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Wells Fargo's next CMBS features heavy exposure to super-regional malls

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Wells Fargo's next offering of commercial mortgage bonds features heavy exposure to super-regional malls, according to rating agency presale reports.

The $951.6 million Wells Fargo Commercial Mortgage Trust 2018-C47 (US CMBS) has a 38.5% exposure to retail; that compares to an average of 28.5% of other multiborrower deals rated by Fitch Ratings this year.

Two of the three largest loans, together accounting for 10% of collateral pool, are backed by super-regional shopping malls: the Class A, 2.2 million-square-foot Aventura (Fla.) Mall. and the B+ quality-grade Christiana Mall in the tri-state region of Newark, Del.

Both loans are treated as "shadow" investment-grade loans by both Fitch Ratings and DBRS, boosting the credit metrics of the overall pool. The transaction includes 12 classes of notes Include $666 million in five class-A term bonds with preliminary AAA ratings from Fitch and DBRS, supported by 30% credit enhancement. KKR Real Estate Credit Opportunity Partners or its majority owned affiliates will purchase and retain five subordinate classes to maintain the risk-retention stakes through eligible horizontal residual interests.

In addition to retail exposure, the loans include a 22.1% concentration in hospitality properties and 12.1% of multifamily properties. The largest geographic concentrations are in Florida (14.9%) and New York (10.6%).

In total there are 74 loans secured by 106 properties, collateralized with light seasoning (1.36 months) and with a weighted average stressed loan-to-value ratio of 103.2%, according to Fitch. Fitch applied a 10.39% haircut to the issuer’s estimated cash flow.

The weighted average interest rate of 4.96% is higher than the 2018 average of 4.67%. Fitch modeled different interest-rate floors on the various assets to account for the higher refinance risk, including 5% for most property types, 4.5% for multifamily properties and 6% for hotels.

But the risks are tempered by the lower-than-average concentration of the largest loans: the top three participations represent only 42% of the pool balance, compared to the less diverse average of 51.3% this year and 53.1% last year for Fitch-rated conduits.

The loans were originated by Wells Fargo, Barclays, Ladder Capital, Rialto Mortgage Finance and C-III Commercial Mortgage.

Aventura Mall is the second-largest loan in the portfolio (5.3% of the pool), through a $50 million portion of a $1.75 billion interest-only loan issued in June to refinance $1.4 billion in debt. The loan also provided $278.3 million in a cash-out equity return to the sponsor, a joint venture of Miami-based real estate developer Turnberry Associates and retail mall giant Simon Property Group. The 10-year-loan is secured by only 1.2 million square feet of the property, which was built in 1983 but has undergone three “significant” renovations since 1997 – including a $230 million expansion in 2017.

Wells was apportioned a similar $50 million slice of a $550 million loan issued to the sponsoring owners of Christiana Mall. The financing provides a $309.8 million equity payout to a 50/50 joint venture of Chicago retail property operator GGP and a prime property fund managed a Morgan Stanley Real Estate. (GGP entered into a buyout agreement in March with $68-billion asset Brookfield Property Partners.) Most of the loan ($450 million) was previously securitized in a single-borrower, single-asset transaction led by Barclays.

The largest loan in the pool is for the Starwood Hotel Portfolio, a $70 million portion of an interest-only $265 million pari passu loan taken out by the $3.13 billion-asset private investment firm Starwood Capital Group. Proceeds were used to refinance $246 million in debt and cash out $2.3 million in equity on a 22-hotel portfolio.

A $65 million portion of the Starwood loan was previously securitized in Morgan Stanley Mortgage Capital Holdings’ multiborrower BANK 2018-BNK14 transaction that priced last week.

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