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Next Wells CMBS has heavy exposure to Silicon Valley offices

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Wells Fargo’s next offering of commercial mortgage bonds features heavy exposure to newly constructed office buildings in Silicon Valley.

The $1.28 billion BANK 2018-BNK10 is backed by a total of 68 fixed-rate loans secured by 181 commercial and multifamily properties. The largest, Apple Campus 3, is a $94 million portion of a $340 million mortgage originated by Wells, Deutsche Bank and Goldman Sachs that is secured by a group of three interconnected, four-story Class A office buildings totaling 882,657 square feet and located in Sunnyvale, Calif. The owner, Jay Paul Co., developed the property, which was completed and delivered to Apple, the sole occupant, in early December.

Jay Paul Co. also owns Moffett Towers II – Building 2, a newly constructed office property in Sunnyvale fully leased to Amazon that secures the 10th-largest loan in collateral pool.

Together, these two loans represent 10.5% of the collateral. While not rated, they have credit characteristics consistent with “shadow” investment grade, according to Fitch Ratings and DBRS. This helps offset the overall leverage in the collateral pool.

Also helping is the inclusion of 16 loans, representing 4.5% of the pool, that are secured by co-operative properties and are very low leverage with minimal term and refinance default risks.

Nevertheless, the pool’s leverage is higher than recent comparable multi-borrower transactions rated by Fitch. The rating agency calculates the overall loan-to-value ratio to be 106.5%, higher than 2017 and 2016 averages of 101.6% and 105.2%, respectively. The pool’s debt service coverage ratio, as calculated by Fitch, is 1.37x; that is higher than the 2017 and 2016 averages of 1.26x and 1.16x, respectively.

Excluding the investment-grade credit opinion and multifamily cooperative loans, the pool has a Fitch DSCR and LTV of 1.16x and 114.9%, respectively.

Both Fitch and DBRS cited as another concern the elevated percentage of loans that pay only interest, and no principal, for at least part of their terms: 74.5%. This means that there will be little amortization over the life of the transaction, increasing the risk that the loans will be difficult to refinance upon maturity.

DBRs also cited as a concern the fact that the pool has a relatively high concentration of loans secured by nontraditional property types, such as self-storage, hospitality and manufactured housing community assets, which, on a combined basis, represent 36.6% of the pool across 18 loans.

Both rating agencies expect to assign a triple-A rating to the super senior tranches of notes to be issued, which benefit from 30% credit enhancement, as well as to the senior tranche.

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