Starwood misses payments on $549M mall debt
Starwood Capital Group missed two monthly payments on securitized debt tied to five shopping malls anchored by bankrupt department stores including Sears and J.C. Penney.
The delinquent May and June payments are further signs of the damage wrought by the COVID-19 pandemic and economic shutdown, especially to retail. The missed payments total $2.7 million on the $549 million commercial mortgage-backed security, according to data compiled by Bloomberg.
Debt delinquencies have soared for mall owners, which lost market share to e-commerce and were hit with tenant bankruptcies even before the pandemic forced shoppers and diners to stay home. By last month, more than 9% of retail commercial mortgage-backed securities were managed by special servicers, the workout firms that handle delinquent debt, up from about 5% before the pandemic, according to property data firm Trepp.
Landlords collected an average 61% of rent from retail tenants in June, down from 88% in March before the crisis, according to Datex Property Solutions.
Starwood Capital, which Barry Sternlicht founded in 1991 as a distressed real estate investing firm, now manages about $60 billion in assets. Starwood declined to comment.
S&P Global put the Starwood CMBS on credit watch on May 6 with “negative implications” on May 6, indicating a 50% chance of a rating change, according to Luke Shane, a spokesman for the rating company.
Starwood acquired the malls, originally a portfolio of seven shopping centers built in the 1970s, in 2013 for $1.6 billion. The five properties in the CMBS are located outside Los Angeles and San Diego; in Toledo and North Olmsted, Ohio; and in Olympia, Wash. At the time of the CMBS origination, the total appraised value of the portfolio was more than $1.2 billion.
J.C. Penney, one of the largest tenants in all five Starwood locations, filed for bankruptcy protection in May and plans to close more than a quarter of its stores. Sears, with stores at three of the Starwood malls, filed for bankruptcy in 2018, months after the debt was issued. Macy’s Inc. last month announced plans to borrow as much as $4.1 billion to tide it through the current crisis.
Other Starwood mall tenants named on the bond documents include movie theaters that are losing market share to at-home streaming services. In 2018, when its department store tenants were already facing falling sales, Starwood secured financing through Israeli investors, $252.8 million of subordinated debt, who stand in line for payment after the CMBS obligations, an S&P presale report said. The Israeli bondholders are currently reviewing offers to buy their debt, according to documents on the Tel Aviv Stock Exchange.
"Please note, as disclosed by Starwood, the CMBS and other direct loans are currently in default and the CMBS and other lenders may have certain consent rights" regarding buyers of the debt, Doron Turgeman, a representative for the Israeli bondholders, said in a June 3 note to bidders.
The malls in the Israeli portfolio collected only 19% of rents in May, according to a filing on the Tel Aviv Stock Exchange.