DBRS Morningstar Finalizes Ratings on Cold Storage Trust 2020-ICE5

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-ICE5 issued by Cold Storage Trust 2020-ICE5:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class HRR at B (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

All trends are Stable.

The Class A-Y, A-Z, and A-IO are CAST certificates that can be exchanged for other classes of CAST certificates and vice versa.

The Cold Storage Trust 2020-ICE5 single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a portfolio of 46 industrial cold storage facilities in the United States. DBRS Morningstar takes a positive view on the credit characteristics of the collateral and maintains a favorable opinion on the long-term growth and stability of the warehouse and logistics sector, and cold storage is no exception for a variety of reasons. DBRS Morningstar believes cold storage continues to benefit from high barriers to entry, primarily large and experienced operators, and little in the way of speculative development.

The portfolio benefits from strong diversity with a Herfindahl score of 30.4 by allocated loan amount (ALA). The collateral spans across 19 states in multiple regions and favorable markets, with approximately 55.9% of the portfolio by trailing 12 months (T-12) EBITDA situated in primary industrial markets near major population centers. The portfolio also exemplifies diversity in terms of income and customer granularity perspectives. The top 10 customer accounts represent 29.9% of total revenue, with the largest account representing just 5.5% of T-12 revenue.

The portfolio’s EBITDA margin, a key indicator of the health of a cold storage operation, is approximately 41.5% based on T-12 EBITDA. This is considered well within the healthy range by DBRS Morningstar as well as third-party experts, and is higher than other DBRS Morningstar-rated cold storage transactions, including CSMC 2019-ICE4, which had an EBITDA margin of approximately 35.3%.

The borrowers amassed the portfolio in phases across seven acquisitions dating from October 2019 to April 2020 and are using whole-loan proceeds to recapitalize the borrowers’ interest in the portfolio, which was unencumbered by secured debt.

The borrowers lease the properties (except for the Chicago Cold - Bartlett property) to an operating company, Lineage Logistics, LLC, pursuant to six master leases. The rent from the master leases is the sole source of cash flow to pay debt service for the trust loan. The properties are currently subject to six master leases (collectively, the Master Leases) between the borrowers and affiliates of the borrowers. The Master Leases provide for the operation of such properties by the related master tenant (or subtenants of such master tenant) or operators engaged by the master tenant or subtenants.

The transaction also benefits in terms of property quality and functionality. The portfolio's properties generally exhibit favorable ceiling heights, loading capacity, and temperature configurations. The portfolio has a WA clear height of over 30 feet and the portfolio benefits from a very high proportion of freezer space (80.4%, based on the appraisal). Freezer space generally commands higher rents and valuations, and is more flexible through down-conversion to refrigeration temperatures when necessary to accommodate customer demand.

Cold storage properties require specialized knowledge and expertise in order to operate effectively. Therefore, the pool of potential buyers may be more limited than traditional dry warehouse facilities. Furthermore, a substantial component of the portfolio's value is dependent on Lineage's client roster and extensive industry expertise.

Cold storage properties are also associated with increased environmental risk resulting from the hazardous refrigerants (i.e., anhydrous ammonia, freon, and CO2) that are present in industrial cooling systems. The EPA generally requires these facilities to have a risk-management program in place that includes employee training, preventive maintenance, leak detection monitoring, and emergency response/evacuation planning.

The properties furthermore have limited alternative use and, given their dependency on the agricultural and food production industries, could be vulnerable to tail-risk style events such as a disease outbreak or widespread contamination. Extreme weather and other market factors, like commodity price volatility, could also affect or disrupt demand.

The mortgage loan is IO through the five-year fully extended term and does not benefit from deleveraging through amortization.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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