Mall operator Brookfield Properties Retail Group is tapping the commercial mortgage bond market to partially finance a new mortgage for a cross-collateralized portfolio of three regional malls, including one on the verge of potential failure.
According to S&P Global Ratings, the Chicago-based real estate investment trust will sponsor a $294.9 million bond offering via Morgan Stanley, backed in part by $395 million mortgage that is part of a split-loan structure financing for a new two-year first mortgage for the mall portfolio.
The mortgage, which has three one-year extensions, also has an $84.5 million pari passu companion loan that will not be included in the transaction, dubbed Morgan Stanley Capital 1 Trust 2019-BPR.
Brookfield, owned by affiliates of Brookfield Asset Management, has owned the three mall properties since 2014, and recently recapitalized the portfolio with a $188.7 million investment from an Australian sovereign wealth fund, Future Fund, that will jointly sponsor the note offering.
The deal will include $163 million in Class A notes paying principal and interest with preliminary AAA ratings from S&P. Remaining notes include $38.5 million in Class B notes (rated AA-), $28.9 million in Class C notes (A-), $35.4 million in Class D notes (BBB-) and an unrated Class E tranche sized at $28.5 million. (Brookfield will also market two AAA-rated note classes paying only interest proceeds on the senior-note tranche.)
The bonds will be backed by proceeds from three malls’ tenant-lease revenue, although only two of them — Lynnhaven Mall in Virginia Beach, Va., and Coronado Center in Albuquerque, N.M. — are currently generating positive cash flow growth year over year. S&P states the Lynnhaven and Coronado malls “generally maintain strong market positions” and “capture a medium-to-high share of department store-types sales” in their regions.
The two malls' performance will buoy the troubled Governor’s Square Mall in Tallahassee, Fla., which lost Sears as an anchor tenant in February and potentially may see Macy’s and J.C. Penney depart in the near term. The 1.03 million-square-foot mall has had a 16.6% decline in cash flow since 2015.
S&P says the loss of all three anchor stores for Governor's Square is a “real possibility,” prompting the ratings agency chose to only use the underlying land value ($16 million) of the mall (appraised at $105.5 million) in assessing its loan-to-value estimate for the portfolio.
“The sponsors have developed a business plan to reposition the mall to target a more youthful demographic, but should those plans not come to full fruition, or one or more of the remaining anchors go dark or vacant, we believe there is a reasonable chance the mall fails,” S&P’s report cautions.
Brookfield has spent $15.5 million in renovating Governor’s Square since 2014, and has designated $9.25 million in proceeds to redevelop and re-lease the vacant 185,000-square-foot Sears location, according to S&P.
As a road map for its plans for Governor’s Square, Brookfield has successfully re-leased vacant anchor locations at the other two malls in recent years. The REIT, for example, spent $60.1 million in renovations and store location/size makeovers at Lynnhaven and helped turn a vacant Lord & Taylor anchor location into a prime spot for three smaller tenants (L.L.Bean, Maggie McFly’s and Cooper’s Hawk).
The Brookfield REIT has one of the largest retail real estate portfolios in mall properties across the country, with 163 locations in 42 states. Australia’s Future Fund (which has $147 billion in assets under management) acquired a 49% interest in the three-mall portfolio last August with its $188.7 million investment, according to S&P’s report.
The net cash flow of the malls is estimated to cover a 1.63x debt-to-service coverage ratio, according to S&P.
