Credit Suisse is marketing bonds backed by a $280 million floating-rate mortgage collateralized by 27 standalone retail properties leased to Mills Fleet Farm.

CSMC Trust 2016-MFF will issue six tranches of notes with preliminary ratings from Moody's Investors Service; the senior, $60.4 million tranche is rated triple-A.

Mills Fleet is owned by private equity firm Kohlberg, Kravis & Roberts. All of the properties in the pool are occupied under a master lease by Mills Fleet Farm, and are a majority of the 35 stores in the chain with stores in Wisconsin, Minnesota, Iowa and North Dakota. The company, founded in 1955 and with $1.5 billion in annual sales, was purchased by KKR in February of this year.

Moody’s reports the retailer’s performance has been enhanced with strong sales figures – the company’s historical same store sales increased annually from 2007 and 2014 with the exception of one year, and the Mills Fleet Farm chain has outperformed competitors including Cabela’s, Lowe’s, Target, The Home Depot, Tractor Supply Co. and Walmart each year.

The company also enjoys a “healthy” occupancy cost ratio due to the master lease arrangement, along with a significant equity investment by deal sponsor Davidson Kempner Capital Management. The Davidson Kempner hedge fund acquired the properties in a sale lease-back with KKR and Mills Fleet for $490 million. The pool itself also benefits by the inclusion of multiple properties, which provides lower cash flow volatility and allows the diversion of excess flow from one property to provide support for a lower-generating property.

However, the limitation to a single master lease agreement for all the properties concentrates the risk in one entity with Mills Fleet Farm Group. And despite the strong corporate-wide sales figures, the 24 properties in the portfolio that have been opened since 2011 has seen declining levels of sales per-square-foot (including firearms and gasoline). Most stores are also located in lower-population secondary/tertiary markets.

The properties in the pool are encumbered with $38.5 million of subordinated, non-pooled mezzanine debt that accounts for 12.1% of the acquisition financing, according to Moody’s. That pushes the first-mortgage loan-to-value ratio of 98.7% to 112.2% when accounting for the subordinate financing.

The trust’s two-year loan (with three one-year extension options) carries a coupon of Libor plus 4.02%, and is non-amortizing.


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