Brookfield Property Partners is tapping the commercial mortgage bond market to refinance three regional malls it acquired through its purchase of GGP Nimbus, according to S&P Global Ratings.
In August, Brookfield closed on the purchase of the interest it did not already own in GGP. This business, which has been folded into Brookfield Properties Retail Group, has now obtained a $375 million floating-rate mortgage on the three properties from Goldman Sachs.
This loan pays only interest, and no principal, for its entire fully extended term of five years and will be divided into six components with an initial weighted average component spread of 3.75%. The spread is required to increase by 0.25% upon commencement of the first extension term and by an additional 0.25% upon commencement of the second extension term.
The three malls – Riverchase Galleria in Hoover, Ala. ($164.2 million of the allocated loan amount); Columbiana Centre in Columbia, S.C. ($137.3 million) and Apache Mall in Rochester, Minn. ($73.5 million) – have a total of 3.1 million square feet, of which approximately 1.97 million is trust collateral.
To facilitate this recapitalization, Australia's sovereign wealth fund (Future Fund) acquired a 49% interest in the portfolio and invested approximately $152.3 million of fresh equity, according to S&P.
The rating agency considers the transaction to be moderately leveraged; it puts the loan-to-value ratio, based on what it considers to be the long-term sustainable value of the property, at 84.8%. The LTV based on appraised value is only 56.5%.
Though considered to be Class B mall, the properties generally maintain strong market positions within their respective primary trade areas, according to Kroll, which notes that the properties “anchor local and regional commercial activity because of their above-average regional access and visibility from interstate and regional thoroughfares.” Moreover, each trade area's demographic profile generally illustrates mature populations with average household incomes that are near or exceed the national average.
Among the risks to the deal, Herberger’s, a tenant at Apache Mall, is closed for business as of late August 2018. Bon-Ton Stores Inc., the parent company of Herberger's, has announced that it will liquidate all of Herberger's stores nationwide by the end of 2018. Herberger's gross rent was excluded from our long-term sustainable net cash flow. Furthermore, at origination, a $3.9 million guaranty was provided by GGP Nimbus for retenanting and redeveloping the former Herberger's space. (S&P doesn’ rate the guarantor, so it provided no additional benefit for this upfront reserve.)
The malls also have exposure to other retailers that have announced stores closures, including JCPenney (all three malls), Macy's (Riverchase Galleria and Apache Mall) and Sears (Riverchase Galleria). S&P notes in its presale report that closures of anchor stores could hurt the collateral by triggering lease terminations or rent relief due to co-tenancy clauses. However this risk is partially mitigated by the consideration we gave to each regional mall's trade area, competitive position, inline retailer composition and performance, anchor performance relative to broader chainwide performance, and our view that the anchor spaces could likely be retenanted if they were vacated. The portfolio have already achieved some level of success repurposing previously vacated anchor and major spaces.
On the plus side, the portfolio has a diverse tenant mix of national anchors (over 50,000 square feet), major retailers (between 10,000 and 50,000 square feet.), and inline retailers (less than 10,000 square feet). The diversity of the retail income lowers the risk of sudden drops in the loan's capacity to meet its debt service obligations, says S&P.
The portfolio's year-over-year net cash flow (excluding management fees, which are not reported historically) increased 2.3% in 2016 and 2017, yet decreased 0.5% as of the trailing 12 months ended June 2018. However, the portfolio's inline sales per square feet remained steady since 2015, ranging from $428 to $443, as reported by the issuer.
