Macerich is tapping the commercial mortgage bond market for a $78.8 million cashout refinancing of a shopping mall in Santa Monica, Calif.
The real estate investment trust obtained a $300 million first mortgage from Wells Fargo on Dec. 4 that is backed by the fee simple interest the 523,139 square foot regional mall just steps from the popular Santa Monica Pier, along with the leasehold interest in two adjacent parking garages and the retail space located in the parking facilities.
This loan, which pays only interest and no principal, has an initial term of two years and can be extended by one year up to three times, for a total term of five year. It is being used as collateral for a transaction called WFCM 2017-SMP, according to Moody’s Investors Service.
Wells Fargo is the servicer for the transaction; AEGON USA Realty is the special servicer.
Approximately $78.7 million, or 26.2% of the loan proceeds, was paid out to Macerich. While this could potentially be seen as a risk factor for mortgage bond investors, Moody’s sees some mitigants. Macerich has owned the property since 2009 and has made approximately $365 million in capital improvements since 2007. The rating agency estimates that the REIT still has some $65 million of equity in the property. It does not appear to be cashing out at what might be the top of the current real estate market cycle, in other words.
“Sponsor [Macerich] invested significant capital to transform the property into a modern retail destination,” converting it from an enclosed mall to an open air one and earning a LEED Gold designation, the presale report states. The mall has also received numerous design awards, including the MAPIC High Street Award, which is an honor bestowed upon innovative retail real estate projects, per Moody’s.
Another $7 million in capital improvements are planned over the next two years.
Moody’s puts the debt service coverage ratio, based on what it sees as “stabilized” net cash flow, at 2.91x; on a “stressed” basis, that falls to 0.86x.
The rating agency puts the loan-to-value ratio (for the first mortgage and excluding any debt not held in the securitization trust) at 94.7%.
Other risks to the deal include high occupancy cost ratios, or the percentage of tenant revenue spent on leasing, of 22.6%. “Centers with high ratios are generally more susceptible to market volatility as they have limited capacity to grow rents as leases expire,” the presale report states. “Additionally, tenants can withstand a greater decline in sales volume at lower occupancy cost ratios.”
In fact, Moody’s expects some expiring leases to be renewed at lower occupancy cost thresholds; it has incorporated an occupancy cost cash flow adjustment in our analysis.
There is also rollover risk, as leases representing 41.7% of the net rentable area and 52.7% of base rent expire during the extended loan term through 2022.
Moody’s expects to assign an Aaa to be issued in the transaction,