NEW YORK CITY—On the face of it, CSMC Trust 2014-ICE is not a bell-ringer among recent CMBS issues. At $655 million worth of commercial mortgage pass-through certificates, it’s considered large but not unusually so in a year that already has seen more than a few $1-billion-plus securitizations, although it’s among the biggest on record for its property type. Yet the transaction, for which Fitch Ratings and Standard & Poor’s have issued presale reports, illustrates the more conservative underwritings that have characterized so-called CMBS 2.0 thus far—even if S&P reported earlier this month that conduit loans’ credit metrics have begun deteriorating.
That being said, CSMC Trust 2014-ICE is a single, interest-only loan rather than a pool. It’s backed by 42 temperature-controlled warehouses owned by 17 special-purpose property companies in an opco/propco arrangement with Colton, CA-based Lineage Logistics Holdings LLC, the second-largest owner of cold-storage facilities in the US after Leesport, PA-based Americold.
A spokeswoman for S&P tells GlobeSt.com that securitizations of loans backed by cold-storage assets are not common. The only S&P-rated deal of comparable size in the current cycle was Americold 2010 LLC Series 2010-ART at approximately $600 million.
Twenty-seven of the warehouses securing the loan are included in a 30-property portfolio that Lineage Logistics acquired with its purchase of Millard Refrigerated Services, based in Omaha. The Wall Street Journal reported in March that the Millard deal, which closed earlier this month along with two smaller acquisitions, was said to be worth about $1 billion, making it Lineage’s biggest buy to date. Lineage itself, formed in 2008 through the acquisition of 11 regional companies, is backed by private equity firm Bay Grove Capital.
Vacancy across the industrial sector has steadily improved since peaking at 14.3% in the depths of the recession, according to CBRE Econometric Advisors data. Yet both Fitch and S&P consider the cold-storage sector largely recession-proof, with Fitch calling it “generally resilient to changes in economic activity, disposable income and employment.” While consumers may put off buying, say, furniture or a big-screen TV, they generally continue eating through an economic downturn.
And while a new Kroll Bond Rating Agency report on industrial notes an uptick in development generally, cold storage poses a high barrier to entry in the form of significantly greater construction costs. They range up to $120 per square foot, compared to an average of $40 per foot for a conventional warehouse, according to S&P. Another hedge against competition is the degree of operational expertise that cold storage requires.
The securitized loan is described by S&P as “low-leveraged,” with a loan-to-value ratio of 68.8% on the ratings agency’s stressed basis and a 55% LTV based on the portfolio’s appraised value of about $1.2 billion. Its debt service coverage ratio is 1.87%, compared to the 1.63% average DSC for Q1 conduit loans in S&P’s recent report.
Space in the warehouses is taken by no fewer than 400 customers, with no single customer contributing more than 8% of total revenue. Further, the loan portfolio is divided across 16 states.
Conversely, however, it’s concentrated by property type as well as sponsor—a risk factor in the view of ratings agencies. Since much of it was newly acquired through Lineage’s Millard deal, it lacks an operating history under Lineage ownership, although Fitch notes that it has demonstrated resilient cash flows and occupancy levels across cycles. Further, the value of the portfolio would be “substantially diminished” if it were converted to conventional warehouse space.
On balance, both agencies have rated the classes of certificates from AAA for the class A certificates, which represent 61.8% of tranche thickness, to BBB for class D. Fitch has assigned a stable outlook to classes A through D.