The first new commercial mortgage securitization to hit the market in two weeks is backed by a portfolio of cold storage facilities.
Cold Storage Trust 2017-ICE3 is secured by a single, $1.295 billion loan that Lineage Logistics obtained from Goldman Sachs and JPMorgan Chase. This loan pays only interest, and no principal, for an initial term of two years, but can be extended for one year up to three times, for a total term of five years. It is collateralized by 54 cold storage facilities spread across 17 states.
The portfolio’s concentration in a single property types increases its susceptibility to fluctuations in the food and cold storage industries; however, Moody’s Investors Service believes that this concern is partially mitigated by the high level of tenant retention and diversity, with over 1,000 tenants occupying the buildings.
The largest tenant, Walmart, represents 7.7% of the total portfolio revenue across eleven facilities. The second largest tenant, IPC (Subway Franchisees), represents 5.2% of total portfolio revenue across seven facilities.
Since acquiring the properties, Lineage has boosted revenue and improved margins by increasing leasing rates, making capital improvements, and technological innovation. Total revenue per cubic foot increased for the entire portfolio is up 13.8% since 2014; total net-cash-flow per cubic foot is up 18.6%.
Cold storage facilities are more expensive to operate and maintain than traditional “dry” warehouses, and are also subject to more government rules, from food grade product handling to safety regarding ammonia used in refrigeration units. Permitting is also more complex and inspections more frequent than with dry warehouses
Moody’s also noted in its presale report that a majority of the facilities in the portfolio lack some form of redundant backup systems or generators, exposing the properties to risk in the event of a prolonged blackout.
While Lineage used the loan to cash out $216.9 million of equity in the properties, leaving them more heavily leveraged, there is still $998.2 million of equity remaining, according to Moody’s.
Lineage can take out additional mezzanine financing of up to $200 million, subject to limitations: the combined loan-to-value ratio cannot exceed 53.5% and the combined debt service coverage ratio cannot fall below 2.03x.
This transaction complies with the Dodd-Frank credit risk retention rules through the retention by a third party, not identified in Moody’s presale report, of a horizontal interest in the transaction.
Wells Fargo is the servicer and Tremont Real Estate Advisors is the special servicer.
Lineage Logistics is the second largest temperature-controlled storage, warehousing and logistics company in North America by cubic feet, operating approximately 685.4 billion cubic feet of refrigerated warehouse space, according to Moody’s. It is more than twice the size of the next largest competitor and is operated by a seasoned team of professionals. The entire Lineage portfolio is comprised of 90 facilities located across 21 states.