MHCs, Self-Storage Tick Upward in CMBS Deals

NEW YORK CITY-Although the major food groups still comprise the majority of collateral in CMBS deals, Fitch Ratings says there has been a steady uptick in the number of non-traditional properties over the past four years. Manufactured housing communities and self-storage properties in particular have increased of late.

The ratings agency says the representation of MHCs in Fitch-related securitizations has grown from less than 1% in 2010 to 2.5% in 2011, 3.2% in 2012 and 5.9% as of Sept. 30. Part of the increase can be attributed to larger loans backed by pools of MHC assets, Fitch says. The low rate of defaults for loans in this sector—historically, less than 1%--has been a factor in boosting the size of loans backed by MHCs.

Generally speaking, MHC loans are secured by the pad sites only, since residents usually own their homes and rent the pads. Fitch says it recently saw a loan that also included mobile homes as collateral. The issuer's underwritten cash flow included the rental income from both the pads and the homes, although the ratings agency sees more volatility in such a case because the home value can deteriorate very quickly in these instancces.

Self-storage assets have also been a growing contributor to securitized deals. Year-to-date, just over 4% were self-storage assets. Loans in this area also enjoyed a default rate of less than 1%. Even so, Fitch says it views these assets cautiously, because many are located in areas with limited barriers to entry.

Although one generally looks at hotels as one of the basic commercial property sectors, historically they've represented about 10% of US multi-borrower CMBS transactions. When CMBS re-emerged from what looked like near-extinction during the depths of the downturn, its share of the CMBS pie was smaller, less than 5%.

As the lodging sector rebounded, leading the way in terms of recovery, hotels' share of Fitch-rated CMBS deals grew to more than 10% in '11, 13.5% last year and 14.5% YTD. Although expecting continued revenue growth into 2014 and maintaining its "stable" outlook for lodging, Fitch notes that some hotels are now at or near their previous revenue and income peaks. Accordingly, the agency will take a close look at new hotel loans to ensure that their current performance is sustainable over the next 10 years.