Unusual risk in UBS' next conduit CMBS: parking garages
There’s an unusual risk in UBS’s next offering of commercial mortgage bonds: exposure to parking garages.
The $730 million transaction, called UBS 2018-C10 is backed by 56 loans commercial mortgages secured by 87 properties, according to rating agency presale reports. All of the loans were contributed by UBS itself, Keybank National Association, Ladder Capital Finance, Societe Generale, Cantor Fitzgerald or CIBC.
Both Kroll Bond Rating Agency and Fitch Ratings point to the deal’s high leverage and high exposure to properties with a single tenant as potential areas of concern.
But Kroll also warns that two loans in the pool accounting for 10.1% of the principal balance are secured by buildings that derive considerable income from parking garages. “Parking revenues can fluctuate over time due to external economic conditions that could affect parking demand,” the rating agency’s presale report states. “In addition, should the loan default, the subject may not be readily marketable as the number of potential buyers is likely to be more limited than the broader universe of traditional real estate investors.”
The largest of these two loans (6.8% of the pool’s balance) is backed by a mixed-use portfolio of a real estate investment trust, which derives nearly one-third (29.1%) of base rent from transient and monthly parking, according to Kroll. The rating agency takes some comfort from the fact that each garage is leased to a third-party operator with leases that extend approximately three and nine years beyond loan maturity, however. “In addition, the properties are located in Manhattan in dense areas with numerous demand drivers,” the presale report states.
The second loan, Port Atwater Parking (3.3% of the pool balance) derives all of its revenue from annual or monthly parking agreements as well as daily and hourly transient parking. Again, the risk is mitigated by strong demand for parking. The subject garage is across the street from the GM Renaissance Center, a 5.6 million-square-foot, office-retail mixed-use complex owned by General Motors that serves as its global corporate headquarters as well as a 73-story, 1,300-key Marriott Hotel, Kroll says.
Fitch is silent on the riskiness of parking garage income, but both rating agencies note the deal’s high leverage. Kroll puts the weighted average loan to value ratio, based on debt held in the securitization trust, at 103.2%. This is the second-highest among the 14 conduits it has rated over the past six months, which ranged from 85.4% to 104.1%.
Additionally, the pool’s exposure to individual loans with loan-to-value ratios, as measured by Kroll, in excess of 100% (35 loans, 71.7%), is also higher than the average of 57.2% for the comparable set.
Fitch puts the weighted average loan-to-value ratio even higher, at 108.2%, which is higher than the 2017 average of 101.6% and the average for 2018 to date of 103.6%.