DDR Corp. and Madison International Realty are tapping the commercial mortgage bond market to finance a portfolio of 52 retail properties with a combined 7 million square feet.
The two firms jointly obtained three separate loans totaling $706.7million from Citigroup and Morgan Stanley; the loans are secured by three separate pools of properties. The three loans are being securitized in a single transaction, dubbed CGMS Commercial Mortgage Trust 2017-MDDR. However the notes to be issued will be secured by one of the portfolios.
DDR, a publicly traded real estate investment trust, has owned and managed these assets since 2007, and has invested $73 million in them over this period.
Although the retail sector has been maligned, Morningstar believes that the collateral properties are a “solid collection of assets, based largely on the concentration of grocery-anchored properties, steady occupancy, and stable store sales.”
However, the rating agency has concerns with several individual properties, largely based on sluggish anchor-store sales, high occupancy costs, near-term rollover, and the threat of co-tenancy clauses that may be triggered if an anchor vacates.
Pool A consists of a $218.7 million loan secured by 13 shopping centers with 2.3 million square feet. This loan has a five-year term and pays a fixed rate of interest at 3.47%.
The $274.8 million Pool B loan is collateralized by 21 retail properties totaling 2.8 million square feet. Finally, the $213.2 million Pool C loan contains 1.95 million square feet of net rentable area across 18 properties. Pool B and Pool C are floating-rate loans that have two-year initial terms, with three extension options. Pool B has a spread of 1.55% over one-month Libor, with an initial interest-rate cap of 3.0%. Pool C has a Libor spread of 1.70% and a 3.0% Libor strike rate for the initial term.
None of the loans pays down principal, which increases the refinance risk at maturity. Based on Morningstar values, all pools exhibit high leverage: Pool A has a loan-to-value ratio of 100.8%, Pool B has 89% LTV, and Pool C has a 91.7% LTV.
No subordinate debt is permitted on any of the properties.
Morningstar expects to assign an AAA to the senior tranche of notes to be tied to each loan. The senior tranche tied the Pool A loan benefits from 49.536% credit support; the senior tranche to be tied to Pool B benefits from 42.329% credit support; and the senior tranche tied to Pool C benefits from 46.364% credit support. The rating agency is not rating any of the subordinated notes to be issued.
Citigroup is expected to a portion of securities from tied to each loan pool in order to comply with risk retention.