Velocity Commercial Capital is preparing a $333 million commercial mortgage-backed securities (CMBS) transaction, secured by a pool of low-balance commercial loans on 858 residential rental and commercial real estate assets.
Kroll Bond Rating Agency plans to split the pool into two separate groups for rating purposes. Subpool 1, consisting of investor loans secured by rental properties of four units or less, which KBRA will value using residential mortgage-backed securities (RMBS) and Subpool 2, which includes commercial real estate assets and will receive a valuation based on its CMBS rating methods. Sub-pool 1 accounts for 51.9% of the total pool balance, with 415 loans, while CRE sub-pool accounts for 48.1% of the collateral balance and 331 loans, KBRA said.
The transaction’s commercial real estate assets, VCC 2022-4, break down further, with 100 mixed-use properties; 64 commercial buildings; 37 industrial properties; 38 multi-family properties; 43 office buildings; 28 commercial condominiums; and 12 auto service properties, according to the rating agency.
Barclays Capital, Citigroup Global Markets and Performance Trust Capital Partners will be the first purchasers of notes from the trust, KBRA said. Velocity Commercial Capital originated substantially all of the loans in the pool, some 781 loans representing 99.5% of the pool, and will sell the loans to the trust. One of the collateral pool loans has subordinated debt in place in the form of second mortgages, the rating agency said.
On a weighted average (WA) basis, the underlying assets have a loan to value (LTV) of 66.1% and a FICO score of 726.
Yet KBRA subsequently observed potential credit issues in the collateral pool. On average, loans have an outstanding balance of $426,531 and remaining balances of less than $250,000. Some 70.4% have balances below $1 million.
Low balance loans have historically had higher default rates, compared to the overall CMBS industry, KBRA said. When low balance loans typically default, collateral properties tend to incur resolution fees that represent a higher percentage of the underlying collateral compared to resolution fees associated with larger assets. However, larger assets are better able to absorb the costs.
Another aspect of the underlying loans poses a mixed credit outlook for VCC 2022-4. The loans, about 781, are fully amortized over their respective terms, but 76 loans have an interest-only period, according to the KBRA. Additionally, the assets have an increase in debt service once the interest-only period is over.
“As the interest-only period ends and debt service increases, there may be a peak in default risk as properties are burdened with higher debt payments,” the KBRA said.