Morgan Stanley is including the lion’s share of a mortgage refinancing the nation’s second-largest storage chain in a pool of collateral for $942.7 million offering of mortgage bonds.
A $92 million portion of $194.4 million mortgage on a portfolio of 36 ExtraSpace Self Storage locations is the largest of 42 loans backed backing the transaction , dubbed MSC 2017-HR2. In total, the loans are secured by 82 properties heavily concentrated in retail (30.1% of the portfolio), office (16.8%) and multifamily (13.6%) properties.
The securitization trust will issue six super-senior tranches of Class A notes supported by 30% credit enhancement, along with a seventh triple-A tranche that is backed with 23.75% CE. All seven tranches are rated triple-A by Fitch Ratings and DBRS.
Both ratings agencies are concerned about the pool’s higher-than-average leverage, but DBRS' presale report notes only moderate term-default risk due to a strong weighted-average debt-to-service coverage ratio of 1.96x on the pool.
None of the loans in the pool are encumbered with subordinate secured debt or mezzanine financing, which normally average 13.7% and 13.5%, respectively, in other Fitch-rated multiborrower deals.
There is a higher-than-average risk that the loans cannot be refinanced at maturity, however, because 67% pay only interest, and no principal, for their entire term. That compares with an average of 45.8% of deals rated by Fitch this year and 33.3% rated by Fitch in 2016. The rating agency notes that just 4.5% of the pool’s balance will be repaid at maturity.
ExtraSpace Self Storage is one of the interest-only loans. The real estate investment trust, obtained its mortgage last month from TH Real Estate, an affiliate of Nuveen, the investment management arm of financial services giant TIAA. Along with a $101.4 million in borrower equity, the loan was used to refinance existing debt secured by ExtraSpace’s appraised property portfolio of nearly $300 million.
Two additional portions of the senior mortgage totaling $102.4 million will be allocated to future securitizations, according to presale reports. The assets backing the loan include a concentration of storage facilities in urban centers, led by Philadelphia (22% of 20,890 collateralized units) and San Bernardino-Riverside, Calif. (14.1%). Most of the storage units are older construction, built between 1940 and 2004, with a single-B property quality class grade.
The second-largest loan in the pool is an $85 million portion of a $200 million whole-loan used for refinancing debt accumulated for a local real estate developer’s 2013 purchase and ongoing capital improvements for The Woods, a 1,841-unit multifamily apartment complex in San Jose, Calif.
The loan is considered a “shadow” investment-grade quality loan with a Fitch-rated LTV of 56.6% and a DSCR of 1.55x on the $675.5 million appraised property. The complex (constructed in six phases between 1981 and 2003) is in a high-demand rental market just four miles from San Jose’s central business district, building its gross potential rent 21% since 2014 to $48 million despite a declining occupancy rate (from 95.6% to 93.2%).
Arcadia Development Co., the sponsor, obtained the loan through Citi, which is among four originators — including Morgan Stanley, Starwood Mortgage Funding and Argentic Real Estate Finance — selling loans into the pool.