Velocity Commercial Capital is preparing a $333 million commercial mortgage-backed securities (CMBS) transaction, secured by a pool of small-balance commercial loans on 858 residential rental and commercial real estate assets.
Kroll Bond Rating Agency expects to divide the pool into two distinct groupings for ratings purposes. Sub-pool 1, comprised of investor loans secured by rental properties of four units or less, which KBRA will assess using residential mortgage-backed securities (RMBS) and sub-pool 2, which includes commercial real estate assets and will receive an assessment based on its CMBS rating methods. Sub-pool 1 accounts for 51.9% of the total pool balance, with 415 loans, while the CRE sub-pool represents 48.1% of the collateral balance and 331 loans, KBRA says.
Commercial real estate assets in the transaction, VCC 2022-4, break down further, with 100 mixed-use properties; 64 retail properties; 37 industrial properties; 38 multifamily properties; 43 office properties; 28 commercial condominiums; and 12 automotive service properties, according to the rating agency.
Barclays Capital, Citigroup Global Markets and Performance Trust Capital Partners will be the initial note purchasers from the trust, KBRA said. Velocity Commercial Capital originated almost all of the loans in the pool, some 781 loans that represent 99.5% of the pool, and will sell the loans into the trust. One of the loans in the collateral pool has subordinate debt in place in the form of second mortgages, the rating agency said.
On a weighted average (WA) basis, the underlying assets have an appraisal loan to value (LTV) of 66.1%, and a FICO score of 726.
Yet KBRA observed some potential credit issues in the collateral pool afterward. On average, the loans have an outstanding balance of $426,531, and remaining balances of less than $250,000. Some 70.4% have balances of less than $1 million.
Small balance loans historically have exhibited higher delinquency rates, relative to the overall CMBS sector, KBRA said. When small-balance loans typically default, the collateralizing properties tend to incur resolution expenses that represent a higher percentage of the underlying collateral compared with resolution expenses tied to larger assets. Larger assets, however, are better able to absorb the costs.
Another aspect of the underlying loans pose a mixed credit outlook to VCC 2022-4. The loans, about 781, fully amortize over their respective terms, but 76 loans have an interest-only period, according to KBRA. Also, the assets have a step up in debt service once the interest-only period ends.
"When the interest-only period ends and the debt service increases, there can be a spike in the risk of default when the properties are burdened with higher debt payments," KBRA said.
