Mapeley’s loss of control over its once £1.87bn-valued UK-wide secondary property empire is accelerating with 228 distressed regional properties expected to be sold through receivership in the months and years ahead across four of the majority Fortress Investment Group-owned investor’s five separate securitised portfolios.
Three of these four portfolios are in a severe state of distress – Mapeley Gamma, Mapeley and Mapeley II – each with significant major LTV covenant breaches, totalling 60 regional assets collectively valued at £433.35m against £638.86m in outstanding securitised debt, taking the combined LTV to 147.4%.
Across the entire five separately securitised pools, Mapeley’s original real estate portfolio comprised 564 UK commercial properties worth a combined £1.87bn, secured by £1.24bn in five senior loans, each securitised separately, and one £165.8m B-note, under the original 364-strong Mapeley Columbus portfolio, predominantly let to Santander.
The aggregate in debt is securitised in three Deutsche Bank CMBS transactions, one by Merrill Lynch and the fifth by Morgan Stanley.
Three of the five portfolios are substantially underwater portfolios – Mapeley Gamma at 187.9% LTV, Mapeley at 227.5% LTV, and Mapeley II at 142.8% LTV – with current market values significantly below vacant possession values (VPV).
There are two opposing schools of thought which justify the difference: the first argument is that this is the result of a combination of significant over-rentedness, capex requirements and structural vacancy linked to micro location factors. All of which would go someway to explaining the value deterioration.
The opposing argument is that pre-credit crunch valuations were partly affected by the exuberant sentiment of the time, as a plethora of cheap debt drove transaction markets, propelling valuations to unsustainably high levels as the property bubble gathered momentum in the middle of the last decade.
Critically, that this investment short-sightedness resulted in economically unjustifiable VPVs, sustained by the mirage that cheap debt, economic growth and robust property fundamentals would be sustained indefinately.
Perhaps, instead, the truth lies somewhere in-between these two positions.
These three portfolios were valued at £794.69m prior to securitisation between 2005 and 2006, and are now worth just £325.25m based in 2012 revelations.
The absence of any meaningful capital appreciation in regional secondary property in the global financial crisis has substantially affected current values.
Two of these three portfolios – the 20-strong Mapeley portfolio and the 16-strong Mapeley II portfolio which were both securitised in Deutsche Bank’s DECO 6 and 8 CMBS transactions respectively – now have current 2012 predominantly occupied valuations lower than the initial VPVs prior to securitisation.
Mapeley I’s 20-strong portfolio – DECO 6 CMBS
The 20-strong portfolio securing Mapeley’s first securitised loan have fallen in value by around 70%, from £244.82m, between 2004 and 2005, to £74.74m as at the end of January this year.
The portfolio’s dramatic decline in value, which is 43% let to the UK Secretary of State, was driven by several factors including, chiefly the vacancy of the largest asset, Croydon’s 252,571 sq ft Delta Point, which fell in value by 82.63%, or £48.42m, to £10.18m.
In addition, the decline was impacted by the reduced weighted average lease term of the portfolio, down to 2.1 years, the wider portfolio’s vacancy rate, up to 18%, the physical condition of the assets as well as downward pressure on the properties’ local investment markets.
Including the £21.5m mark-to-market swap exposure as of January 2012, the LTV of the Mapeley loan was 257% in early 2012, according to Barclays Capital.
“We think that since January 2012, the swap mark-to-market likely increased,” wrote Christian Aufsatz, CMBS analyst at Barclays Capital, in a research note. “In our view, the recent loan commentary implies that the special servicer aims to replace the asset manager, conduct asset management initiatives and dispose of the properties over time.”
After Delta Point, the next four largest portfolio assets comprise:
- Edinburgh’s 132,337 sq ft Chesser House has fallen by 77.50%, or £22.05m, to £6.4m;
- Hercules House in Waterloo has fallen by 49.18%, or £11.97m, to £12.37m;
- Reading’s Kings House has fallen by 56.46%, or £9.74m, to £7.50m; and
- Peterborough’s Touthill Close has fallen by 88.57%, or £12.40m, to £1.6m.
Mapeley II’s 16-strong portfolio – DECO 8 CMBS
Two weeks ago, Solutus Advisors was finally appointed as special servicer over the Mapeley II loan, which is expected to take until early next year before piecemeal or a portfolio sale is assembled, likely through the receivership route, in line with the disposal strategy Hatfield Philips exercised in July for the 20-strong Mapeley loan in DECO 8.
Last week, a new valuation for the Mapeley II loan was issued of £134.3m, dated to August 2012, for the 16-strong portfolio, 44% lower than the previous £241.9m valuation in 2008.
The Mapeley II portfolio has an outstanding debt balance of £190.5m, taking the LTV to 142%. Although the loan originally breached its LTV covenant in 2009, this was waived until July 2012, in exchange for a cash sweep.
“Compared with the Mapeley portfolio in Deco 6 UK2, the Mapeley II portfolio characteristics are better: the vacancy rate is lower (6.7%) and the weighted average lease term is longer (5.9 years),” wrote Barclays Capital’s Aufsatz.
The 246,004 sq ft Microsoft Campus office complex in Reading is the loan’s largest asset, currently worth circa £70m to £80m, contributing 27% to the loan’s rental income, with tenant Microsoft signing a new 15-year lease in 2012.
With the exception of this one long lease, the remaining weighted average lease term is just 2.4 years.
The remainder of the portfolio also includes four regional offices: the 232,631 sq ft Tri Centre, the 55,874 sq ft Oak House in Watford, the 100,925 sq ft Rowland House in Chesterfield, and the 100,152 sq ft Sussex House in Burgess Hill.
Mapeley Gamma’s 24-strong portfolio – Deco 11 CMBS
While the Mapeley and Mapeley II portfolios, along with the 168-strong more granular Mapeley Columbus portfolio, are all in special servicing, the 187.9% LTV covenant breach in the 20-strong Mapeley Gamma has been waived.
Mapeley Gamma, the third portfolio securitised by Deutsche Bank in the DECO 11 CMBS, has an outstanding balance of £218.35m, against an October 2012 valuation of the 24-strong portfolio of £116.2m.
The five largest assets by original purchase price comprise:
- The 344,477 sq ft Lynch Wood Park in Peterborough, let to Diligenta at £4.1m pa, was purchased for £65m;
- The 245,064 sq ft Leon House in Croydon, let to various tenants at £3.6m pa, was purchased for £53.2m;
- The 93,877 sq ft 58 Clarendon Road in Watford, let to KPMG at £2.5m pa, was purchased for £35.8m;
- The 193,856 sq ft IBM Campus in Warwick, let to IBM at £2m pa, was purchased for £29m;
- The 146,207 sq ft Nelson Gate in Southampton let to various tenants at £2.3m pa, was purchased for £19.27m.
The Mapeley Gamma vacancy rate is 17%, the tenant base is relatively diverse with a weighted average lease term of 4.9 years. Bondholder recoveries would likely be further eroded through swap breakage costs if the loan servicer – now The Situs Companies – transferred the loan into special servicing before its April 2016 maturity.
Mapeley Columbus’ 168-strong portfolio – Perseus ELoC 22 CMBS
The fourth portfolio, Mapeley Columbus portfolio, is now just 168-strong with a current aggregate value of £108.1m, with outstanding securitised debt of £38.09m and a £21.84m B-Note, underneath the Morgan Stanley-issued Perseus ELoC 22 CMBS.
The portfolio has a vacancy rate of 25% and is predominantly comprised of regional offices let to Santander, including – at the time of the securitisation – the loan’s eight largest assets: comprised of three in Milton Keynes, one in Glasgow, Bradford, Sheffield, Stockton-on-Tees and Fareham. However, the service has not published details of those sold and those assets remaining.
The loan defaulted on its July 2012 maturity date and was transferred into special servicing and is currently subject to a standstill agreement that is renewable on a quarterly basis until July 2013.
“The work-out strategy includes borrower-led property disposals and a reduction of the loan balance over time,” wrote Aufsatz.
There is an estimated £13m mark-to-market interest rate swap which has nine further years to run. “We still view loan enforcement as unlikely, given that it would increase the recovery prospects of the senior A loan, but not the recovery prospects of the whole loan,” wrote Aufsatz.
Mapeley Loan’s 100-strong portfolio – Taurus 2006-2 CMBS
Finally, a fifth securitised portfolio – the original 140-strong Mapeley Loan portfolio which was worth £549.825m prior to securitisation with a £176m loan in the Merrill Lynch-issued Taurus 2006-2 CMBS – comprises 100 assets today, collectively worth £395.6m as at April 2012, with £151.34m in remaining debt.
However, unlike the previous four portfolios, Mapeley only owns the leasehold over the properties in the portfolio, while the £151.34m Mapeley Loan is performing with a current LTV of just 38.25%, based on an updated valuation of £395.6m, although the properties have fallen in value by 15% in value since June 2011.
Christian Aufsatz, CMBS analyst at Barclays Capital, wrote in a research note that his estimate of the valuation of the Her Majesty’s Revenue and Customs (HMRC)-leased office portfolio, which expires in April 2021, is more likely to be lower – at between £325m and £350m.
Aufsatz added in the note: “The loan matures in April 2021, but has a “term change date” in September 2013, when the loan’s financial covenants become tighter, the loan’s margin increases by 150bp (all-in interest rate of 6.75%) and a cash sweep comes into effect, with the aim of incentivising the borrower/sponsor to repay.
“In our view, a repayment of the loan on its term change date in September 2013 is unlikely, taking into account the remote margin increase, the relatively low all-in interest rate post step-up.”