Investors can reach for yield beyond senior CMBS and yet maintain a higher level of credit enhancement through single-asset or single-issuer deals, according to an FTN Financial report released yesterday afternoon.
The firm's data showed that there is considerable yield pickup with the single issuer/asset deals in various average life buckets.
Although single issuer/asset deals do not provide property-type and issuer diversification, FTN analysts said they are comparatively easy to understand and analyze. They are also conservatively underwritten usually with low LTV ratios that are hard to match. These low LTV ratios make it more probable that the borrower can refinance at maturity thus lessening and also mean lower default risk.
With spreads on new-issue CMBS conduit bonds tightening because of the extremely high demand, some buyers are looking for higher-yielding alternatives, specifically in the current scenario given the extended low interest rates, FTN analysts said. Single issuer/ asset CMBS can be a good alternative for buyers wanting to pick up some extra yield without having to move down the capital structure to lower levels of credit enhancement.
Analysts said that there is a tradeoff for buyers. FTN said that single issuer/asset deals do not benefit from the property-type and issuer diversification provided by conduit CMBS and they are also somewhat less liquid. But, the single issuer/asset deals usually have much more conservative underwriting versus conduit CMBS. Data FTN presented showed that the single issuer/asset deals have much less LTV ratios and higher DSCRs and debt yields versus 2012-vintage conduit transactions.
FTN analysts also singled out some recent deals in their report to illustrate their points.
The firm cited JPMCC 2012-WLDN, which is a $270 million single-asset deal backed by the Walden Galleria mall that is close to Buffalo, NY. The mall was appraised at $600 million in April 2012, which meant very low leverage. The loan had an LTV ratio of only 45% and had an occupancy rate of 87% at securitization. The main tenants at securitization were JCPenney, Dick’s Sporting Goods, and Regal Cinemas, analysts reported. JCPenney’s lease expires in two years while Dick’s and Regal Cinema have leases that extend beyond the loan's ten-year term. The prepayment protection comprises two years from origination of lockout as well as a yield maintenance provision that is still in effect until four months before the balloon date.
The firm also cited the GSMS 2012-SHOP deal, which is a $625 million transaction backed by two retail and entertainment centers, The Grand Canal Shoppes at the Venetian, which was 73% of the appraised value, and The Shoppes at the Palazzo, which was 27% of the appraised value. These properties are both within the respective resort hotel-casinos on the Las Vegas Strip. The properties were appraised at $1.275 billion in May 2012 resulting once again in very low leverage or an LTV ratio of 49% and had a combined occupancy rate of 93%. The prepayment protection comprises lockout that remains in effect until three months before the seven-year final balloon maturity date. The A tranche has a credit enhancement level of 23.52%.
The last deal analysts looked at was BMLDB 2012-OSI. This is a $325 million deal backed by 261 restaurant properties, mostly Outback Steakhouse (199 properties) and Carrabba’s Italian Grill (47 properties.) According to FTN, the properties were appraised at a combined $650 million at origination resulting in an LTV ratio of 50%. The prepayment protection for the fixed-rate component of this transaction comprises lockout that remains in effect until three months before the five-year balloon maturity date.
While this offering does not offer property type or issuer diversification, it does feature geographic diversification via properties in 34 states. Florida with 18% and Texas with 14% of the deal balance are best represented, analysts said.The A2FX tranche has 28.4%a credit enhancement level.