Another real estate investment trust is tapping the commercial mortgage bond market to refinance part of its portfolio.
This time it's, Hartman REIT, which has obtained a $259 million mortgage from Goldman Sachs on 39 office, retail, and industrial properties totaling 5.8 million square feet. located across Dallas/Fort Worth, Houston, and San Antonio, Texas.
Proceeds will be used to repay $199.9 million of existing mortgage debt, fund $20.8 million in upfront reserves, a $10.3 million delayed advance reserve, and return $25 million of equity to the sponsor. (The delayed advance reserve is for one property in the portfolio, Promenade North Shopping Center, that is currently not collateral for the loan because the borrower has not yet been granted the property's release from the current mortgage note.)
This loan, which pays a floating-rate of interest, and no principal, over its entire extend term of up to five years, is being used as collateral for a deal called GS Mortgage Securities Corp. Trust 2018-HART.
S&P expects to assign an AAA to the senior, $128.9 million tranche of notes to be issued. It reckons that the portfolio would have to experience a 73.8% decline in its value (currently appraised at $518 million) in order for this this class of securities to experience a loss.
There are also five classes of subordinate term notes with ratings ranging from AA- to B+ and an unrated tranche of variable rate funding notes.
The rating agency considers to mortgage loan balance to have “moderately high leverage,; it puts the loan-to-value ratio at 85.9%, based on its valuation of the portfolio. Using the appraiser’s as-is valuations, the LTV is much lower, at 50%.
The portfolio is also heavily concentrated in three cities in Texas: Houston (55.7% of net rentable area), Dallas/Fort Worth (34.7%), and San Antonio (9.6%).
In addition, a “substantial portion” of in-place rental income, 81.8% as calculated by S&P, is derived from suburban office properties, which the rating agency considers to be riskier than offices in central business districts due to the lower barriers to entry and the generally lesser-quality tenant base.
The portfolio faces considerable tenant rollover risk during the initial two-year loan term, with 28.1% of the leased NRA and 28.9% of the in-place rent, as calculated by S&P, expiring by 2020. However this rollover risk is partially mitigated by the diverse tenancy at the properties, which contain roughly 1,100 unique tenants, none of which makes up more than 2.6% of the in-place base rent
In addition, the portfolio's occupancy has historically remained stable, and the portfolio's net operating income has exhibited a stable compound annual growth rate of 2.% from 2015 to the trailing 12-month period ending July 2018 for the properties acquired before 2015. Lastly, the loan's structure requires upfront and ongoing reserves to partially mitigate the rollover risk.
