DBRS Morningstar Assigns Provisional Ratings to BX 2021-PAC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates to be issued by BX 2021-PAC:

-- 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)
-- Class X-CP at AA (low) (sf)
-- Class X-EXT at AA (low) (sf)

All trends are Stable.

The Class X-CP and Class X-EXT balances are notional. Class X-CP is an IO certificate that references multiple rated tranches. Class X-EXT is an IO certificate that references multiple rated tranches. The IO classes will not have a certificate balance and will not be entitled to receive distributions of principal. The Class X-EXT Certificates are notional with respect to the Class B, Class C, and Class D certificates. The Class X-CP Certificates are notional with respect to 70% of each of the Class B, Class C, and Class D certificates.

The BX 2021-PAC single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple and leasehold interests in a portfolio of 41 industrial properties totaling more than nine million sf across six markets and three states in some of the nation’s most densely populated areas. The portfolio is largely concentrated in California and the Western U.S., with infill, core assets located in leading gateway distribution markets. LBA acquired the portfolio over the past 10 years and in 2016, Blackstone Property Partners purchased a 99% interest in the portfolio with LBA retaining a 1% interest and control of day-to-day operations. 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 Coronavirus Disease (COVID-19) pandemic has created across all commercial real estate asset classes.

The subject portfolio has benefited from the strength in the industrial sector of the economy. The 59 new or renewal leases signed since July 2020 have a weighted-average (WA) base rent that is approximately 16.0% above the WA in-place base rents for similar properties within the portfolio's six markets. With 240 unique tenants the portfolio realizes significant granularity and diversification that protects it from significant net operating income (NOI) volatility. No tenant comprises more than 8.9% of the portfolio net rentable area or greater than 5.0% of total base rent. Investment-grade-rated tenants pay approximately 16.8% of the portfolio’s base rent, providing further 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 percentage of office is 9.4%, which compares favorably with other industrial portfolios recently analyzed by DBRS Morningstar.

The portfolio has demonstrated very strong and occupancy performance with a WA occupancy at or above 95% since 2018. The portfolio’s NOI increased 9.2% between 2019 and the trailing 12 months ended June 2021. The portfolio is expected to benefit from continued NOI growth through the loan term. The loan sponsor estimates that the portfolio's WA rent is 17% below market rents.

The portfolio benefits from locations across numerous strong-performing west-coast gateway industrial markets, including the markets in Los Angeles, Orange County, and Inland Empire in California and Seattle. The portfolio’s WA in-place base rent of $9.48 per square foot (psf) is above the major national index of $8.32 psf (reported by Newmark Knight Frank as of Q2 2021). The portfolio benefits from high in-fill locations with dense populations. The pool WA population within a five, 10, and 15-mile radius is 402,948, 1,375,084, and 2,556,084, respectively.

DBRS Morningstar continues to believe that functional bulk warehouse product and last-mile delivery facilities near major population centers will outperform other property subtypes, and maintains a bullish outlook on industrial property based on ever-growing e-commerce demand.

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 Class X-EXT are IO certificates that reference 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.

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

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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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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