DBRS Morningstar Finalizes Ratings on MED Trust 2021-MDLN

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-MDLN (the Certificates) issued by MED Trust 2021-MDLN:

-- 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 subject transaction is a sale-leaseback transaction to Medline Industries LP (Medline), a leading U.S. manufacturer and distributor of healthcare supplies. The mission-critical portfolio consists of 49 distribution, manufacturing, and office properties across 30 states. The subject financing is part of a larger $34.0 billion leveraged buyout of Medline by a group of private equity firms including Blackstone, Carlyle, and Hellman & Friedman. As a part of the transaction, the Medline operating company (OpCo) signed a brand-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.

DBRS Morningstar has a favorable view on the functionality characteristics of the distribution component of the portfolio, which was mostly built to suit Medline, along with the credit profile of the mortgage loan and the long-term NNN master lease to a well-established tenant. Although Medline does not carry an investment-grade rating, its business has demonstrated long-term stability, with 2020 revenue of approximately $17.5 billion and more than 23,000 employees. According to the arranger, the firm has a 90% customer retention rate and virtually all of the company's customers have been doing business with Medline for a decade or more. The manufacturing and office components of the portfolio (collectively 18.2% of the DBRS Morningstar Base Rent) also consist of a variety of mission-critical production and headquarters office space for Medline across various markets.

Approximately 86% of the portfolio by square feet (sf) consists of build-to-suit warehouse and distribution space with very strong functionality metrics. The distribution properties have a weighted-average (WA) year built of 2015, which is the newest among the myriad of industrial portfolios DBRS Morningstar analyzed over the past several years. The properties also have a strong WA clear height of approximately 37 feet, which compares very favorably with other recently analyzed warehouse/distribution portfolios. The average size of the distribution properties exceeds 700,000 sf, which is favorable, and the percentage of office space is typically minimal (single-digits percentage of the net rentable area).

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. There are no termination options during the loan term, and Medline has two successive five-year renewal options.

The portfolio is mission-critical to Medline, and DBRS Morningstar views it as highly unlikely that the firm would voluntarily relocate to other properties for a variety of reasons. All but one of the distribution properties were built to suit for Medline, which has strategically located its warehouses near major client and population centers to enable for 24-hour delivery turnaround times. Furthermore, the largest of the portfolio's five office properties serves as Medline's corporate headquarters space.

The DBRS Morningstar loan-to-value ratio on the trust loan is significant at 136.4%, which is well above the typical leverage point in single-asset/single-borrower transactions. The high leverage point, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

The portfolio entirely depends on lease income from the Medline OpCo lessee and, unlike other industrial or office portfolios, the transaction does not benefit from any tenant granularity or diversification across industries. While DBRS Morningstar believes it is unlikely Medline would elect to vacate at the end of the initial lease term, demising and retenanting the entire portfolio would require significant tenant improvement/leasing commission funds. Additionally, demising some of the larger distribution facilities and retenanting the manufacturing space could prove difficult. Furthermore, a corporate-level bankruptcy or negative credit event at Medline could put the master rent, and therefore the mortgage loan, at an increased risk of default for nonpayment.

The borrowers have entered into an affiliate unitary master lease agreement with the Master Tenant. While the borrowers and the Master Tenant are not under common control and a true lease opinion was provided, affiliate master lease arrangements may still pose a risk of recharacterization of the master lease as a financing from the borrowers to the Master Tenant. Furthermore, there is no limit on the amount of secured financing the Master Tenant is permitted to obtain; additional debt could reduce available cash flow and negatively impact the Master Tenant's ability to make the lease payment. The Master Tenant is also permitted to sublease up to 1 million sf of any property to any third party for ancillary use, which DBRS Morningstar considers a de facto transfer provision for properties under this threshold.
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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277