Starwood Capital Group is tapping the commercial mortgage bond market to refinance five aging regional shopping malls, according to S&P Global Ratings.
It could be a tough sell.
All five — Plaza West Covina Mall (Calif.), Franklin Park Mall (Ohio), Parkway Plaza (Calif.), Capital Mall (Wash.) and Great Northern Mall (Ohio) — were built in the 1970s and are facing potential store closures from major tenants including JCPenney and Sears.
Starwood turned to an unusual source to fund planned upgrades on the properties. In March, it sold $252.8 million of unsecured bonds through a public offering. In Israel. At least 75% of the proceeds will be used for capital improvements and/or redevelopment opportunities, per S&P. (The bonds pay interest of up to 5.7%. No other additional debt is permitted.)
Goldman Sachs subsequently provided Starwood with a $549 million first mortgage on the five malls in May. This loan, which has an initial term of three years and a pays only interest (one-month Libor plus a 240 basis points), and no principal, is being used as collateral for a transaction called GS Mortgage Securities Corp. Trust 2018-SRP5.
S&P does not indicate when Starwood’s current financing on the five malls, which it purchased from the Westfield Group in 2013, matures. Starwood reportedly put them all up for sale in 2016, apparently with no success.
In its presale report, S&P acknowledges that brick-and-mortar retail has “come under substantial pressure in recent years from online shopping,” but asserts that “super-regional shopping centers should be more resilient because they have a diverse mix of tenants, strong sponsorship, and serve larger trade areas.”
The five malls “generally maintain strong market positions within their respective primary trade areas,” per S&P. They “anchor local and regional commercial activity because of their above-average regional access and visibility from interstate and regional thoroughfares.” Moreover, each trade area's demographic profile generally illustrates mature populations with average household incomes that are near or exceed the national average.
The total occupancy rate for the loan's collateral is approximately 96.1% as of the trailing 12 months ended February 2018. This has remained stable since 2015 when it was also 96.1%.
Still, all five malls contain a JC Penney and two, Plaza West Covina Mall and Great Northern Mall, also contain a Sears. Closures by any anchor could hurt the collateral by triggering lease terminations or rent relief due to other tenants, though S&P thinks the anchor spaces “could likely be retenanted.” It notes that several properties in the portfolio “have already achieved some level of success repurposing previously vacated anchor and major spaces.”
Currently, just one of the five malls, Parkway Plaza, contains an anchor on a store closure list, and this location is not part of the collateral for GS Mortgage Securities Corp. Trust 2018-SRP5. While the closure could still impact the collateral, Seritage Growth Properties, a real estate investment trust that redevelops real estate occupied by Sears, has interest from two prospective furniture tenants.
S&P considers the loan to have low leverage; it puts the loan-to-value ratio, based on its own estimate of the portfolio’s long-term sustainable value, at 66.7%. (That’s below the LTV of 44.5%, based on the appraiser’s valuation.)
After taking into consideration the unsecured bonds, however, the LTV rises to 99.6%, which S&P considers high.