New York Retail Center Illustrates Risks of Loan Modifications

While the number of delinquent loans are among the highest for CRE asset classes, many have been salvaged by forbearance and loan modifications. This has been a prime reason why so little distress has entered the market. But in some cases, these lender overtures are merely kicking the can down the road. DBRS Morningstar recently described the risks remaining with a New York regional mall loan returned to the master servicer after a loan modification was approved.

The 484,556-square feet portion of the regional mall that secures the loan is about 25 miles south of the U.S.-Canada border in Plattsburgh, NY. An affiliate of The Pyramid Cos., a privately held company that owns 15 regional malls totaling 17.8 million square feet in the Northeast US, is the loan’s sponsor, according to DBRS Morningstar.

Like many mall operators, large shutdowns have stymied Pyramid. Significant revenue declines have weighed the company down amid the pandemic as a large part of its portfolio shuttered for the spring months of 202, according to DBRS Morningstar.

The loan is maturing in March 2021. Given that deadline, DBRS Morningstar says it remains cautious on the sustainable performance of the loan.

In the loan modification, payments from April to September 2020 were converted to interest-only, with half of the accrued interest deferred. Additionally, a waiver of ongoing collections for replacement and leasing reserve payments was also provided.

In October 2020, the borrower would begin to repay the deferred principal and interest reserves. Those amounts were to be collected over 12 months.

At year-end 2019, the loan’s debt service coverage ratio was 1.47x. In Q3 2020, nine months later, the loan’s DSCR fell to 0.76x. Over the same nine-month period, occupancy fell from 83.0% to 73.0%. The loans YE2019 NCF fell 24.0% below the issuer’s underwritten figure.

In July 2020, the property was reappraised for $23.8 million, which was a 61% decrease in value since the at-issuance appraisal.

This New York mall isn’t alone. There are problems all across the country.

According to Moody’s Analytics REIS, the sector’s vacancy rate increased by 0.2% in Q3 to 10.4%, which was the highest mark since 2013. Average asking rents and average effective rents fell 0.1% and 0.4%, respectively. 

Vacancies in malls hit their highest rate in 20 years, after rising 0.3% to 10.1% in Q3. The average mall asking rent declined 0.7% in the quarter and 0.6% over the year.