Starwood Provides $89M CMBS Refinance on Medical Office Portfolio

The sponsor is an affiliate of medical real estate investment firm, ShareMD

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Starwood Mortgage Capital has provided $89 million in commercial mortgage-backed securities (CMBS) debt to JDS Real Holdings to refinance a six-building collection of medical office assets in southern California and in Miami, according to Fitch Ratings

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The 10-year, partial interest only loan pays interest at a rate of 4.2 percent, and together with $13.2 million in equity from the sponsor, the debt refinanced $41.3 million worth of existing debt on four properties in California. It also covered a roughly $53.7 million purchase of the remaining two assets in Florida that round out the portfolio as well as leasing obligations and closing costs, as per Fitch analysis.

Of the $89 million, a $60 million controlling A note as well as $10 million in the form of a non-controlling A-2-A note will be securitized in the roughly $700.3 million Barclays-led BBCMS 2020-C8 CMBS transaction. There’s also a $19 million non-controlling A-2-B note that will more than likely be securitized in one or more future transactions.

Starwood’s valuation of the portfolio was set at $148.5 million, indicating an underwritten loan-to-value ratio of just under 60 percent. The lender pegged the portfolio’s net cash flow at $7.3 million, with a debt service coverage ratio of 1.4x. 

The portfolio comprises a combined 297,839 square feet and is 96.2 percent occupied, per Fitch analysis. The two largest properties in the bundle are the 82,753-square-foot Galloway Medical Park in Miami (representing 24.4 percent of the loan amount) and El Camino Real, a 74,124-square-foot property in Encinitas, Calif. that was renovated last year and is 88.5 percent leased — the lowest of the properties in the portfolio. The El Camino Real property represents 35.2 percent of the total CMBS loan amount. 

The four California assets, which comprise almost 53 percent of the portfolio’s overall rentable area, were purchased by the borrower as distressed assets from 2013 to 2018, per Fitch. While this presents obvious concern for the portfolio, JDS’s recent leasing success somewhat dispels this. 

As of earlier last month, JDS — a real estate holding company and subsidiary of ShareMD, a real estate investor focused on medical office assets — had grown the overall occupancy to 93.4 percent. from 73 percent in the summer last year. With that, the two Florida properties — currently fully leased and located in a strong medical office submarket south of downtown Miami — that were acquired and added to this portfolio reinforce a positive leasing outlook as they both have registered an average occupancy of around 98 percent over the last decade, per Fitch. 

While leasing momentum has been strong, there are tenant rollover concerns. As per Fitch, 91.3 percent of the portfolio’s total rentable area is set to expire prior to the loan’s maturation, with most of it scheduled to occur in 2021 (14.1 percent) and 2024 (25 percent). Still, the largest tenant in the portfolio occupies just 5.2 percent of the total rentable area, and nearly 12 percent of the rentable space is occupied by a tenant affiliated with JDS — the majority of which is used as offices for one of the founders of ShareMD.

This financing also includes monthly tenant improvement and leasing commission reserves that are capped at a total $2 million — there is $33,524 available per month to cover leasing costs.