Real estate and tenant leases for space and electrical capacity in five completed and operating data centers in Virginia and Texas will secure $701 million in asset-backed securities.
The CyrusOne Data Centers, 2023-1, deal represents the first issuance for the master trust, as the sponsor will share the collateral between series 2023-1 and any future series from the master trust, according to a pre-sale report from S&P Global Ratings.
A number of banks are collaborating as arrangers, comprised of Barclays Capital, KKR Capital Markets, Citigroup Global Markets, Goldman Sachs & Co., and Wells Fargo Securities.
Between the properties in Sterling, Virginia and San Antonio, Texas, the properties have an aggregate critical load power of 65.25 megawatts, S&P said.
All of the data centers in the portfolio are turnkey, which the rating agency considers positive. In turnkey situations the issuer owns the critical mechanical and electrical infrastructure and provides space, physical security, power and cooling, as well as ongoing maintenance of the power and cooling systems, S&P said.
Further, modified gross leases are expected to make up about 100% of the annualized adjusted base rent (AABR) generated by the portfolio as of the transaction's closing date, S&P said, even though the proportion could change over time as capacity is released to future tenants.
In other portfolio characteristics, the portfolio is more heavily balanced toward multi-tenant than single-tenant properties. Currently, two data centers in Sterling and one data center property in San Antonio are multi-tenant properties, while two other buildings—in Sterling, Va., and one in San Antonio, Texas—are single-tenant.
Other potentially positive credit aspects of the deal include a strong management team. Not only does CyrusOne itself have more than 20 years of operating history, but the management team includes individuals with extensive experience in real estate, REITs, telecommunications, technology and mission-critical infrastructure industries, according to S&P.
As for the critically important question of location, S&P noted that three of the properties, which account for 55% of the deal by AABR, are located in northern Virginia, the world's largest data center market. The remaining two properties are in the San Antonio, Texas market. There, and as of 2021, S&P notes, CyrusOne had the largest market share among data center operators.
The quality of the tenants also strengthens the deal, as 70.3% of tenants are investment-grade by AABR, the rating agency said. Lease maturities are staggered, with the expiration dates ranging from 2023 through 2034. Also, some 45% of the total AABR corresponds to leases with options to extend for two additional terms of five years each. Meanwhile, 19% of the total AABR corresponds with options to extend for three additional terms of five years each, according to the rating agency.
The list of weaknesses is short by comparison, but S&P did note that the tenant diversity is limited. Some 41.7% of leased capacity and 45.3% of total AABR can be attributed to a single tenant.
S&P expects to assign ratings of 'A-' to the A-2 notes and 'BBB-' to the class B notes. Both classes have an expected legal maturity of 25 years.
