Five commercial mortgage securitizations totaling some $3 billion hit the market Tuesday and Wednesday. This marks a return the pace seen before last week’s presidential election, when deal flow slowed considerably.
Issuers have been rushing to complete deals before risk retention rules take place at the end of December. However one of the deals is designed to comply with the rules, which require sponsors to hold on to 5% of the economic risk of their deals. It is one of only four to date.
CD 2016-CD2
Deutsche Bank and Citigroup have teamed for the $975 million CD 2016-CD2. The two sponsors will retain 5% of each class of securities to be issued by the deal, for a total of $48.77 million, according to Fitch Ratings and Kroll Bond Rating Agency, which are rating the deal. In addition, the effective interest rate on their holdings is equal to the weighted average coupon rate of the deal. This method of comply is known as the “vertical strip.”
The notes to be issued are backed by 30 loans on 37 properties. The pool has leverage statistics in line with recent Fitch-rated multi-borrower transactions. Fitch calculates the debt service coverage (DSCR) ratio at 1.19x and the loan-to-value (LTV) ratio 105.8%. However, excluding two high quality loans, 10 Hudson Yards (6.9% of the pool) and 667 Madison Avenue (4.1%), the pool’s DSCR would be lower (1.17x) and its LTV higher (110.7%).
Among other risks, 11 loans (58.2% of the pool) pay only interest, and no principal, for their entire terms. Another seven (25.9%) pay only interest for part of their terms.
The pool is also geographically concentrated. Ten loans (48.8% of the pool) are located in New York, including six of the top 10.
Bank of America Merrill Lynch, Morgan Stanley and Wells Fargo have also teamed up on two CMBS deals this year with a retained vertical strip.
The Bancorp Commercial Mortgage 2016-CRE1
The Bancorp Bank is marketing $280 million securitization of 22 commercial mortgages collateralized by 24 properties located in 12 states. All of loans were contributed by The Bancorp Bank.
Among the strengths of the deal, according to Moody’s Investors Service, is the quality of the properties, strong market composition, lack of single tenant concentration and the high concentration of loans used to acquire properties, as opposed to refinancing them.
Offsetting these strengths are the pool’s high LTV, as measured by Moody’s, and the lack of amortization. All of the loans in the transaction pay only interest, and no principal, for their entire terms. This increases the risk that they could prove difficult to refinance should real estate prices decline.
Moody’s also notes that a number of the properties are in a “transitional phase of their lifecycle.” In other words, they are operating at below market occupancy; under renovation, or have suffered due to lack of financial strength of previous ownership. “We believe there is an increased risk that the properties will not achieve stabilized cash flow relative to other previously rated large loan transactions,” the presale report states.
Wells Fargo Bank, National Association will be the master servicer, and Trimont Real Estate Advisors, LLC will be the special servicer for this transaction.
MSC 2016-UBS12 – Moody’s
Morgan Stanley’s latest deal, the $824 million MSC 2016-UBS12, is collateralized by 42 loans totaling secured by 72 properties, according to Moody’s.
Among the positive features, according to the rating agency, is the concentration of pool in major markets and low concentration of buildings with a single tenant.
Offsetting these strengths are the low diversity of property type and high leverage. Moody's calculates the DSCR at 1.68x , which is below the average of 1.76x for transactions it has rated this year.
It puts the LTV at 117.6%, which is above 2016 average for deals it has rated of 113%. The pool contains one loan structured with subordinate debt. With the additional debt, the Moody's total debt LTV ratio rises to 118.4%.
RCMT 2016-3
ReadyCap Commercial is marketing a $162.1 million securitization of 60 small balance commercial mortgages on 63 properties. The loans range in size from $536,947 to $10.1 million for the largest loan, Berkeley Tower (6.3% of the pool), a 49,390 square foot suburban office building in Berkeley, California.
All of the loans were originated by ReadyCap.
The pool’s weighted average seasoning is 14.3 months, as one loan (5.0%) was originated in 2007, eight loans (13.6%) were originated in 2014, 17 loans (26.3%) were originated in 2015 and the remaining 34 loans (55.2%) were originated this year.
ReadyCap, was formed in September 2012 and began originating loans in March 2013.
Although the sponsor has a limited track record, it is a wholly owned subsidiary of Sutherland Partners, LP he overall pool has a relatively low weighted average in-trust appraisal LTV of 55.0%, which compares favorably to the 58.6% average of the 17 CMBS conduits KBRA has rated in the last six months.
A significant portion of the pool (22 loans, 43.9%) is comprised of loans whose proceeds were used to refinance prior debt and return equity to the borrower. The reduction of the related sponsor’s equity may reduce the incentive of the borrower to keep the loan current in periods of economic stress, resulting in higher defaults and loss severities.
KBRA expects to assign a triple-A rating to the senior tranche, which benefits from 38.8% credit enhancement.
Wells Fargo Commercial Mortgage Trust 2016-LC25
Wells Fargo, which has already launched or completed two risk retention compliant CMBS, is marketing a $954.9 million deal that is not designed to comply with the rules. The collateral consists of 60 fixed-rate loans secured by 135 properties, according to Moody’s.
The collateral pool has an LTV ratio of 114.7%, though this would be higher, 124.6%, if not for the inclusion of a few loans with relatively low leverage, including one on a trophy building in Manhattan, 9 West 57th, and a number of loans on cooperatives.
Wells Fargo contributed 28.9% of the loans; Ladder Capital financed another 43.5%, Rialto Mortgage Finance 20.9%, and National Cooperative Bank 6.7%.
