A combination of low rates and high property values look set to boost the share of large-loan, single-asset CMBS deals in 2015.
This week alone, there three deals in the market totaling $1.07 billion, according to rating agency presale reports.
That brings supply for the year to date to $6.6 billion, well ahead of last year’s pace, which was below $5 billion according to JP Morgan. By contrast, year-to-date conduit issuance is $11.1 billion, in line with 2014 volume.
“In 2014, single-borrower issuance started slow throughout the first several months of the year before picking up meaningfully and setting a new record for volume ($24.8 billion),” JP Morgan analysts stated in a report published Friday. “This year, we expect the pace of single borrower issuance to remain elevated and for supply to again set a new record.”
The analysts currently expect to see a total of $30 billion in single-borrower, single-asset issuance for 2015 as a whole.
These deals are attractive to investors because they are easier to analyze than conduits backed by a large number of loans backed by different kind of property in different parts of the country, according to JP Morgan. That’s particularly appealing at a time when commercial loan underwriting continues to deteriorate.
There’s strong appeal for sponsors as well Today’s "environment of low rates (with impending hikes in the near future), high property values, and strong demand for CMBS bonds as a good time to refinance, even if it means paying a prepayment penalty or defeasing the loan," according to Sean Barrie, a CMBS research analyst at Trepp.
The chart below from JP Morgan compares issuance of single asset, single borrower deals and conduit CMBS.
Among deals currently in the market are a securitization of a $280 million loan on a mall and $790 million of securities across two deals backed by hotel portfolios owned by Starwood Capital Group.
BBCMS Trust 2015-SLP securitizes a three-year, $580 million floating rate loan underwritten by Barclays, according to a Standard & Poor’s presale report. The loan has two, one-year extension option and is secured by the fee, leasehold and sub-leasehold in 135 hotel properties. The loan has a loan-to-value (LTV) ratio of 92.8%, it pays only on interest for its entire five-year extended term. There is an additional a $72.5 million mezzanine loan, which is held outside of the trust and increases the LTV ratio to 104.4%.
The loan funds the purchase of 135 limited-service and extended-stay hotels as part of the sponsor's acquisition of TMI Hospitality Inc. (TMI), which includes 182 hotels and the company's management and development teams for a total acquisition cost of over $1.1 billion, of which $947.8 million was allocated toward the purchase of the collateral hotels. The hotels in the portfolio are managed by TMI Hospitality Inc.
The hotels are operated under 15 different brands that are affiliated with Marriott (67.3% by allocated loan amount), Hilton (20.7%), IHG (5.5%), Choice (4.2%), Carlson (2.0%), or Best Western (0.4%). The three largest brands in the portfolio are Fairfield Inn & Suites (46 hotels; 30.8% by allocated loan amount), Hampton Inn (22 hotels, 17.8%), and Residence Inn (11 hotels; 13.0%).
S&P plans to rate $200 million of class notes AAA’, $68 million of class B notes, AA-, $55.1 million of class C notes, A-, $75.6 million of class D notes BBB-, $76.3 million of class E notes, BB- and $105 million of class F notes B’.
Barclays Capital and Bank of America are the underwriters.
A second large loan CMBS deal, called Citigroup Commercial Mortgage Trust 2015-SSHP, is also backed by $210 million, floating rate loan secured by a portfolio of hotels that is 95% owned by Starwood. Schulte Hospitality Group (SHG) owns 5% of the portfolio.
The loan has an initial maturity date of Sept. 9, 2017 but allows for two one-year extensions. The transaction also includes $25 million of subordinate, mezzanine debt that is held outside the trust.
There are 18 collateral properties in the Starwood Schulte Portfolio according to Morningstar, the rating agency hired to rate the deal. All the hotels are managed by SHG and operate under Marriott, Hilton and Intercontinental flags.
Starwood acquired nine of the hotels between October 2013 and June 2014 through a series of seven separate transactions, largely sourced from local owner / operators. The remaining nine properties were acquired with the closing of the underlying mortgage loan in September 2011 from Rockbridge Capital for a purchase price of $141.0 million.
Morningstar calculates the loan’s LTV at 91.3%, based on the portfolio’s term value of $230.0 million; the additional mezzanine debt raises the LTV to 102.2%. However, the higher leverage is mitigated by the much higher appraised value of the portfolio of $285.5 million. According to Morningstar based on the appraised value, and including the mezzanine debt, the LTV drops to 82.5%
Morningstar plans to rate $71 million of class A notes, AAA’, $26 million of class B notes AA-, $14.4 million of class C notes, A-, $30 million of class D notes BBB-, and $34.4 million of class E notes BB-. The trust also includes $34 million of unrated class F notes.
Starwood, founded in 1991, has acquired 2,200 hotels. The company currently has assets under management valued at $42 billion. In 1995, Starwood created Starwood Hotels & Resorts Worldwide Inc., which acquired Sheraton for $14 billion in 1998. Starwood acquired 58 hotels (5,767 rooms) in 2011 and an additional 22 hotels (3,768 rooms) in 2013.
A third large loan deal, called BBCMS Trust 2015-VFM, that is currently marketing is secured by a $280 million loan, which is backed by the Vintage Faire Mall, a super-regional mall located in Modesto, California.
Barclays is the loan underwriter and the Macerich Co. (Macerich), a publicly traded REIT, is the loan sponsor.
The BBCMS Trust 2015-VFM loan amortizes on a 30-year schedule over an 11-year loan term, according to S&P.
The loan’s leverage although lower that the hotel deals , is still considered high, according to S&P. The LTV ratio, based on S&P’s valuation is 86.1% However based on the appraiser's valuation the LTV is lowered to 54.7% and according to the issuer, the loan will be paid down by approximately $69 million through year 11, resulting in a 41.2% appraisal LTV.
S&P plans to rate $154.5 million of class A notes , AAA’/, $32.5 million of class B notes AA-, $24.4 million of class C notes, A-and $30 million of class D notes BBB- . $38.7 million of class E notes are also structured as part of the trust but will not be rated by S&P.
Macerich has owned the property since 1996 and invested $38.0 million in capital improvements at the property since 2001. In 2008, $24.0 million was spent on developing the 60,000-sq.-ft. Village addition, an adjacent outdoor shopping area that has attracted several higher-end tenants to the property, such as Apple, Sephora, and Coach, among others. This expansion currently generates more than $2.0 million in annual income.
