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Wells Fargo CMBS relies on super-regional mall to offset high leverage

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Wells Fargo’s next offering of commercial mortgage bonds relies on exposure to a super-regional mall in Fairfax, Va., with investment-grade characteristics to offset the overall leverage in the transaction.

The $692.1 million WFCM 2018-C46 is backed by a total of 49 loans secured by 55 properties; a $40.5 million mortgage on the Fair Oaks Mall is the second largest, at 5.9% of the total pool. This property has a loan-to-value ratio, as calculated by Kroll, of 58.6%.

Low leverage, however, isn’t the only notable thing about the 1.5 million-square-foot mall, which is some 20 miles outside of Washington, D.C. The property is anchored by department stores which have announced store closures in 2017, including JCPenney, Macy’s and Sears. In addition, the mall’s weighted average inline sales ($529 per square foot, including an Apple store) are below the International Council of Shopping Centers’ reported average for malls in the mid-Atlantic region ($599 per square foot).

Nevertheless, the loan’s low leverage helps pull down the overall LTV of the transaction 99.6%. Kroll doesn’t indicate in its presale report what the deal’s LTV would be without the Fair Oaks Mall loan; even with it, however, the overall LTV is above the average of 97.1% for the 14 CMBS conduits rated by KBRA over the past six months.

And both the figure for the Fair Oaks Mall LTV and the overall LTV only include debt held inside the securitization trust; 10 loans, including the Fair Oaks Mall, are encumbered by additional debt held outside the trust.

In addition to the high overall leverage, Kroll is concerned about dispersion of LTVs, which are skewed from the mean, creating an uneven distribution of risk. Higher losses generated from high-leverage outliers may not be offset by lower losses from lower-leveraged outliers. The pool’s exposure to loans with LTVs, as measured by Kroll, of over 100% is 31 loans, or 60.4%. That’s higher than the average of 56.1% for the comparable set.

Additional credit concerns cited by Kroll in its presale report include a loan on 350 East 52nd Street (the sixth largest, at 4.6% of the pool), a 137-unit, Class B high-rise multifamily complex in the Midtown East neighborhood of Manhattan. The sponsor is currently a defendant in a class-action lawsuit with tenants for liabilities related to property tax abatement. The suit impacts 30 units, four of which are currently not paying rent. Damages from past rent overcharges are estimated to be as high as $2.8 million. However, $700,000 was reserved upfront to cover liabilities and the liability is related to the borrower who has liquid assets estimated at $15 million.

Another three loans (3.8% of the pool) are secured by nontraditional real estate assets or are leased to tenants that use the properties in a nontraditional manner. “Should these tenants vacate, the assets may require significant improvements to convert to a traditional use,” the presale report states.

All of the loans were contributed by Wells Fargo, Barclays, Benefit Street Partners Realty Trust, Argentic real Estate Finance or Realto Mortgage Finance.

Kroll expects to assign an AAA rating to the super senior tranches of notes, which benefit from 30% credit enhancement, as well as to a “junior A” tranche with just 21.875% credit enhancement.

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