DBRS, Inc. (DBRS Morningstar) confirmed the ratings of Americold Realty Operating Partnership, L.P.’s (AROP) Issuer Rating and Senior Unsecured Notes at BBB. All trends are now Positive. With these rating actions, DBRS Morningstar also removed the ratings from Under Review with Positive Implications, where they were placed on October 16, 2020. DBRS Morningstar notes that the ratings are based on the credit risk profile of the combined entity, including AROP and its subsidiaries, as well as Americold Realty Trust (collectively, Americold or the REIT).
On October 16, 2020, following the announced acquisition of Agro Merchants Group (Agro; the Agro Transaction), DBRS Morningstar placed AROP’s Issuer Rating and Senior Unsecured Notes rating Under Review with Positive Implications due to anticipated improvement in the Business Risk Assessment (BRA) and the assumption that debt-to-EBITDA would decline near 5.2 times (x) on a sustained basis. Notwithstanding the stronger BRA factors, Americold has not achieved the expected level of debt-to-EBITDA. The higher than anticipated leverage subsequent the acquisition of Agro has been driven by: (1) higher-than-expected finance, operating, and sale-leaseback obligations assumed as part of the Agro Transaction (lease obligations treated as 100% debt); (2) disruptions to retailer supply chains caused by the Coronavirus Disease (COVID-19) pandemic leading to higher operating costs, particularly labor; and (3) the resulting lower inventory levels despite increasing consumer demand. As such, DBRS Morningstar removed the ratings from Under Review with Positive Implications and all trends are now Positive.
Americold’s ratings are supported by the REIT’s growing size via acquisitions driving EBITDA growth, its market position in the temperature-controlled warehouse (TCW) business, property and geographic diversification, and the experience and sophistication of its management team. While DBRS Morningstar views TCWs as specialty in nature relative to traditional property types, DBRS Morningstar believes Americold’s assets provide somewhat stable cash flows as they exhibit better-than-average ability to withstand market weakness, despite current challenges brought on by supply chain disruptions caused by the pandemic. As well, Americold increasingly demonstrates a sustainable competitive advantage from a number of sources, including customer-switching costs, intangible assets, and efficient scale. These considerations are somewhat offset by its short lease maturity profile, exposure to relatively high counterparty risk, and asset-type concentration with pure-play exposure to the TCW space.
The Positive trends reflect DBRS Morningstar’s expectation that Americold will return leverage below 6.0x total debt-to-EBITDA and maintaining EBITDA interest coverage above 4.5x as of year-end 2022, if not sooner. This higher level of leverage is permissible relative to that which DBRS Morningstar had originally expected in October 2020 in the low 5x range, which reflects the improvements in market positioning, diversification, and size.
A positive rating action would be considered if Americold can demonstrate total debt-to-EBITDA below 6.0x on a sustained basis, likely via improvement in same property net operating income growth through successfully mitigating supply-chain issues brought on by the pandemic, and building on its global leadership position. DBRS Morningstar would change the trends to Stable if Americold fails to improve debt-to-EBITDA below 6.0x on a sustained basis.
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/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is Rating Entities in the Real Estate Industry (April 23, 2021; https://www.dbrsmorningstar.com/research/377358), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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.
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.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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