Investor Memo: Debt Service Coverage Ratios

To: Limited Partners & Co-Investors From: ColdPort Investment Committee Date: May 22, 2026 Subject: Debt Service Coverage Ratios (DSCR) as the Ultimate Risk Governor

Executive Summary

In the capitalization of commercial real estate, the application of leverage is a double-edged sword. While debt geometrically expands the cash-on-cash yield for equity investors, it introduces the existential risk of foreclosure. To navigate this dynamic safely, institutional capital relies on strict performance metrics to govern leverage limits. Chief among these is the Debt Service Coverage Ratio (DSCR). This memorandum outlines ColdPort’s rigorous methodology for utilizing DSCR as the primary risk governor, ensuring our cold storage assets generate massive cushions of cash flow to withstand severe macroeconomic volatility.

The Mechanics of DSCR

The Debt Service Coverage Ratio is the foundational metric used by commercial lenders and sophisticated sponsors to evaluate a property's ability to service its debt. It is calculated by dividing the property’s Net Operating Income (NOI) by its total annual Debt Service (principal and interest payments).

DSCR = Net Operating Income (NOI) / Annual Debt Service

• A DSCR of 1.0x means the property generates exactly enough income to pay the mortgage, with zero cash left over. This is a precarious "breakeven" state.
• A DSCR of 1.25x means the property generates 25% more income than is required to pay the debt. This 25% excess cash flow is distributed to the Limited Partners.

Institutional lenders typically require a minimum "sizing DSCR" of 1.25x to 1.35x to approve a loan. However, underwriting to the bare minimum lender requirement leaves the equity highly exposed to minor fluctuations in revenue or operating expenses.

ColdPort’s Defensive DSCR Mandates

In the cold storage sector, the highly specialized nature of the assets and the intensive operational requirements demand a significantly higher margin of safety. ColdPort engineers its capital structures to target robust, defensive DSCR profiles:

1. The 1.50x+ Stabilization Target ColdPort typically targets a stabilized DSCR of 1.50x or greater. This means our assets are engineered to generate 50% more cash flow than required to service the debt. This massive buffer ensures that even if a facility suffers an unexpected vacancy, a spike in unrecoverable utility costs, or a sudden increase in floating interest rates, the asset easily covers its mortgage obligations without requiring a dilutive capital call from our LPs.

2. Stress-Testing the Cash Flow Buffer During the acquisition underwriting phase, ColdPort subjects the projected DSCR to severe stress tests. We model a "shock scenario" wherein operating expenses spike by 15% and vacancy drops to market-bottom levels. If the modeled DSCR drops below 1.15x under these severe stress conditions, the asset is deemed over-leveraged, and ColdPort either renegotiates a lower purchase price or structures less debt (injecting more equity) to bring the shock-DSCR back to safe levels.

DSCR vs. LTV: The True Measure of Risk

Many retail syndicators focus obsessively on Loan-to-Value (LTV) ratios (e.g., borrowing 65% of the property's appraised value). ColdPort views LTV as a fundamentally flawed risk metric because it is based on appraised value, which is subjective and highly volatile based on Cap Rate fluctuations.

A property with a "safe" 60% LTV can easily default if its NOI collapses. Conversely, a property with a high 75% LTV is incredibly safe if it generates a massive 1.80x DSCR.

Therefore, ColdPort prioritizes DSCR (cash flow) and Debt Yield over LTV (appraisal value). We engineer our capital stacks to prioritize the absolute certainty of debt service over the maximization of leverage-driven IRR.

Interest-Only Periods and Cash Flow Velocity

To further protect early-stage cash flows and accelerate the return of capital to LPs, ColdPort aggressively negotiates "Interest-Only" (I/O) periods on our senior debt. During an I/O period (typically the first 2 to 5 years of the loan), the fund does not pay down any principal; it only pays the interest.

This drastically lowers the annual debt service, which artificially inflates the DSCR to highly defensive levels (e.g., 2.0x+) during the riskiest phase of the business plan (lease-up and stabilization). This structure maximizes the velocity of cash flow distributed to investors in the early years, significantly boosting the time-weighted Internal Rate of Return (IRR).

Conclusion

Leverage is a critical tool for wealth creation, but it must be meticulously governed. By utilizing strict Debt Service Coverage Ratio mandates, ColdPort ensures that the pursuit of yield never compromises the preservation of principal. Our conservative capitalization methodology ensures that our cold logistics portfolio remains a financial fortress, generating highly resilient cash flows that withstand economic turbulence and deliver absolute certainty to our Limited Partners.

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