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2012 vintage CMBS holding steady on strength of malls: Report

April 4, 2018

Commercial-mortgage-backed securities issued in 2012 have attracted significant attention, given their high exposure to regional malls, which totals some $4.05 billion. But the performance of these loans is likely to be stable in the near term, despite negative narratives about retail, according to Morningstar Credit Ratings’ semiannual review of the sector.

Even as such major retailers as JCPenney, Macy's and Sears have announced hundreds of store closures over the past several years, the stronger malls are adapting well to changes in demographics and shopping habits, says Steve Jellinek, a Morningstar vice president of CMBS research, in a press release.

"It may seem surprising that many malls are not only surviving, but thriving," said Jellinek. "Our view on regional malls has become nuanced over time. Stronger malls are changing their mix of retailers, offering additional amenities, focusing on dining and experiential offerings and aggressively retenanting vacated spaces."

The roughly $4 billion of vintage mall-backed CMBS in 2012 was underwritten before mall defaults began mounting, in 2013, with higher leverage than their 2013 and 2014 counterparts, Jellinek says.

Despite this challenging landscape, most mall-backed, securitized commercial mortgages issued in 2012 are benefiting from their strong locations and from a healthy economy, Jellinek says. “They have posted improving cash flow and should continue to perform well.”

As a result, says Jellinek, Morningstar Credit Ratings believes that most of these loans are likely to remain stable in the near term. But the agency cautions that some of these loans may face headwinds as they approach maturity, as a consequence of changes in lender and investor appetites. Since the latter half of 2017, four loans have been transferred to special servicers, the companies that handle debt obligations for troubled or potentially problematic CMBS loans.

By Brannon Boswell

Executive Editor/SCT

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