Retail REITS Still Dealing with Prickly 2006 Loans as Due Dates Arrive for Properties Loaded with Debt
While the overall retail property sector appears to be strengthening, a handful of loans for lower-quality shopping centers and malls financed at the height of the previous CRE cycle are coming due now and proving to be a thorn in the side of publicly traded REITs.
Simon Property Group and WP Glimcher both turned malls back over to the lenders this week, and Kimco Realty Corp. disclosed that it doesn’t expect one of its joint venture-owned malls will be able to refinance a loan set to come due this fall.
All three of the malls involved in the foreclosure actions were last financed in 2006 and securitized in mortgage backed bond conduits.
Simon Property’s Greendale Mall in Worcester, MA, and WP Glimcher’s Merritt Square Mall on Merritt Island, FL, were transferred to REO status. And Kimco’s Cheyenne Commons in Las Vegas, which is owned in a joint venture with Big Shopping Centers USA, was moved into special servicing.
Simon stopped making payments on its Greendale Mall mortgage last October, one year before its repayment due date. The noteholder reported taking over the property this week in its monthly bondholder report.
CoStar currently shows a sizable vacancy at the 428,860-square-foot mall, which has been eclipsed by two larger Simon-owned malls within 12 miles of the Greendale property. Simon owns the 586,242-square-foot Auburn Mall eight miles to the south of this property but with a reported vacancy of just 1%. Simon also owns the 886,479-square-foot Solomon Pond Mall 12 miles to the east with a reported vacancy of 4%.
A look at the mall’s financials reveals little surprise in Simon’s decision to turn over the property. The Greendale Mall was appraised at $14.7 million last November but carried an unpaid principal loan balance of $45 million. The mall’s net operating income could not cover its debt service, with a bondholder report showing a fiscal 2015 debt service coverage ratio of 0.77x. In addition, leases for three of the top five tenants, representing 32% of the space, expire in the next year and a half.
Merritt Square Mall
After disclosing in May that its Merritt Square Mall could be headed back to the lender, WP Glimcher this week confirmed the expected outcome. Mark Yale, CFO of WP Glimcher, said the loan on the 811,055-square-foot mall was one of four the REIT had coming due this year.
While Yale said the goal was to refinance the four loans, he added the REIT was content to let them go back to the lender if deals could not be worked out.
“The good news is with the four loans that represent $260 million in total outstandings and all having debt yields in the single digits, the ultimate exit of these malls in this fashion will allow us to improve the company’s overall debt leverage,” Yale said.
One of the other four loans was returned to the lender earlier this year. The REIT is still negotiating to refinance the other remaining two.
Merritt Square Mall had an unpaid principal balance of $52.1 million, which exceeded its appraised value as of September 2015 of $49.2 million. When the loan was underwritten in 2006, it was done so at a 15% probability of default, according to bondholder reports. Debt service coverage at year end 2015 was 1.43x.
Merritt Square is likely not to remain REO for long. A previously scheduled auction on the property closed last week and the property is now reportedly in escrow. Sources say it sold for an implied cap rate of 14.5%.
Based on July servicer data, the $55 million loan on Kimco’s Cheyenne Commons loan has been transferred to special servicing for imminent monetary default. The loan, which is scheduled to mature in November 2016, is secured by a 361,486 square-foot shopping center in Las Vegas.
Complicating the potential refinancing of the loan are leases for three of the center’s largest tenants set to expire in the next year and a half. Wal-Mart leases 114,500 square feet; Marshall’s leases 30,000 square feet; and Ross Dress for Less leases 24,000 square feet.
According to Kimco, the property has lost significant value. New appraisals for the loan are currently underway. In 2006, the property was appraised for $81.5 million.
The center’s latest fiscal year net operating income came in at $3.18 million representing a debt service coverage of 1.05x.
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