Deutsche Bank and JPMorgan Chase are readying $300 million of commercial mortgage bonds backed by a single asset – a San Francisco shopping mall.
The collateral for the deal, dubbed DBJPM 2016-SFC, is a $306.9 million portion of a $558 million first-lien mortgage on Westfield San Francisco, a nine-story, 1.4 million square foot retail and office property located along Market Street in the Union Square neighborhood. (The remaining portion of the loan is expected to be securitized in a future transaction.)
The borrower, Westfield America, a real estate investment trust, used the mortgage to refinance existing debt, some of which was securitized in 2007, just before the financial crisis. Westfield appears to be refinancing early; the securitized loan is likely not due before next year, since most CMBS loans have 10-year terms. Another portion of the original financing package also comes due in 2017, but can be extended for one year, according to Kroll Bond Rating Agency.
While conditions in the commercial mortgage bond market are not ideal, refinancing now allows Westfield to avoid any additional disruption that might occur over the next year as participants grapple with impending risk retention rules.
In order to do so, however, the borrower had to contribution an additional $1.7 million in equity. This could reflect the fact that the property is not worth quite as much as it was pre-crisis. It could also reflect the fact that investors are not willing to lend as much against the value of the property. The loan has a loan-to-value ratio, as measured by KBRA, of 79.3%. This is lower than 10 of the single-asset transactions backed by malls that KBRA has rated to date, which ranged from 69.3% to 94.4%, with an average of 81.4%.
The relatively low leverage serves as a buffer against future declines in the value of the property. That’s important, since the 3.394% loan pays only interest, and no principal, for its entire 10-year term. In other words, there is no amortization.
KBRA cited as its primary ratings considerations the historical performance of the property and its prime location. For the trailing 12 months ending in March, Westfield San Francisco reported comparable in-line tenant sales of $915 per square foot. That’s sales nearly twice the average in-line sales for US malls of $471 per square foot, per the International Council of Shopping Centers. It’s also 26% higher than Westfield Corp.’s average reported sales of $725 per square foot.
KBRA also notes in its presale report that Union Square is the San Francisco Bay Area’s premier retail district, with very high foot traffic and a large concentration of various retailers, including mainstream, discount, designer, and luxury stores. “The subject benefits from proximity to the Moscone Convention Center and is within short walking distance to several convention and tourist hotels,” the report state.
Westfield San Francisco has two traditional mall anchors, Bloomingdale’s and Nordstrom, which together comprise 650,298 square feet and report strong sales.
The property’s in-line occupancy level has fallen as low as 87.7%, in 2010, during the Great Recession, but has average 92.5% over the nine-year period. As of April, it was 93.7%.
DBJPM 2016-SFC will issue seven classes of certificates, four of which are entitled to principal and interest, one of which is entitled to interest only, and two of which are residual classes. The senior class is provisionally rated ‘AAA’ by KBRA.