Leaving Big Holes in CMBS as mega-landlords, such as Bookfield and Westfield’s owners, walk away.
By Wolf Richter for WOLF STREET.
Here are four big malls that are open and doing business, and that have defaulted on their debts, and whose value has been slashed over the past couple of months as lenders are bracing to get stuck with the collateral, while landlords are either walking away or filed for bankruptcy.
The loss of “value” is measured from the time the mall loan was securitized into commercial mortgage-backed securities (CMBS) until the most recent haircut.
Westfield Palm Desert Mall (Palm Desert, CA): -74%.
The 1-million sq. ft. Westfield Palm Desert Mall, along with other Westfield malls, is owned by European commercial property giant Unibail-Rodamco-Westfield which, bucking under $32 billion in debt, vowed in February to get rid of all its US malls. One way of getting rid of a mall is to walk away from it and let lenders take the loss.
A 575,000-square-foot portion of the mall, not including the anchor stores, serves as collateral for a $125 million loan that was securitized in 2014 into CMBS. To sell the CMBS to investors, the portion of the mall was appraised at $212 million.
Investors felt secure by this conservative structure. What could go wrong with lending $125 million on $212 million worth of collateral?
What went wrong was the brick-and-mortar meltdown that started in 2017 and which has now turned into mallmageddon.
In November 2019, Sears announced that it would close its store at the mall. The former Sears store, which wasn’t part of the collateral, remains empty. An empty box for an anchor store is deadly for a mall. The other anchor stores at the mall, a Macy’s and a JC Penney, are also not part of the collateral. JC Penney filed for bankruptcy in 2020.
In May 2020, the Unibail-Rodamco-Westfield defaulted on the loan payment. In June 2020, the $125 million loan was transferred to special servicing for payment default.
Unibail-Rodamco-Westfield has already shed several Westfield malls by giving them back to the lenders. In November 2020, ratings agency Fitch expected that either a deed-in-lieu or a foreclosure would be the likely outcome.
Now, the lenders have taken control. Management will be “transitioned” to a third party. Lenders are trying to sell the mall, and Unibail-Rodamco-Westfield will wash its hands off another American mall. The lenders will take the losses.
But how much are the lenders expected to lose? The special servicer had the collateral portion of the mall appraised twice: In March, at $65.9 million; and in August, according to Trepp, at $55.2 million.
This cut the “value” of the collateral from the $212 million “value” with which the CMBS was sold in 2014 to $55.2 million now amounts to a haircut of 74%.
If the mall can actually be sold for $55.2 million, and before fees and other charges, lenders, having lent $125 million against $212 million in collateral, would pocket a loss of 56%.
Park Place Mall (Tucson, AZ): -72%
The 1-million sq. ft. Park Place Mall is owned by the second largest mall landlord in the US, Brookfield Properties, which has also been shedding malls in the manner that is now so popular, by handing them back to the lenders, letting them take the loss, and walking away.
A 480,000 sq. ft. portion of the mall is collateral for a $164.3 million loan. The largest tenant in the collateral portion of the mall is a movie theater, yup. The anchor stores, a Macy’s and a Dillard’s, are not part of the collateral.
When the $164.3 million loan was securitized in 2011, the collateral was valued at $313 million. What could go wrong with lending $164 million against collateral worth $313 million?
You guessed it, mallmageddon, which started years ago. The loan was supposed to mature and get paid off in May this year. And that was a pipedream.
In October last year, the loan was moved to special servicing, with a default expected. Brookfield said that it would no longer support the property with infusions of equity, according to special servicer data.
Now the special servicer cited a new appraisal of the collateral: $88 million, down from $313 million at securitization, a haircut of 72%.
If the collateral is actually sold for $88 million, the lenders, which lent $163 million on $313 million in collateral, would walk away with a loss, before fees and other costs, of 46%.
Valley Hills Mall (Hickory, NC): -66%
Owned by Brookfield Properties, yup, again, the nearly 1 million sq. ft. mall had four anchor stores, now down to three and an empty box after the Sears store closed in April 2020. The other three anchor stores are Belk, Dillard’s, and J. C. Penney. Belk and J.C. Penney filed for bankruptcy in 2020 and have now emerged from bankruptcy.
Brookfield has already removed the mall from its list of malls that it owns, having already walked away. Now it’s just a matter of sorting through the debris.
In 2013, a 325,166 sq. ft. portion of the mall – which doesn’t include the four anchor store locations – was used as collateral for a $57.9 million loan that was then securitized into CMBS. At the time, the collateral was valued at $97.9 million. What could go wrong lending $57.9 million on $97.9 million in collateral?
Mallmageddon. In September 2020, the loan transferred to special servicing due to payment default.
Now the special servicer, cited by Trepp, noted that the collateral value was reduced from $97.9 million at securitization to to $33.1 million, a haircut of 66%.
If the collateral is actually sold for $33.1 million, the lenders, having lent $57.9 million on $97.9 million in collateral, would pocket a loss before fees and other costs of 43%.
Jefferson Mall (Louisville, KY): -66%
The nearly 1-million sq. ft. mall with four anchor stores, owned by CBL & Associates Properties, borrowed $59.5 million in 2012, secured by a 280,000 sq. ft portion of the mall. At securitization in 2012, the collateral portion of the mall was valued at $101.7 million, for the purpose of selling the CMBS to investors.
What could go wrong lending $59.5 million on $101.7 million in collateral? You guessed it. Mallmageddon.
In September 2017, Toys ‘R’ Us filed for bankruptcy and was liquidated in 2018, and all its stores were closed, including the store at the Jefferson Mall, one of the four anchor stores.
In 2018, Sears announced it would close a whole bunch of stores, including its store at the Jefferson Mall, which closed in January 2019, leaving behind an empty box. Dillard’s and JC Penney are the remaining anchor stores.
In November 2020, the mall’s owner, CBL & Associates Properties, filed for bankruptcy.
This summer, the collateral’s value was reduced from $101.7 million at securitization to $34.7 million, a haircut of 66%.
If the collateral is actually sold at $34.7 million, the lenders – having lent $59.5 million on $101.7 million in collateral – will book a loss before fees and costs of 42%.
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