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Category ArchiveCMBS

CREFC 2018: Say Hello to CLOs

Commercial real estate collateralized loan obligations (CRE CLOs). It’s a bit of a mouthful for sure, and for some, CLOs are a sobering reminder of the pre-crisis Wild West. But, they’re baaack. And, judging by the packed house with standing room only that the CREFC panelists—including issuers, lenders and an investor—spoke to, people are curious about the new and improved 2018 CRE CLO market.

And for good reason: The market is heating up, significantly. Case and point, in December, Blackstone Group issued the largest CRE CLO post-crisis, the BXMT 2017-FL1 transaction, weighing in at a whopping $1 billion. The transaction was collateralized by 31 senior participation interests in loans secured by 71 properties, according to a report by KBRA at the time of the deal’s issuance.

Last year saw almost $8 billion in deal volume, but panelists estimate that amount will easily rise to $12 billion to $14 billion in 2018, driven partly by investor demand for the bespoke financing market. It’s a significant increase, given that in 2016 there was only $2 billion in issuance. That said, the market may be growing but remains disciplined and well balanced, one panelist said.

Today, CRE CLOs are a benign, nonrecourse source of financing that serve a distinct market purpose, panelists noted. Specifically, they solve the capacity issue around balance sheet financing. As an added bonus, when the market is functioning well, a CRE CLO is an accretive form of financing that complements warehouse financing nicely. Further, the deals create new capital markets opportunities and relationships for their participants.

First up in the panel discussion was the question of how recent CRE CLOs differ from CLOs issued pre-crisis. One panelist said that today’s CRE CLOs are “plain vanilla” unlike the more exotic pre-crisis days. But simply put, they have improved collateral quality. Pre-2007, the majority of transactions were more leveraged and the loans pledged as collateral had higher leverage attachment points. Today’s CRE CLOs are also composed entirely of first lien mortgages in contrast to pre-crisis collateral, which consisted of various position in the capital stack.

Most of the loans securitized in today’s CRE CLOs are floating-rate, short-term bridge loans on transitional assets where the sponsor is in the process of implementing a business plan on the property.

The notion that the loans included in the structures must always be cash-flowing is overstated, one panelist said. While generally true, the spectrum of loans in deals varies greatly and rating agencies are very pragmatic on how these loans are viewed. However, ground-up construction loans won’t make the cut.

Lenders also have more flexibility with CRE CLOs than they typically would in a REMIC structure, panelists said, with less servicing restrictions when it comes to modifying the loans. A key factor, given the transitional nature of the underlying collateral and the varying timelines of a borrower’s business plan implementation for those assets.

Tempted to dabble in the space and issue a one-off CRE CLO deal?

Proceed with caution, said participants. Significant resources are required from both an expense and labor perspective in order to pull a transaction together. From pooling the assets in an investor-friendly structure to working with the rating agencies and legal counsel to contending with extended transaction timelines and market volatility. The gestation period can take up to 15 weeks, and in a volatile market, the cost of funds targeted by an issuer can move significantly.  And don’t forget, CRE CLO issuances, like CMBS, are subject to risk retention requirements.

Something else to bear in mind if considering a single deal is that investors are typically more receptive to those who are in the market more frequently, panelists said.

Investors in the asset class areas alwaysresponsible for doing their homework. While one panelist had some concern that this isn’t necessarily always the case, evident in oversubscribed AAA tranches, another panelist argued that investors today are buying CRE CLO bonds based on diligence and underwriting as opposed to ratings—another key differentiation from the pre-crisis era.

One thing is pretty clear, with issuance expected to almost double this year, the use of CRE CLOs for transitional lending will continue for the foreseeable future.

Source: commercial

CREFC 2018: How’s CMBS Doing? KBRA’s Eric Thompson Fills Us In

CREFC’s annual conference at the Loews Hotel in Miami kicked off with an overview of how the CMBS market has been faring, courtesy of Eric ThompsonKroll Bond Rating Agency’s senior managing director. All eyes have been on CMBS with the financing source proving its competitiveness in 2017 and going up against bank and life company loans. Proof is in the pudding, and last year’s issuance volume neared $90 million, surpassing most analysts’ expectations.

Single-borrower issuance in particular increased by a whopping 88.7 percent in 2017 year over year to $36.5 billion, while conduit issuance remained flat at $48.5 billion.

KBRA expects single-borrower issuance to remain strong in 2018. “There’s a number of factors that might contribute to that,” Thompson told Commercial Observer between panels. “Some borrowers may be seeking to lock in a better rate than they currently have, do so ahead of rising interest rates and take some value accretion out of a property. It is also anticipated that M&A activity may spur acquisitions that result in capital market financings.”

There is also a couple of dynamics going on in the single-borrower space that make it appealing to market constituents, Thompson said: “One is that while it can be a very competitive market for pricing and execution for issuers that can lead to compressed profit margins, they can pre-place a lot of the debt with investors and have a good idea of where that execution might be. Two, I think there’s a deeper pool of subordinate buyers who are willing to buy further down in the capital stack because they’re comfortable with the credit on a single asset and comfortable in looking at their basis from the perspective of owning it. Unlike in a conduit deal, if things do go bad, you have more transparency into what conditions can effectuate a change in control as there is only one asset.”

KBRA is aware of a dozen or more single-borrower transactions coming down the pipeline as the year begins and expects to see up to three CRE CLOs issued by mid-February.

At 57 percent, 2017 appraisal LTVs were at their lowest since KBRA began rating conduits in 2012, which is both good and bad. “The issue is that when you have that level of leverage CMBS is competing more with insurers and banks. Even if banks pull back because of regulatory concerns, you have more competition than you would even if you had marginally higher leverage.”  

Historically a financing source dedicated to assets in secondary and tertiary markets, one interesting trend uncovered in KBRA’s research last year was CMBS’ increasing exposure to primary markets. “We found that primary markets default less than secondary markets by two to three points. When they do default, they have losses that are five points less than any other market,” Thompson said. “In the most liquid MSAs, the default rate is actually half that of other market tiers. So this is a positive credit element and a bright spot in terms of trends from prior years.”

CMBS loans in the largest, most liquid markets MSAs—New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco—reached 33 percent in 2017, up from 28.1 percent in 2016. When combined with exposure to the next 11 largest MSAs, that percentage pierced the 50 percent level for the first time in KBRA’s rating history, reaching 54.3 percent (compared with 45.5 percent in 2016).

In his opening remarks, Thompson cautioned that, while primary market’s diverse economies can certainly withstand downturns, oversupply is always a concern to consider.

In terms of property types, 2017 was the year of the office with CMBS exposure to the asset class increasing to 39 percent. Perhaps unsurprisingly, retail exposure took a hit, dipping to 25.4 percent after averaging above 31 percent in previous years.

And while delinquency levels remain low, they are increasing. KBRA’s conduit portfolio delinquency rate reached 0.44 percent by year-end 2017, up from 0.15 percent at the end of 2016. The increase was somewhat expected given seasoning in transactions, Thompson said. Term defaults historically peaking between years four and six; the bulk of the delinquency (0.32 percent) is from the 2013 and 2014 vintages.

As one of the most buzzed-about topics at the CREFC conference, it looks like CMBS will continue to shine in 2018.


Source: commercial

2018 CMBS: The Rating Agencies’ Predictions

After a stellar 2017, what’s in store for CMBS next year? We asked the industry experts to opine…


erin stafford 2017 06 27 dbrs 3455 2018 CMBS: The Rating Agencies’ Predictions
Erin Stafford. Jeff Wasserman/ For DBRS

Erin Stafford,  Head of North American CMBS at DBRS

What are your predictions in terms of 2018 CMBS issuance volume and what will be the key drivers of that issuance?

We are expecting volume to be flat compared to 2017. The lion’s share of the increase in U.S. CMBS volume in 2017 came from increased issuance in the single-asset, single-borrower (SASB) market, while the conduit market in 2017, after adopting risk retention, is likely to end up close to flat from the previous year. It is likely that the SASB volume could remain strong as many of those transactions are short-term in nature and may need to be refinanced into the CMBS market as interest rates remain low.

Are there any property types or regions that you are paying close attention to as we go into the new year? Why?

We are seeing some softening in certain markets. For instance, Houston was on our radar prior to Hurricane Harvey as office vacancies in the energy corridor had increased in addition to lower hotel occupancies and higher concessions at higher-end multifamily properties. There are markets where new supply may cause short-term disruptions; this is particularly noteworthy for hotels. Regional malls are something that we are watching very closely especially since last year retailers were quick to make store closure decisions following disappointing holiday sales, and we expect this again in 2018. We notice that some mall operators are making great strides to upgrade their offerings while others are lagging, seemingly awaiting more store closures. Other areas we are paying close attention to are suburban office projects and student housing properties.


James Manzi, Senior Director at S&P Global Ratings

jmanzi 2018 CMBS: The Rating Agencies’ Predictions
James Manzi. Photo: Standard & Poor’s

What are your predictions in terms of 2018 CMBS issuance volume and what will be the key drivers of that issuance?

We’re expecting about $85 billion in CMBS issuance next year, which is slightly lower than this year’s total, which we expect to be around $90 billion. Lower CMBS loan maturities are a headwind, while continued activity in the single-borrower space and the potential for more multifamily collateral making its way into conduits are tailwinds.

Are there any property types or regions that you are paying close attention to as we go into the new year? Why?

With offices taking a leading role in conduits in the 2017 vintage (at around 40 percent of collateral) and being second only to lodging in terms of volume securitized in single borrower deals, we’ll be closely watching performance in that sector. It will be interesting to see if companies (office tenants) choose to use smaller footprints over time, similar to the way retailers have reduced theirs.


zanda lynn 1 2018 CMBS: The Rating Agencies’ Predictions
Zanda Lynn. Photo: Stefan Falke/ For Fitch Ratings

Zanda Lynn and Huxley Somerville, Head of U.S. CMBS Business Development and Head of U.S. CMBS at Fitch Ratings

What are your predictions in terms of 2018 CMBS issuance volume and what will be the key drivers of that issuance?

Zanda Lynn: Our projection for non-agency CMBS is approximately $75 billion for 2018. We expect the slowdown in commercial real estate activity to contribute to a decline in overall volume, though the single-borrower market looks strong.


huxley somerville 3 2018 CMBS: The Rating Agencies’ Predictions
Huxley Somerville. Photo: Stefan Falke/ For Fitch Ratings




Are there any property type or regions that you are paying close attention to as we go into the new year? Why?

Huxley Somerville: Hotels, while continuing to perform, are showing signs of slowing revenue growth especially in New York City where new construction is adding to underperformance. We do not believe current revenue levels are sustainable over the longer term.


larry kay kbra senior director 2018 CMBS: The Rating Agencies’ Predictions
Larry Kay. Photo: KBRA

 Larry Kay and Eric Thompson, Managing Director and Senior Managing Director at KBRA

What are your predictions in terms of 2018 CMBS issuance volume and what will be the key drivers of that issuance?

While we are forecasting that CMBS private label issuance will decline from 2017 levels, there is still good support for new issuance as many positive CMBS and CRE underpinnings remain intact. Interest rates are still historically low, CRE provides favorable returns compared to other asset classes, CRE capital flows while slightly down are still strong, and credit performance remains stable. However, a potential market disruptor could be if the market believes that the Federal Reserve’s balance sheet unwinding is taking too much liquidity out of the system; this could trigger a jump in, or more volatile, interest rates. In addition, investors may be more cautious in their CMBS and CRE allocations in 2018 as property values are beginning to feel stretched, and a decline in scheduled maturities may limit refinancing opportunities. As a result, we are forecasting $65 billion of private label issuance in 2018, which could end up being 25 to 30 percent lower than 2017 levels.

eric thompson kbra senior managing director 2018 CMBS: The Rating Agencies’ Predictions
Eric Thompson. Photo: KBRA


Are there any property types or regions that you are paying close attention to as we go into the new year? Why?

In addition to concerns regarding full-price department stores, in 2018, we will be watching their off-price formats very closely. Chains that report sales with off-price department store offerings include Nordstrom Rack, which just reported fiscal 3Q 2017, and Saks Off Fifth with reported fiscal 2Q 2017 numbers. Both experienced declines in same-store sales performance for each respective quarter and through the nine and six months ending October and July 2017. Declining sales in what has been a high-growth segment leads us to believe there could be sales cannibalization and brand dilution taking place.

Historically, the underlying assertion was that department store retailers would not open off-price stores close to their full-line brand if it cannibalized sales. Based on KBRA’s analysis, which used Nordstrom financial disclosures, the distance between Nordstrom Rack and the retailer’s full-line offerings will increase in the future. Of the existing stores, approximately 42 percent of the off-price locations were situated within five miles of the nearest full-line store—the comparable figure for scheduled openings is just 17 percent. Perhaps this has to do with the availability of real estate. However, it could also signal that the retailer is trying to mitigate the potential for cannibalization and brand dilution.

img 1976 edit 2018 CMBS: The Rating Agencies’ Predictions
Lea Overby. Photo: Kaitlyn Flannagan/ For Commercial Observer

Lea Overby, Head of CMBS Research and Analytics, Structured Credit Research and Ratings at Morningstar Credit Ratings

What are your predictions in terms of 2018 CMBS issuance volume and what will be the key drivers of that issuance?

We expect 2018 nonagency issuance of $70 billion to $75 billion, down slightly from this year’s full-year total of around $85 billion. We are also likely to see another $100 billion in agency issuance next year. The volume of maturing loans that must be refinanced in 2018 will be far lower than in 2017, and most maturing loans are with portfolio lenders, rather than in CMBS. In fact, only $24 billion in CMBS will mature next year, down from over $80 billion that matured in 2017.

Despite the dip in maturing loan volume, we believe that lending may remain relatively constant. We expect transaction volume to remain steady, and borrowers may prepay loans to get ahead of potential interest rate increases. Also boosting CMBS issuance, conduit lenders may become more competitive with balance sheet lenders because conditions in the capital markets remain favorable with tighter CMBS spreads and low volatility. 

Are there any property types or regions that you are paying close attention to as we go into the New Year? Why?

Even though we believe that talk of the retail apocalypse is overblown, we do have concerns for this sector. We expect to see another round of bankruptcies and store closures after the holiday shopping season, and this will likely result in higher vacancy rates in 2018. We will also be keeping a close eye on grocery-anchored space. We believe this sector will see further consolidation, as Amazon’s purchase of Whole Foods and the U.S. expansion of discounters, such as Aldi and Lidl, affect traditional grocers.  Aside from the retail sector, we are also watching the multifamily and hotel sectors. Both have done extremely well during this economic cycle, but the party might not last too much longer. We are seeing signs of overbuilding in certain markets, which may leave multifamily properties and hotels more vulnerable to changes in the economic cycle. There are indications that the stable economy may at last be leading to rising homeownership rates, which may hurt apartment performance. On the other hand, the hotel sector is always vulnerable to economic downturns, and this is exacerbated by increased supply.

Keith Banhazl, Managing Director, Moody’s Investors Service

keith banhazl moodys 2018 CMBS: The Rating Agencies’ Predictions
Keith Banhazl. Photo: Moody’s Investors Service

What does 2018 hold in store for CMBS?

The credit quality of newly originated and outstanding commercial mortgage-backed securities conduit and fusion loans will remain steady in 2018. Rising interest rates and a cyclical inflection point in the commercial real estate cycle pose some challenges to CMBS collateral performance, but declining leverage and increasing coverage in conduit loans provide some degree of protection. Further, the wave of maturing and aggressively underwritten loans from the 2006 and 2007 vintages has mostly come and gone, and we expect the overall delinquency rate to improve as the volume of newly issued CMBS 2.0 loans outweighs that of delinquent CMBS 1.0 loans.

Source: commercial

Chicago Office—Suburbs’ Losses Are Downtown’s Gains

Chicago, America’s third-largest office market with over 470 million square feet, exemplifies the nationwide trend of companies relocating to urban areas from the suburbs as young people and knowledge workers congregate in city centers. The Windy City is the largest in the Midwest and differs from its smaller neighbors with its vibrant central core, strong public transportation network and amenities that are attractive to younger residents. Despite population losses in the metro area, downtown Chicago gained over 42,000 residents between 2010 and 2015, according to the U.S. Census Bureau. Some of these gains, however, have come at the expense of its suburban neighbors. In fact, the city reports stable office vacancy of around 13 percent since 2015, but vacancy in the suburbs is much higher.

Beam Suntory, one of the world’s largest spirits producers, and Sara Lee Corp. have traded in their suburban offices for downtown Chicago, and McDonald’s and Motorola Solutions are following suit with planned moves in the next year. The biggest blow outside of the city was dealt to the Schaumburg area, which saw AT&T surrender 1.3 million square feet. The former AT&T campus in Hoffman Estates is a real estate-owned asset of two CMBS trusts, MSC 2006-T21 and BSC 2006-PW11, with a forecast loss of over $70 million. Average vacancy in the Schaumburg area was 21.1 percent as of November, according to CoStar Group. The only major gain for the suburbs in this time was when Caterpillar, which spent over 100 years in downstate Peoria, Ill., moved its operations north to suburban Deerfield in early 2017.

In the other large suburban office markets, Central North and Western East/West Corridor, the average vacancy rate is nearly 16 percent, up from a pre-crisis low of 9.2 percent, with high four- and five-star sublease availability of more than 25 percent between the two. In addition to ConAgra, a number of companies either moved their headquarters or relocated a significant portion of their work force from the Central North submarket to Chicago, including Walgreens, Allstate and Sterling Partners.

In addition, since 2009, many companies have relocated to Chicago from out of state, bringing thousands of jobs and increasing the demand for office space. These include ConAgra Brands, a packaged-food giant that moved its headquarters from Omaha, Neb., in 2016, and the Kraft Heinz Co., which shuttered the Madison, Wis., headquarters of its Oscar Mayer division and established a co-headquarters arrangement between Pittsburgh and Chicago.

Rising demand has led to an increase in office construction in the city. Developers delivered two office towers of over 1 million square feet each in early 2017, River Point and 150 N. Riverside Plaza, and the John Buck Co. is building an 820,000-square-foot office tower for CNA Financial. With its size, Chicago is unique for the region in that the addition of two 1-million-square-foot office towers will have a relatively modest effect on vacancy and rent. In fact, CoStar forecasts a vacancy rate of 13 percent for 2019 for the metro area, 100 basis points lower than at the start of 2017. .

The West Loop could be the greatest beneficiary of growth in downtown Chicago. With technology employers including Google, Gogo and Glassdoor taking space in the area and the nearby Fulton Market’s transformation from a meatpacking district to a restaurant mecca, millennials have made the West Loop one of Chicago’s trendiest neighborhoods.

Morningstar believes that Chicago’s ongoing migration of younger residents to the central core will continue to attract employers to the area. While there will still be a need for suburban office space, the lack of construction in those areas and weaker access to public transit may dampen growth. Consequently, we expect growth in these areas to be more modest.

Steve Jellinek is a vice president of CMBS research and Edward Dittmer is a senior vice president of CMBS credit risk services at Morningstar Credit Ratings. They can be reached at steve.jellinek@morningstar.com and edward.dittmer@morningstar.com.

Source: commercial

One Year Later, Risk Retention Is a ‘Nice to Have’ Feature for CMBS

Risk retention in U.S. CMBS will be one year old later this month. In 2017 (through Oct. 31), Fitch has rated 40 multiborrower CMBS transactions with risk retention. What has changed compared to previous years?

Structurally, average credit metrics like debt service coverage ratio (DSCR) and loan-to-value (LTV) have improved since 2015. Reflecting the improvement in credit, Fitch’s
BBB- credit enhancement has decreased during the same timeframe.

A big factor in the improvement in credit is the influx of investment-grade loans in 2017 transactions. Investment-grade loans receive a credit opinion from Fitch. Typically, they are large loans on high-quality properties with conservative debt levels. Fitch provides a credit opinion at BBB- or higher, analyzing it as if it were a standalone deal. In 2015, 4 percent of the loans in CMBS conduits were investment grade, whereas so far in 2017 that proportion is over 11 percent. In other words, an additional 7 percent of today’s transactions, on average, do not need credit support at BBB-. This means the decline in credit enhancement is exaggerated by the number of investment grade loans in 2017 deals. The improvement in credit remains even if you strip out investment grade and low-levered co-op loans.

This improvement may be a result of risk retention. However, Fitch would posit that a more important reason goes back two years to the introduction of Regulation AB. What this regulation effectively accomplished was to reduce by half the number of originators supplying loans to CMBS. This has allowed the remaining originators to hold their credit line because the borrower is unable to go around the corner to another originator and get better loan terms.

Not all credit metrics have improved in the last three years. Fitch’s cash flow haircut, for instance, has continued to increase. Cash flow haircut is the difference between what the originator determines is available to pay debt service and what Fitch determines, incorporating, among other things, adjustments for above-market occupancies and rents, as well as allowances for tenant improvements and leasing commissions. The haircut went from 9.6 percent in 2015 to 11.3 percent this year. Interest-only loans have also continued to increase. Full-term interest-only loans have almost doubled in the past two years and currently stand at 44.3 percent. In contrast, partial term interest-only loans have declined to just under 30 percent. Interest-only loans in any form now make up 73.6 percent of a deal, up from 66.4 percent in 2015. These trends are also repeated when the investment grade, and co-op loans are stripped out.

Of the 40 loans reviewed with risk retention, there is an equal split between vertical, horizontal and L-shaped structures; L-shaped has 12 deals, horizontal 13 and vertical 15. There are some differences in the credit metrics among the three structures though. Typically, L-shaped structures have better credit characteristics. Both Fitch DSCR and LTV on the L-shaped structure are slightly better compared to the vertical and horizontal structures. Fitch cash flow haircuts on the three structures are all between 11 percent and 11.5 percent. Additionally, there tend to be more interest-only loans in CMBS with the L-shaped risk retention structure compared to horizontal and vertical.

Why do L-shaped structures have the best, or close to best, credit metrics? It all comes back to investment-grade loans. L-shaped transactions have 15.4 percent of loans classified as investment grade. Vertical has just 8.4 percent and horizontal 12 percent.

So one year after the rules became official, has risk retention improved CMBS credit? Certainly, the risk retention deals of this year have better credit than the 2016 and 2015 deals that didn’t. That said, risk retention is more of a “nice to have.” If competition to make CMBS loans increases to the point that credit metrics worsen, then risk retention, and higher credit enhancement from Fitch, may provide the brake on what might otherwise be further declines in credit.

Huxley Somerville is the head of U.S. CMBS for Fitch Ratings. He can be reached at huxley.somerville@fitchratings.com.

Source: commercial

Regional Malls Look to Reposition as Retail CMBS Space Sweats

The e-commerce contagion has pulled brick-and-mortar retailers, regional malls and shopping centers under the weather, resulting in tenant bankruptcies and mass store closures that have, in turn, put pressure on maturing retail commercial mortgage-backed securities loans predominantly those issued in 2006 and 2007, prior to the financial crisis—and created refinancing hurdles for borrowers.

“The concern is everywhere, and in some cases, it’s a surprising reality,” said Manus Clancy, a senior managing director at Trepp. “Because of the outlook for retail in general, a lot of borrowers are struggling to refinance. The problems are across the sector.”

From November 2016 to October 2017, roughly $29.3 billion in securitized mortgages backed by retail properties were paid off or liquidated, 12 percent of which was disposed with losses, according to data from Trepp. The disposed loans were written off at an average loss severity of just under 55 percent, up from around 47 percent in 2016, while overall CMBS loss severity for all loans disposed within the same time frame fell to just under 43 percent. This year, there have been 244 retail loans—totaling $3.4 billion—that have been resolved with losses at around $1.8 billion, according to data from Trepp and Morningstar Credit Ratings.

“If I had to guess, [retail loss severities] are in excess of 50 percent,” said Andrew Hundertmark, a managing director at CWCapital Asset Management. “In my opinion, a mall was never worth what it was when the loan was made. There were assumptions made to rent growth and tenant strength that didn’t turn out to be true, and 10 years ago then these loans were made, no one saw Macy’s as a troubled retailer. J.C. Penney showed some cracks but wasn’t a concern. People underwrote loans thinking everything was going to stay as it was.”

The rest is history. Retail giants such as J.C. Penney, Sears and Macy’s have closed hundreds of stores as they try to shift investment focus to e-commerce, technology and the use of delivery services. On Nov. 2, Sears announced that it plans to close more than 60 locations by late January 2018, marking 243 total closures since January 2017. The retailer will be left with around 680 stores operating in the U.S., down from 3,500 locations in 2010.

What impact have these closures had on maturing retail CMBS? These loans have been made vulnerable, in part, because they’re propped up by leases from major anchor retailers. When anchor boxes come under increased stress or shutter, it creates a vicious cycle for the mall owner or landlord that can negatively affect overall consumer traffic to small- and midsized in-line retailers such as Radio Shack or Bon-Ton Stores—both of which have recently closed stores—who fill out the mall and benefit from a strong anchor presence.

“The best we can do [as servicers] is try to stabilize tenancy and get them in longer-term leases,” Hundertmark said. “We want leasing arrangements with tenants who can take advantage of co-tenancy if anchors close. Just because you have a mall that’s troubled, it doesn’t mean there aren’t retailers ready to come in. They’re all about traffic counts, and they don’t care so much if Sears is open for business or not.”

Chattanooga, Tenn.-based REIT, CBL Properties’ Mall of Acadiana in Lafayette, La., may be a transitionable survivor. Its debt was originated by Bank of America in 2007, and the loan comprises 63 percent of the roughly $196 million BACM 2007-2 CMBS transaction. The enclosed mall at 5725 Johnston Street was previously anchored by the usual suspects: Sears, J.C. Penney, Dillard’s and Macy’s. According to Trepp watchlist commentary, Sears will shutter its location at the mall by the end of the year, and “there are significant co-tenancy implications tied to the two anchors closing, which may have a significant negative impact on cash flow and potentially collateral occupancy.” The mall is buoyed by its collection of noncollateral tenants such as a Carmike movie theater, which occupies 247,072 square feet—or roughly 81 percent —of usable space, an Old Navy, a Barnes & Noble, an Olive Garden and a Taco Bell. As of November, Trepp commentary indicated that the borrower is “self-managing and leasing the mall and continuing to make monthly payments” despite the mall’s status as nonperforming beyond maturity.

Some major high-end national mall landlords, such as Washington Prime Group or GGP, look to reposition retail space to include entertainment and lifestyle services and national restaurants. Washington Prime has even moved to use online competitor Amazon’s fulfillment lockers to help draw consumers.

“Often, the property will be sold at auction for a discounted price, and now, at lower basis, the new owner can invest and turn them around. It’s a mixed bag,” said Edward Dittmer, a senior vice president of CMBS at Morningstar Credit Ratings.

Smaller entities may not be so lucky or may not have the capital necessary to make a change, being that repositioning an anchor into an entertainment venue or fitness center can be a daunting task. It can sometimes be an even harder challenge as malls in metro areas and gateway cities are just simply outdated and face competition from newer facilities complete with more modern amenities.

westside pavilion interior 2008 Regional Malls Look to Reposition as Retail CMBS Space Sweats
Interior view of West L.A.’s Westside Pavilion mall. Photo: Wikipedia Commons

Los Angeles’ Westside Pavilion is one recent victim of an oversaturated market. The future health of the three-story, 766,608-square-foot mall at 10800 West Pico Blvd. in the suburbs came into question in August after its debt service coverage ratio fell below 1.10x as it faced hurdles with lease terminations—major tenants have begun moving just a few miles away to the Westfield Century City mall.

“West L.A. has too many malls chasing the same customer and it was due for consolidation,” said Macerich Chief Executive Officer Art Coppola—Westside Pavilion’s owner—in the company’s third-quarter earnings call. In October, Macerich, announced its search for a buyer. The $142 million, post-crisis era loan was transferred to special servicer Rialto Capital Advisors for the first time in September due to imminent monetary default. The note comprises just under 13 percent of the remaining collateral in the roughly $700 million WFCM 2012-LC5, Wells Fargo-sponsored CMBS transaction.

“[Many borrowers] view retail as undervalued and come in at a good basis with a plan and some money and an opportunity to make some good return,” Hundertmark said. “In general, people are out there trying to sell the troubled stuff. Regional malls attract a much different buyer set. Strip malls or shopping centers tend to bring in more local buyers, those who know the market and may have owned the property next door and can bring some synergies there with repositioning. The buying universe really differs, and there are a couple names in almost all sales.”

CMBS retail issuance has climbed while delinquencies have fallen 16 basis points to 6.47 since August, Trepp data shows. Changes in the way retail space is being modeled and used have most certainly spurred new investment into the sector and enabled many operators to thrive despite widespread concerns over the performance of the physical retail environment.

“A lot of the new delinquencies we’ve seen have been maturity defaults in 2017 as a result of the 2007 issuance,” Dittmer said. “Some of those loans have not been liquidated yet and are going to take some time to work through. It may take a year or two to see what will be the ultimate resolution.”

Retail delinquencies recovered more quickly than other major property types after the most recent financial crisis, according to Trepp analysts. Special servicers acted more swiftly to foreclose on distressed retail collateral to cut losses, in contrast to the “extend and pretend” approach more commonly employed with other property types, analysts said.

“We’ve talked to a lot of landlords, and most of them are scratching their heads because every location is different,” Hundertmark said. “If we can get a gym in here and a couple of nice, national restaurants, the community is strong enough, so we can keep this moving. But, retail has moved away from us, so what can we do? We can partner with or sell to a multifamily developer to put up a new development. The old retail paradigm has been shattered. There is no one size fits all.”

GGP, a Chicago-based publicly traded owner and operator of high-end malls, has sought to survive retail market headwinds by renovating former department store boxes into restaurants, supermarkets and movie theaters. Meanwhile, GGP is considering a takeover bid by Brookfield Property Partners.

“[Landlords] have got more flexibility and more options than a servicer, and [they’re] definitely getting more creative and more aggressive, taking steps they’d never dreamed of 10 years ago,” Hundertmark said. “The model was you build the mall, and the anchors stores build around you.” That’s no longer the norm as landlords can no longer rely on anchors and must take matters into their own hands.

Some analysts argue that yield can be mined easily in the right market with the right strategy. “The bright side is pruning season is ending,” Clancy said. “Sears and Macy’s have been pruning and closing stores, but what’s left in their portfolio they’re confident in. Simon Property Group and GGP and others who provide experience can still make the business model work. The headlines have outpaced reality. People can still make a good buck with the right strategy, market and tenants. What’s disastrous is older malls, sagging demographics and newer competition.”

National mall landlords who can reposition these assets may be the future of regional malls as they’ve been able to exhibit the clout and capital needed to entice bondholders and take on such projects. And, these companies, like GGP, have seen its stock price climb in recent months.

There’s an interesting variety of players at auction for distressed regional malls, ranging from major national mall landlords to development firms looking to use the typically stellar locations where malls have been built to construct lifestyle centers full of national retail brands and restaurants, along with a residential building to help drive foot traffic and spark cash flow.

“First things we look for from a borrower is do they have the desire and the capital to reposition this mall, and three, do they have a plan?” Hundertmark said. “If they don’t know what they’re doing with the capital, they’re wasting everyone’s time. More and more we’re seeing them come in with a plan and turn it into a discount strip center or what have you.”

With approximately 25 percent of the CMBS arena being retail and roughly $3.1 billion in retail CMBS set to mature in the next 12 months, many borrowers may be done wiping their noses and ready to lick their chops.

Source: commercial

As Malls Suffer, Investors Study Retail Hedge Options

O.K., so the retail apocalypse might arrive with the next recession, the next earnings call or the next time a cold front moves through.

What’s a panicked trader to do about it?

The news is grim for real estate investors, according to bankers and economists who study the sector: There may not be an easy or straightforward answer for protecting yourself from the storm.

“One of the problems with real estate is that you can’t go in and out like you can elsewhere,” said Milton Ezrati, the chief economist for the financial communications agency Vested. “You’re buying a portfolio or a group holding. You have no liquidity to speak of.”

That presents a twofold difficulty for property owners when a sector like retail turns south. First, it can be hard for investors to build a portfolio with the right level of diversification to protect against a highly specific risk, like loan defaults among low-quality American shopping malls.

Unlike in the stock market, where an individual investor can buy into an index fund for $1,000, in real estate, no one but the largest institutions can afford to own a large and varied set of physical assets. Buyers of real estate investment trusts may face the opposite problem, taking on exposure to troubled segments they may wish to have avoided.

“If you’re in property, you’re by definition concentrated,” Ezrati said. “I don’t know of hardly anyone who owns hundreds of retail outlets across the country.”

The second problem is that timing the market—a daunting problem even in well-traded asset classes like equities or corporate bonds—is all the more difficult in a viscous sector like real estate. Even determined sellers might find it takes weeks, months or years to unload a portfolio—especially in a spooked market.

Refusing to allow the pursuit of a perfect answer to banish decent alternatives, retail bears have at times relied this year on an otherwise obscure tactic to protect against risk in the sector: bets on a set of indices, called CMBX, synthesized from options contracts on securitized commercial mortgages.

Introduced by the financial services company Markit in 2006, the CMBX indices are split by year of issuance. CMBX 1, for example, referenced a set of 25 fixed-rate conduit commercial mortgage-backed securities deals that closed in 2005. Broken into tranches to mirror the underlying transactions’ various rated classes, a CMBX index is designed to mimic the value of the underlying securities—just as the Dow Jones Industrial Average apes the U.S. stock market.

In general, the CMBX indices cover a representative sample of a given year’s conduit transactions. Today, with the retail sector under vastly heightened scrutiny, underwriting on retail CMBS loans is far more selective than it was earlier in the business cycle, and the CMBX’s more recent iterations—the latest is Series 10—offer less exposure to troubled malls.

But one historical series in particular, CMBX 6, which represents transactions that closed in 2012, happens to reflect a higher level of retail issuance than its peers.

Taking advantage of an index whose performance correlates with retail’s fortunes, investors this year began heavily shorting the indicator, buying insurance contracts against its collapse in much the same way that the traders chronicled in The Big Short bet against residential mortgage bonds.

The index “has definitely reacted to the headlines, so it has definitely been an effective way to state that negative retail view,” said Roger Lehman, a managing director at Credit Suisse who heads the bank’s CMBS research.

The bonds that CMBX 6 references have, in general, performed well. But the series has a significantly higher concentration among retail properties than its later peers, flagging it as an obvious barometer of the hot-button issue of retail decline.

“Early this year is when you saw a material repricing of Series 6 relative to the other indices, as well as relative to the broad credit markets,” said Will Goldsmith, a director at Credit Suisse. “[The index] keeps weakening with all of the noise around malls.”

Brian Phillips, the director in charge of CMBS research at AllianceBernstein, said that as the Series 6 loans have matured, the index has grown to become more representative of retail strife.

“The loans originated in Series 6 began life [with] a 63 percent loan to value, but through amortization, [debt levels decline] over the life of the mortgage, so you have all this effective de-levering,” Phillips said. But, because some lower-quality malls have begun to miss payments over the last few years, “you [still] have significant leverage in the retail space.”

That feature has drawn the attention of investors seeking to hedge against the risk of accelerating retail decline—a tougher proposition than it may appear. It’s not straightforward to stake out positions that will perform better the more malls that close, the AllianceBernstein banker said.

“Could [an investor] take a long position in warehouses or [a long position in] pure-play e-tailers?” Phillips said. “There might be another way to express that [negative] view [on retail],” but any such trade would require creativity.

Even so, in Phillips’ mind, those less direct approaches are a better strategy than a bet against CMBX. The problem? CMBX insurance contracts are just too expensive, he said.
The swaps follow a pay-as-you-go format, which means that those buying protection must pay ongoing premiums to maintain the position.

“If you’re going to be a protection buyer of [BB-rated CMBX tranches], you’re going to have to pay me a 5 percent annual coupon,” plus a large upfront fee, Phillips said. If the underlying loans incur no losses, “I’m going to be getting a yield of 14.3 percent.”

“In a world of low carry and tight spreads, it is a large coupon to pay out every month,” Goldsmith said. As a result, “no one is naked short [selling] these instruments.”

Instead, many investors have used the index to make short-term bets about market sentiment.

“If you’re a protection buyer and spreads continue to wider, you can exit at a better level,” Phillips said. “You can make money just by playing the momentum. The guys who came out with these white papers, they’ve done O.K.”

Those “guys” would be Alder Hill Management, a New York-based hedge fund run by Eric Yip. In February, The Wall Street Journal reported, Alder Hill shopped his short CMBX 6 bet to a group of Wall Street investment firms. The fund, according to the Journal, gained 8 percent in the first quarter of 2017—not because of rampant mall defaults but because bearish retail sentiment allowed the fund to sell its short positions at a better value.

A representative from Alder Hill declined to comment on the firm’s strategy for this story.

Because holding the position is so expensive, deciding when to get in and out can make or break the play.

“There is a healthy debate around the timing [of retail’s demise impacting CMBS],” Goldsmith said. “There are people in the camp that the issue will be near term—a year or two out—versus maybe a slim majority who view these only as maturity issues, which means it’s even further than four or five years out.”

“To maintain a hedge in the position in the long term would be onerous,” Ezrati said. “It’s only there for the panic moments.”

As a result, the level of the trade’s appeal has everything to do with investors’ varied views on retail. In all, the CMBX 6 short is better suited to hedge funds aiming for a risky short-term profit in momentum trading, bankers said, than institutions looking to hedge against downturns over a longer horizon.

And all agreed that the storm isn’t coming just yet.

“Retailers don’t want to be 100 percent online right now,” Phillips said. “They know that the conversion rate is higher in the store. Some [business] still needs to be conducted in the store.”

And the trend is more varied than at first blush.

“It’s noteworthy that more retail opened than closed in the last two years,” Ezrati said. “So the economy is creating some kind of retail demand. I don’t think this thing where Amazon swallows the world will happen quite as fast as people think.”

According to Phillips, “The point is, there’s an optimal mix” between retail and e-commerce. That idea leads him to believe that malls won’t disappear overnight.

“[Retail] might be a train wreck,” he said, “but it’s a very slow train wreck.”

Source: commercial

A Credit Analyst Who Rates

Commercial mortgage-backed securities have traveled a rocky road during Mary MacNeill’s two decades rating CMBS bonds at Fitch Ratings—or, to be more precise, a smooth road with one very large boulder. When issuance in the sector nosedived during the financial crisis 10 years ago, many wondered whether the asset class would ever again rise to its former vibrancy. Issuance may not have returned to 2007 levels yet, but the 51-year-old College of Saint Rose graduate remains optimistic about the sector’s strength, citing improved underwriting. The New York City-based managing director spoke to Commercial Observer earlier this month about Fitch’s rating process, the shape of the market and what makes a good credit analyst.

Commercial Observer: How did you become a CMBS analyst?
Mary MacNeill: I was in the accounting-financing world, and that’s where I started out at Fitch. I started out at the analyst level and worked my way up. A number of us in the senior staff in CMBS team did that. So, I’ve actually been in the CMBS group for about 20 years.

And how large is your team now?
I’m responsible for a group of about 20 analysts.

What was CMBS like in the early days? Were deals any less standardized?
CMBS did a very good job of normalizing or standardizing the reporting package from early on. I was involved in some of those discussions, as far as what [information] needs to go into what is now the Commercial Real Estate Finance Council’s investor reporting package. But the industry was certainly growing—it wasn’t as established as it is now.

Tell me about some of the challenges of rating structured finance deals, compared with corporate debt, which had long been your industry’s bread and butter.
I think one of the challenges that we’ve always faced is to ensure that a BBB [rating] in corporates is the same as a BBB in structured finance. And that question comes up pretty often: the consistency among the ratings and the meaning of the ratings.

Consistency means that a given rating denotes the same likelihood of default in all sectors?
Yes, it would be the same default probability.

How does Fitch make that happen?
We go through a pretty rigorous process in looking at our criteria every year, and post-crisis, the process around it has become much more formalized. We have different groups who oversee the development of our models and our criteria and the associated backtesting. We go through an entire process each year to provide backup for how we got to certain assumptions that are integral to our criteria. We publish a new criteria report every year. That doesn’t necessarily mean we change the criteria, just that we refresh the backtesting that we’re doing.

What was it like covering this sector during the financial crisis?
For a while, everyone had been questioning whether we were in a bubble. There was a lot of issuance in 2006 and 2007. That probably [lasted] until the crisis with Lehman happened, in August of 2007, when issuance just really fell.

What was the outlook for the future of the market at that point?
I think there was certainly a feeling that the market wouldn’t come back. There were mixed views on would it come back at all, or [whether it] would come back much smaller. As we’ve seen, it certainly has come back much smaller—to a more normalized size. There were a lot of conversations in the industry around, “What if the market doesn’t come back?” And I think that still is a conversation today. Borrower satisfaction is a big topic. I think that’s one of the reasons that people have focused on how we can tighten language in the deals and how we can bring more discipline into the entire process so we don’t fall back to the same crisis level.

How has recent regulation affected the pace and quality of business?
The regulatory side has its plusses and minuses. But I think there has certainly been some self-discipline within the industry to keep the industry going. The industry is self-disciplined. But there are fewer originators today than even a few years ago, and some of that is regulatory. With the regulation that a senior manager has to sign for the deal, originators have certainly dropped off. We had a high of about 40 [originators], and now we’re down to 20 or fewer.

Did the crisis lead Fitch to significantly re-evaluate ratings criteria?
There haven’t really been significant changes to the criteria themselves. What has improved is the discipline around the cash-flow analysis. As I said before, pro forma income is a good example. Now, we have outside people sit in on our credit committees, both on our ratings decisions and on our criteria development.

And you continue to surveil deals annually?
At a minimum. Once the deal closes, it comes over to the surveillance side. Hopefully there are no delinquencies or changes in the pool. We’re monitoring over time for delinquencies, transfers to special servicing, and then year over year, we’ll look at how the cash flow and the underlying properties fluctuated. We focus a lot of our time on the larger loans in the pool—the top 15 especially. We go through and compare what it looked like at origination, how we looked at it from origination and how it performed over time. And then we look at overall pool-level losses.

What were the biggest trends of 2017?
Delinquencies have been down. But when we talk about delinquencies overall for the market, we separate CMBS into 1.0 and 2.0—1.0 being pre-crisis and 2.0 being deals after that. As far as 2.0, the deals have been pretty stable over time. We really don’t see a whole lot of term default risk. Any risk we do see is more at maturity. Interest rates have been low. So the delinquencies and the defaults that we’ve seen—and most of the rating movement—has appeared on the 1.0 transactions.

Many of those downgrades were to the already distressed classes, and the upgrades were more to the top of the stack. Some of those had maybe been downgraded before, and had better-than-expected recoveries, so they were upgraded. In some cases we have defeasance that covers a good percentage of the pool, so we would have upgraded the top because that’s what you’re left with. And on the 2.0 transactions, we only had a little bit of upgrades and downgrades on two transactions this year, where we had two malls that had got into trouble.

I would imagine that retail is a significant concern for you.
There’s definitely a shift in consumer spending. Clearly the malls in locations where they have other competition, those are probably the most of concern and the easiest ones to identify as being of concern.

How important is a mall’s location and nearby competition?
There are a number of malls that are out in tertiary locations that, if they lose their anchors, could be of concern. That’s especially true if you have an operator that doesn’t have the deep pockets to revitalize the area or if you don’t have the demographics to support the size of the mall. The better operators are able to redevelop the malls and put in more entertainment concepts. Make the mall more of an experience as opposed to retail shopping. Online shopping will continue to make up a bigger percentage of overall sales.

In past coverage, we’ve seen sentiment that industrial properties are gaining prestige.
Industrial has never been a large segment of the overall population. I don’t think it has increased significantly. We look closely at where [the site] is—is it close to enough transportation hubs? [But industrial] hasn’t really had a big impact up to this point.

Do trends like that inform ratings analysis—or does your analysis of the fundamentals guide your thinking about the big picture?
We have meetings quarterly to discuss trends within each of the property types, so that might frame how we might look at deals. For hotels, we’ve been concerned about overbuilding and being at a peak for quite a while now, so we’re scaling back our revenue-per-available-room benchmarks to 2014 levels. With multifamily, we [think it might be] at or near its peak, and we’ve been scaling back cash flow to 2016 levels.

So the trends inform the standards that you compare the data against?

What are Fitch’s takeaways from the first year of risk retention?
We’re credit neutral on risk retention. That doesn’t factor into our analysis, and we usually don’t know what structure [the transaction] is going to use for risk retention until the deal is close to closing. But we have seen a slight improvement in underwriting in 2017, so that could be influenced by risk retention. It’s kind of early to tell at this point.

Do memories of the crisis continue to drive underwriters to be more conservative than they were 10 years ago?
I think people have short memories. I think the crisis is kind of awhile [ago] now. That’s why we’ve been credit neutral on risk retention.

How do folks find their way into your line of work?
I think the real estate aspect of CMBS is really what drives people to be interested in it. It’s a more tangible asset. I think that that’s a big plus for people. On the new deal side, we go out and see a lot of the properties, so they get to go out and travel. I think that’s very appealing.

What do you have your eye on for 2018?
A lot of the same trends that we were looking at for this year will probably carry over into next year. Concerns with multifamily and hotels continue to [catch our attention], and retail will obviously be a concern. We’ve seen less of that in the newer deals. Of course, we’ll continue to stay on top of the credits.

Source: commercial

Closing 40 Stores, Bon-Ton Sets Off CMBS Alarm Bells

Fittingly, Cyber Monday brought yet another downbeat omen for nationwide retail tenants.

The Bon-Ton Stores announcement this month that it will close 40 stores—15 percent of its total portfolio—could imperil a swath of more than a dozen securitized commercial mortgage deals, according to a report yesterday by Morningstar Credit Ratings.

Bon-Ton, a Milwaukee and York, Pa.-based company that operates department stores under six brands primarily in the Northeast and Midwest, announced the closures in its lachrymose third-quarter earnings call. Same-store sales fell nearly 7 percent compared with the prior year, and the company posted a net loss of $45 million.

“While results in the third quarter fell short of our expectations, we are taking more aggressive actions to fuel improved performance as well as strengthen our financial position,” William Tracy, Bon-Ton’s chief executive officer, said in a statement.

The retailer, which runs stores under names including Boston Store, Younkers and Bergner’s, has not yet announced which of its 260 stores will be shut down by the end of next year. According to Morningstar, 59 commercial mortgage-backed securities deals have exposure to one of Bon-Ton’s locations. Fourteen of those deals are now especially concerning, said Morningstar vice president Steve Jellinek, an author of the report.

“For a couple of these loans, Bon-Ton’s leaving is going to mean that multiple anchor stores have vacated” recently, Jellinek said. “That pretty much spells the death knell for the property—especially if you’re not in a prime location.”

That would mean trouble is ahead for the malls that led Morningstar to sound the alarm. Located mainly in small cities far from major metropolises, like Norfolk, Neb., Alexandria, Minn. and Genoa Township, Mich., some of the shopping centers that host a Bon-Ton store would see occupancies drop to troubling levels in the event of a closure. Without its Bon-Ton anchor, for example, the Schaumburg Mall in Schaumberg, Ill. would be only two-thirds leased. At the Wausau Center in Wausau, Wis., occupancy would drop to 53 percent if Bon-Ton closed its store there.

The concerns highlight the disconnect between how malls were originally designed and the preferences of modern shoppers.

“When malls were initially conceived and built, the thought was, ‘Let’s build them around the anchors. They’ll feed shoppers to the in-line tenants,’” Jellinek said. “Over the past five or 10 years, with increasing competition from a multitude of other shopping options, the anchors became less and less important.”

As multiple anchors close at a single mall, property managers may face a spiraling crisis of declining rent rolls.

Non-anchor “tenants have lease provisions that if one or two anchors close, the tenant has discounted rent for a period of time,” Jellinek said.

If the anchor spot isn’t filled, smaller tenants may even have the option to vacate their lease early, without penalty.

Some of the embattled CMBS transactions seemed doomed from the start. As its largest source of concern, Morningstar pointed to University Mall in South Burlington, Vt., which secures 44 percent of the Lehman Brothers-sponsored LBCMT 2007-C3 transaction. At underwriting, its scant debt service coverage of 1.14x “left it unable to withstand tenant turnover and declining rents,” Morningstar noted in the report.

Appraisers valued the shopping center at $44.8 million in July, down over 50 percent from the value allocated to the CMBS transaction.

But even deals underwritten in the more risk-conscious atmosphere that swept in after the financial crisis face a bleak path forward.

If the Boston Store at Southridge Mall in suburban Milwaukee were to close, it would be the third anchor tenant the site has lost in a year. Sears closed shop there in September, and Morningstar expects Kohl’s to wind down its location in the mall by the end of 2018.

Such closures can lead to a vicious cycle of decline for retail properties, according to Morningstar. Without much surplus lease income to speak of, managers have to put off re-investing in improvements to bring their properties up to 21st century standards.

“There’s often barely any profits to put back into the property,” Jellinek said.

The Morningstar analyst said he’ll be keeping a close eye on securitized shopping center loans as Bon-Ton announces its specific closures.

“We’ll be watching for same-store sales,” Jellinek said. “They haven’t been growing—in fact they’ve been negative—for a long time. The final shoe dropping would be [Bon-Ton’s] filing for bankruptcy.”

Source: commercial

CCRE Provides $53M in CMBS and Mezz Financing for Pennsylvania Multifamily Property

Meridian Capital Group has arranged $52.5 million in financing for Riverview Landing at Valley Forge—a luxury multifamily property in Eagleville, Penn.—on behalf of Liss Property Group, Commercial Observer has learned.

CCRE provided the debt, sources familiar with the transaction told CO, which combined a $44 million senior CMBS loan with a $8.5 million mezzanine loan. 

Officials at Meridian declined to confirm the lender’s identity or the individual loan amounts, but said the 10-year financing package has a blended rate of 5.68 percent and full-term interest-only payments. Additionally, an 82.5 percent loan-to-value was achieved by combining the senior CMBS loan with the mezzanine debt. 

Riverview Landing at Valley Forge is located at 1776 Patriots Lane in the Valley Forge suburb of Philadelphia. The property consists of 310 units across six buildings. Property amenities include a swimming pool, grilling stations, a fitness center and a 5,000-square-foot clubhouse with a kitchen, a fireplace and a billiard room.

Meridian’s Russ Drebin and Steven Halpert negotiated the deal. 

“The proceeds of this financing package were used to retire a bridge loan that was used to renovate approximately 30 percent of the units,” Halpert said. “The success of this capital improvement initiative allowed Meridian to secure favorable permanent financing with mezzanine debt that includes funds allocated for the renovation of the remaining units.”  

As previously reported by CO, Liss Property Group—a Pennsylvania-based, family-owned real estate investment firmpurchased the apartment complex for $55 million from Texas-based Milestone Apartments REIT in October 2015. Greystone provided a $46 million loan for the acquisition and introduced Liss Property to its joint venture equity partner in the transaction, Azure Investments.

“We identified the project and came in very aggressive because we knew we would be an underdog in purchasing it,” William Liss, the founder and chief executive officer of Liss Property, told CO at the time of the acquisition. “We haven’t owned a property of this size and the purchase price was about double what we have bought in the past. We recognized the tremendous upside.”

A spokeswoman for CCRE did not immediately return a request for comment.

Source: commercial