DBRS Morningstar Confirms Ratings on All Classes of Cold Storage Trust 2020-ICE5

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-ICE5 issued by Cold Storage Trust 2020-ICE5 as follows:

-- 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.

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

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations as exhibited by the year-over-year net cash flow (NCF) growth. The transaction is collateralized by the borrowers’ fee-simple interest in a portfolio of 46 industrial cold storage facilities in the United States, totaling approximately 10.3 million square feet (sf). The portfolio is well diversified as it spans 19 states in multiple regions in favourable markets near major population centres. The portfolio also exemplifies diversity in terms of income and customer granularity perspectives. At issuance, the top 10 customer accounts represented 29.9% of total revenue, with the largest account representing just 5.5%. Property releases are permitted at release premiums ranging from 105.0% and 115.0% of the allocated loan amount, depending on the percentage of the original principal balance and certain debt yield tests, but none have been processed to date. A minor paydown occurred in March 2021 as a result of reserve disbursements, representing a collateral reduction of 1.7%. The outstanding loan balance since then has not changed.

The $1.3 billion floating-rate loan is interest only (IO) and has an initial three-year term until November 2023, with two one-year extension options, for a final maturity in November 2025. The loan was added to the servicer’s watchlist in December 2021 for delinquent taxes and based on the August 2023 reporting, approximately $129,000 is outstanding. This is a significant reduction from the prior year when the collateral reported about $1.4 million of delinquent taxes. The loan is also being monitored on the watchlist for its upcoming maturity in November 2023. It is likely the borrower will exercise its first extension option, which is subject to an interest rate cap agreement, although it is worthy to note that the cost of those agreements have increased.

The borrowers amassed the portfolio in phases across seven acquisitions dating from October 2019 to April 2020 and used 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 six master leases (collectively, the Master Leases) are between the borrowers and affiliates of the borrowers. The Master Leases allow the related master tenant (or subtenants of such master tenant), or operators engaged by the master tenant or subtenants to operate such properties.

The transaction benefits from property quality and functionality. The portfolio's properties generally exhibit favorable ceiling heights, loading capacity, and temperature configurations. The portfolio has a weighted-average clear height of more than 30 feet, and it 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. According to a March 2023 article published by Newmark, national cold storage development hit an all-time high of 9.8 million sf by YE2022, growing at a rate of approximately 7.5% from 2021 to the first half of 2022, compared with the annual average of 2.2% observed from 2013 to 2020.

According to the trailing 12 month (T-12) ended March 31, 2023, financials, the portfolio is fully occupied with an NCF of $170.4 million, an increase from the YE2022 NCF of $162.9 million and the DBRS Morningstar NCF of $122.5 million. Despite the improvement in NCF, the debt service coverage ratio (DSCR) has been declining with the T-12 March 31, 2023, figure at 2.92 times (x), compared with YE2022 DSCR of 3.68x, and DBRS Morningstar DSCR of 4.68x. This is due to an increase in debt service payments due to the floating-rate nature of the loan. According to the January 2023 appraisal, the portfolio was valued at $1.75 billion, representing a 5.5% decline from the issuance value of $1.85 billion at issuance. At issuance, DBRS Morningstar concluded a value of $1.4 billion based on the DBRS Morningstar NCF of $122.5 million and a capitalization rate of 8.75%, which represents a haircut of 20.1% from the January 2023 value and 24.5% from the issuance value. In addition, DBRS Morningstar applied positive qualitative adjustments totaling 7.5% to the sizing to reflect the property’s quality, cash flow volatility, and market fundamentals.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

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 [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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