CMBS Deal Backed by Suburban Office, Industrial Assets Hits Special Servicing – Robert Khodadadian

The sponsor of the borrowers is PennCap Acquisitions and the lead originator was Ladder Capital. The portfolio — known as the PennCap portfolio — consists of 69 percent suburban office and 31 percent industrial by balance in the debt package. By square feet, the mix is 51.8 percent suburban to 48.2 percent industrial, data shows. 

The WFRBS 2014-LC14 and COMM 2014-LC15 deals have “slightly underperformed underwritten expectations” with debt service coverage ratio (DSCR) of 1.13 times as of June 2023, which is below the 1.40 level that the deals were underwritten at and also below the typical 1.20 industry standard for CRE lenders. 

“You have a very tight lending environment now and cash flow that’s managed to keep the loan afloat for 10 years but just isn’t isn’t sufficient to refi, which is why the borrower reached out for a modification to try and get some extra time to get some leasing done and get cash flow improved,”  David Putro, head of CRE analytics at Morningstar Credit Information & Analytics, told CO. 

Putro noted that despite its DSCR struggles, occupancy in the portfolio as of March 2023 hit its highest level in several years at 84 percent, and the special servicer holds “fairly significant reserves” with plans to make principal loan payment in November during the loan’s open date period to avoid penalties. The reserves include $2.2 million captured in an additional collateral reserve from a cash flow sweep and an additional $11.8 million held back by the servicer after a property release.

While a 1.20 DSCR has typically been the industry standard for CRE lenders, Putro stressed that loans now need to be well north of that and closer to 2.0 to achieve a refi. He cautioned that even though there is a large industrial component to this loan, it doesn’t mean more distress is on the horizon for the sector given the many localized warehouse tenants and the large office concentration in the portfolio.

“In this case, it is a lot of in between flex industrial stuff assets being bogged down by the office component,” Putro said. “I certainly wouldn’t use this as a predictor for what’s to come for industrial as it seems to be a different sort of an animal than a straight industrial portfolio that is being used for last-mile warehousing or Amazon.” 

Andrew Coen can be reached at acoen@commercialobserver.com