DBRS Morningstar Confirms Credit Ratings on All Classes of MED Trust 2021-MDLN

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-MDLN issued by MED Trust 2021-MDLN as follows:

-- Class A at AAA (sf)
-- Class A-1 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class E at BB (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in October 2021, the loan continues to exhibit healthy credit metrics, with the servicer-reported financials for YE2022 and the trailing six (T-6) month period ended June 30, 2023, reflecting occupancy, revenue, and net cash flow (NCF) figures that remain consistent with DBRS Morningstar’s expectations.

The subject transaction is a sale-leaseback to Medline Industries LP (Medline), a leading U.S. manufacturer and distributor of healthcare supplies. At issuance, the mission-critical portfolio consisted of 49 distribution, manufacturing, and office properties across 30 states. The subject financing was part of a larger $34.0 billion leveraged buyout (LBO) of Medline by a group of private equity firms including The Blackstone Group, The Carlyle Group, and Hellman & Friedman Capital Partners. As a part of the transaction, the Medline operating company (OpCo) signed a new, 15-year absolute triple-net (NNN) unitary master lease covering all the properties in the portfolio. The master lease has no termination options and has two five-year renewal options.

The capital structure is both highly complex and highly levered featuring the $2.23 billion subject financing on the property company (PropCo) as well as numerous layers of debt on the OpCo, as a result of the LBO. The PropCo debt of $2.23 billion, along with $14.80 billion of OpCo debt and approximately $16.69 billion in sponsor equity, was used to acquire Medline at a purchase price of over $30.0 billion. Additional proceeds will purchase $606.0 million in management partnership units, provide $308.0 million in cash to Medline’s balance sheet, and cover closing costs and transaction expenses. The OpCo financing package includes $7.0 billion in U.S. dollar and euro denominated term loans, $3.8 billion in senior secured notes, and $4.0 billion in senior unsecured notes.

The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan is scheduled to mature in November 2023; however, the servicer has confirmed that the borrower intends to exercise its first extension option, pushing the maturity date to November 2024. There are no performance triggers, financial covenants, or fees required for the borrower to exercise any of the three one-year extension options. However, execution of each option is conditional upon, among other things, no events of default and the borrower’s purchase of an interest rate cap agreement for each extension term. DBRS Morningstar notes that the cost to purchase a rate cap has likely increased given the current interest rate environment.

Approximately 86.0% of the portfolio by area in square feet (sf) consists of build-to-suit warehouse and distribution space with very strong functionality metrics. The manufacturing and office components of the portfolio (approximately 18.0% of DBRS Morningstar’s base-rent figure) also consist of a variety of mission-critical production and office spaces for Medline across various markets. The transaction benefits from strong cash-flow stability attributable to the unitary absolute NNN master lease that Medline executed as a part of the sale-leaseback transaction. The master lease provides for annual escalations of 2.0%, along with the recovery of all operating expenses and capital costs at the properties. In addition, the master tenant is permitted to sublease up to 1.0 million sf at any property to any third party for ancillary. Although Medline does not carry an investment-grade rating, its business has demonstrated long-term stability, with 2022 revenue of approximately $20.0 billion and more than 34,000 employees.

The transaction features a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 30.0% of the original principal balance, where individual properties may be released from the trust at a price of 105.0% of the allocated loan amount (ALA). Proceeds are applied sequentially for the remaining 70.0% of the pool balance with the release price increasing to 110.0% of the ALA. DBRS Morningstar applied a penalty to the transaction’s capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premium. The release provisions require the pool to maintain a minimum debt yield of 6.3% after each property release. According to the October 2023 remittance, the outstanding trust balance has been reduced nominally by $10.7 million because of prepayments, primarily related to the release of two small properties totalling 0.45% of the ALA at issuance.

According to the annualized financial reporting for the T-6 month period ended June 30, 2023, and YE2022, the portfolio generated NCF of $139.4 million (a debt service coverage ratio (DSCR) of 0.81 times (x)) and $137.8 million (a DSCR of 1.36x), respectively. The decline in the DSCR was primarily driven by a significant increase in debt service obligations, given the loan’s floating-rate structure. At issuance, DBRS Morningstar derived a NCF of $114.7 million and applied a blended capitalization rate of 7.02% to arrive at a value of $1.63 billion. This resulted in a DBRS Morningstar loan-to-value (LTV) ratio of 136.4% compared with the LTV of 74.7% based on the appraised value at issuance of $2.98 billion. As part of this review, DBRS Morningstar adjusted its analysis to exclude the two released properties, resulting in a nominal difference to the aforementioned credit metrics. DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 7.5%, to account for cash flow volatility, property quality, 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 https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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
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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 (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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].