Sports Authority’s plans to close 140 stores impact 25 loans backing commercial mortgage bonds, though only six are at elevated risk of default, according to Morningstar Credit Ratings.
The rating agency believes that the remaining 19 loans won’t see a significant decline in net cash flow because Sports Authority doesn’t represent a large portion of the net rentable area.
And of the six CMBS loans most impacted, two have balances of more than $6.0 million, and in Morningstar’s view, are not at risk of material value deficiency.
Sports Authority filed for Chapter 11 bankruptcy last week after missing a $20 million interest payment on subordinate debt in January. Morningstar would not be surprised to see the retailer announce more store closings, as another 60 stores are under consideration for closure. Sports Authority is a tenant in 77 properties that serve as collateral in about $3.55 billion of CMBS loans.
The largest loan of concern is the $32.2 million Caruth Plaza loan, which represents 2.6% of the balance of WFRBS 2014-LC14, which Morningstar believes will be able to cover its debt service despite the store closure.
Sports Authority is the largest tenant at the Dallas shopping center, accounting for 28.2% of the space under a lease that expires in January 2019. Morningstar values the collateral at $35.2 million using a discounted cash flow approach, which assumes the space could be re-leased within five years. “We assumed rents at approximately $16.00 per square foot, a market vacancy rate of 14.0%, a discount rate of 10.6%, and a cap rate of 7.6%,” the rating agency stated in a report published Thursday.
It said the loan, which is current, had a debt service coverage ratio of 2.05x for the first nine months of 2015.
The second-largest loan of concern is the $12.3 million loan backed by the Steger Town Crossing in Rockwall, Texas, which amounts to 1.5% of GSMS 2011-GC3. Morningstar believes that the loss of Sports Authority less than three years before the loan’s January 2019 lease expiration could push the DSCR below breakeven, which could land the loan in default depending on the borrower’s desire to fund the shortfall.
Sports Authority is the largest tenant in the collateral, accounting for 54.8% of the more than 100,000-square-foot suburban Dallas shopping center. The loan, which is current, had a debt service coverage ratio of 1.31x for the first nine months of 2015 on 95% occupancy.
Morningstar performed a discounted cash flow analysis assuming the Sports Authority space remains vacant for two years. Using a 9% cap rate and a 12% discount rate, it concluded a value of $12.8 million. Adding one year to the lease-up time frame results in a $12.2 million value.
“Despite the challenges facing Steger Town Crossing, the Rockwall submarket has remained robust,” the report states. “Costar reports a strong retail vacancy rate of less than 2.0% as of February 2016, down from 3.1% at year-end 2014, and stable triple-net asking rents of $21.00 per square foot over the same period. These metrics should make it easier to find a replacement tenant.”