DBRS, Inc. (DBRS Morningstar) confirmed Americold Realty Operating Partnership, L.P.'s (Americold or the Company) Issuer Rating and Senior Unsecured Notes rating at BBB with Stable trends. DBRS Morningstar notes that the ratings are based on the credit risk profile of the combined entity, including the Company and its subsidiaries, as well as Americold Realty Trust, Inc. (collectively, the REIT).
The Stable trends consider (1) Americold's ability to negotiate greater revenue per occupied pallet with customers as inflationary costs are passed along to the end consumer, (2) the increased inventory levels to meet current consumer demand levels, (3) the substantial increase in fixed commitment rent and storage revenue (up to 48.5% of revenue as of June 30, 2023), and (4) Americold's plan to prudently develop properties in high-demand segments and markets. The Company has demonstrated its ability to successfully complete and deliver its sizable development pipeline, which is progressing toward stabilization over the next 18 months. Three additional projects are nearing completion and are scheduled to be delivered in the second half of 2023, which will considerably reduce the Company's development pipeline and overall development risk. Americold has publicly stated its intent to target annual development starts in the range of $100 million to $200 million in the near term, considerably lower than recent years.
The Company achieved a 6.9 times (x) debt-to-EBITDA ratio as of last 12 months (LTM) ended June 30, 2023, which was in line with DBRS Morningstar's projections. EBITDA interest coverage ratio (including capitalized interest) totaled 3.46x as of LTM ended June 30, 2023, which was slightly below DBRS Morningstar projections given the higher interest rate environment and sizable capitalized interest costs from recent developments. DBRS Morningstar projects considerable improvement in leverage metrics in the near term with debt-to-EBITDA near the 6.0x-range and EBITDA interest coverage ratio in the high 3.00x-range in 2023 and 2024. Near-term improvement is expected to be driven from continued strong same-store net operating income (NOI) growth, the stabilization of its developed assets, and debt reduction.
The rating confirmations reflect (1) Americold's strong financial metrics relative to its rating category, (2) the Company's strong market leadership position in the North American market and globally, (3) its geographical diversification across North America, Europe, and the Asia Pacific region, and (4) its overall portfolio size in terms of EBITDA. DBRS Morningstar notes the one-notch improvement for the portfolio size business risk assessment primarily as a result of EBITDA and square footage growth from its recent developments. Conversely, the rating continues to be constrained by (1) Americold's lease maturity profile relative to traditional real estate entities, (2) its asset type concentration within the temperature-controlled warehouse (TCW) sector, and (3) the specialized nature and limited liquidity of TCWs relative to traditional real estate, affecting overall asset quality.
DBRS Morningstar would consider a positive rating action if (1) the debt-to-EBITDA ratio comfortably remains below 6.0x on a sustainable basis with the EBITDA interest coverage ratio remaining above 3.50x, all else equal, or (2) Americold continues to materially improve its lease maturity profile with increased fixed commitments, thus improving cash flow stability. A negative rating action would be considered if the debt-to-EBITDA and EBITDA interest coverage ratios deteriorated to 7.3x and 3.00x, respectively, all else equal.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (dated July 4, 2023).
All figures are in U.S. dollars unless otherwise noted.
DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Entities in the Real Estate Industry (April 11, 2023) -https://www.dbrsmorningstar.com/research/412477/
The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694
-- DBRS Morningstar Criteria: Common Adjustments for Calculating Financial Ratios (December 8, 2022) https://www.dbrsmorningstar.com/research/407058/
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (October 26, 2022) https://www.dbrsmorningstar.com/research/404334/
The credit rating methodologies used in the analysis of this transaction can be found at:: https://www.dbrsmorningstar.com/about/methodologies.
A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.
Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at email@example.com.
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