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REIT taps CMBS to borrow against U.S. malls it's selling off

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Last July, SITE Centers spun off its lower-quality U.S. shopping centers and its Puerto Rico assets into a new real estate investment trust called Retail Value Inc., or RVI. The idea was to divest the 50 properties over the next few years and ultimately wind down the new REIT.

RVI has already disposed of 14 of the properties for $430.5 million; now it’s tapping the commercial mortgage bond market to borrow against another 25 retail assets until it can dispose of them. The REIT recently obtained a $900 million mortgage from three banks, Column Financial, JPMorgan Chase and Morgan Stanley, secured by the properties, which are in 14 states and Puerto Rico and contain nearly 3.5 million square feet of net rentable area. This loan, which has a fully extended term of up to five years and pays interest of Libor plus 2.5%, and no principal, for its entire term, is being used as collateral for a transaction called RETL 2019-RVI.

This commercial mortgage securitization has a number of unusual features. While CMBS typically put restrictions on early repayment or require that collateral be defeased or substituted, in this case the properties will be removed from the securitization trust as they are sold.

In addition, the trust only holds a mortgage on one of the Puerto Rican properties, Plaza del Sol; instead, it holds pledges of the equity interests in the property-owning entities of the other properties. “Essentially, the trust is a mezzanine lender on these properties, which are not encumbered by any mortgage liens to other lenders,” Moody’s states in its presale report.

There’s also an unusual amount of rollover risk; leases representing 60.6% and 50.7% of mortgaged and non-mortgaged net rentable area, respectively, and 65% and 69% of mortgaged and non-mortgaged portfolio’s base rent, respectively, are scheduled to expire by the end of 2023.

Moody’s takes some comfort from the fact that the properties in the transaction have strong anchor tenants, granular tenant rosters, experienced property management and strong sponsorship, however.

New Jersey is the largest state concentration at 16% of the allocated loan amount. The state contains two properties, Wrangleboro Consumer Square (10.4% of ALA) and Hamilton Commons (5.6% of ALA), both located in the Atlantic City metropolitan statistical area. Puerto Rico is second-largest geographic concentration at 12.9% of ALA.

At loan closing, RVI will invest $45.5 million of fresh equity. Based on the as-is aggregate appraised values for the portfolio of $2.14 billion, the sponsor will have a remaining implied equity of $1.24 billion in the transaction.

The REIT invested a total of $94.6 million or $9.79 per square foot into the mortgaged properties between 2015 and 2018 while investing approximately $15 million or $3.92 per square foot into the non-mortgaged properties during that same period.

Moody’s puts the debt service coverage ratio at 3.07x based on what it considers to be “stabilized” net cash flow. Its loan-to-value ratio for the first mortgage balance is 68.3%.

The rating agency expects to assign an Aaa to the $445.1 million senior tranche of notes to be issued in the transaction.

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CMBS Puerto Rico