Retail landlord Macerich’s refinancing of a Connecticut shopping mall during a credit crunch illustrates the difficulty of obtaining loans even for some of the better-performing retail properties in the country.
The $155 million loan on Danbury Fair mall in Danbury is set to be rolled into new multiborrower deals available to investors on the commercial mortgage-backed securities market.
The mall attracts among the highest number of visitors for such properties in the state, is nearly 98% occupied and has annual double-digit growth in revenue. Nearly half of the space has been newly leased or renewed since 2020, according to CMBS documents.
That performance bumps up against high interest rates and more conservative lending standards. Property owners are left with weaker leverage when it comes to what they can borrow, according to bond analysts. With retail loan delinquencies on the rise, fewer than 40% of retail loans set to mature this year were expected to get refinanced, according to Fitch Ratings, one of the firms that has analyzed the upcoming offering.
Those that do get to refinance will require accepting smaller loan amounts at a more expensive interest rate and include provisions for setting aside money to cover potential costs such as lease-ups, analysts have noted.
Macerich’s loan is set to be split across five different CMBS offerings in the coming months with a $90 million portion leading an upcoming deal from Bank of Montreal. That bank co-originated the entire loan in January along with Goldman Sachs and Morgan Stanley, according to a new filing with the Securities and Exchange Commission.
The loan has a 10-year term at an annual interest rate of about 6.3%. Macerich is only required to make interest payments on the loan through the term.
Discussing the loan on Macerich’s fourth-quarter earnings call last month, Chief Financial Officer Scott Kingsmore acknowledged the real estate investment trust did not get as much of a loan as it could have under normal lending conditions.
“The loan to value, if I recall correctly, was in the low 40s based on appraisal,” Kingsmore said. “We typically finance in the 55% realm. So yes, there's a little bit of liquidity on the table, but it's the state of the market today. … And recall, we've been trying to finance that thing through a difficult capital market environment for almost two years.”
CoStar News reached out to Macerich via email twice for additional comment but did not hear back.
Danbury Fair is a 1.27 million-square-foot enclosed super regional mall of which 923,598 square feet serves as collateral for the $155 million loan. The financing does not include any portion of the property occupied by Macy’s and JCPenney, which own their parcels, according to the SEC filing.
The collateral is more than 97.9% occupied and through the first nine months of 2023 posted net operating income of more than $30 million, a total that already surpassed full 2022 earnings, according to the SEC filing of the latest figures available. Comparable sales for smaller inline shops were $747 per square foot in the third quarter, up 13.6% over pre-COVID 2019 sales of $658 per square foot.
Tighter Lending
To underwrite the loan, the collateral was appraised at $371 million. If Macerich were able to obtain a loan at its more typical 55% of the appraised value, the debt would have amounted closer to $204 million — or about $49 million more than what the REIT received.
Put another way, Danbury Fair would have had to score an appraised value of $485.7 million to get $204 million at the 42% loan-to-value that Macerich secured for the property, according to David Putro, senior vice president at Morningstar Credit Analytics, in an email to CoStar News.
“There are a couple things at play in the lending markets at the moment,” Putro said. “Underwriting standards have gotten a bit more conservative. So, we are absolutely seeing mall deals get done, but at lower loan-to-value ratios than a few years back. This effectively leads to lower proceeds on a refinance if there hasn’t been adequate value growth to offset.”
The other factor is interest rates, according to Putro. Deals that were done in 2014 and hitting their 10-year maturities were generally financed at interest rates of around 4.5%. There is just a lot less willingness on the part of lenders to do deals at today’s rates without adequate net cash flow growth to offset the more expensive debt.
Since Macerich acquired Danbury Fair in 2005, the REIT has invested almost $151.2 million in the property, putting its total cost basis at $622.2 million, according to S&P Global in its analysis of the upcoming CMBS deal.
Among potential risks associated with the new loan is significant lease rollover during the 10-year loan term, with 86% of the net rentable area set to expire and 94.8% of in-place gross rent expiring through year-end 2034, as calculated by S&P.
The loan is structured with rollover and excess cash flow reserves that are funded upon the net operating income-based debt yield falling below 12.5% during the first eight years of the loan term or 15% during the past two years of the term. The current debt yield is 19.4%, according to S&P.
Debt yield is measured by dividing a property's net operating income by the loan amount. The lower the percentage, the higher the risk.
With the new loan, Macerich paid off a $117 million loan approaching its maturity date.
The REIT has been busy in the debt markets during 2023 and into this year. Over that time frame, it refinanced or extended eight loans totaling $2.9 billion, including a 4 1/2-year renewal. It also increased its revolving corporate credit facility to $650 million.