a positive outlook on industrial property based on the continued e-commerce demand.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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/402907/baseline-macroeconomic-scenarios-for-rated-sovereigns-september-2022-update.

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@dbrsmorningstar.com.

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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