Regional Mall CMBS ‘Pressured’ by Retail Closures

A new DBRS Morningstar report assesses the sponsors that will ride out coronavirus-related mall closures and those that will struggle.
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After years of confronting stiff competition from e-commerce and numerous retailer bankruptcies, the regional mall sector has, for weeks, suffered further injury from temporary mall closures. That has analysts focusing on the $4.6 billion in mall-backed CMBS loans maturing through 2021.

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According to a new DBRS Morningstar report, some malls and sponsors are likely to ride out the “pressure” on those maturities relatively smoothly, while others face a more perilous course. The deciding factors will be: market position, strength of sponsorship, willingness to invest, access to debt, cash flow and leverage. 

The best vs. the rest

Forty-nine regional mall CMBS loans totaling almost $4.6 billion are scheduled to mature this year and the following year, the report states. Sixteen of those, comprising more than $957 million of outstanding debt, reported year-end DSCRs under 1.50x. Ten of these loans, totaling $562 million, “would be unable to cover their debt service following a 20 percent haircut to the in-place net cash flow,” the report stated.

Steven Jellinek, Vice President North American CMBS, DBRS Morningstar. Image courtesy of DBRS Morningstar

In addition, as of the March 2020 remittance dates, 31 outstanding regional mall CMBS loans and loan pieces that originated in 2010 or later, with a combined balance of $2.2 billion, were in special servicing. Though these loans’ LTV ratios at issuance amounted to a weighted average of 62.8 percent, 14 of them—with a total balance of $540 million—have reported new, much lower valuations since issuance. Declines ranged from negative 40.9 percent to negative 79.6 percent, with a weighted average of 67.7 percent.

Gwen Roush, DBRS
Gwen Roush, Senior Vice President North American CMBS at DBRS Morningstar. Image courtesy of DBRS Morningstar

The stronger sponsors discussed in the report are Simon Property Group and Brookfield Property Partners, whose regional malls back loans totaling 65.1 percent of the outstanding balance of the CMBS loans maturing by the end of 2021. The relatively weaker sponsors are CBL Properties, Washington Prime Group and The Pyramid Cos., which are behind 23 percent of those loans.

DBRS Morningstar notes that Simon appears to be staying on course for its $3.6 billion acquisition of 80 percent of Taubman Realty Group, which was announced in February. Similarly, the report suggests that despite holding the largest slice of maturing CMBS debt ($1.8 billion, or 39.4 percent of the total), “Brookfield’s maturity portfolio is … well positioned to withstand upcoming challenges.”

Alex Sgorlon, Senior Financial Analyst North American CMBS at DBRS Morningstar. Image courtesy of DBRS Morningstar

Others might not fare as well. Washington Prime Group already has three loans in special servicing, and, along with other concerns, six of its seven malls securing loans maturing soon have not seen positive net cash flow growth.

CBL Properties appears, according to the report, to be focusing its attention on redeveloping its core malls and disposing of its less productive ones. One such mall is facing imminent default and is in special servicing.

Jason de Souza, Senior Financial Analyst North American CMBS at DBRS Morningstar. Image courtesy of DBRS Morningstar

The nation’s largest privately owned mall developer, Pyramid, is evidently focusing on triage, investing in its more successful assets at the risk of giving up some weaker ones. “The regional mall industry is experiencing a seismic shift as owners of larger Class A malls invest in their properties, while Class B malls struggle to find their place in a changing retail landscape … lower-quality assets … are losing tenants and cash flow, while upper-quality assets see investment from their owners,” the report concluded.