A securitised loan backed by a portfolio of German multifamily housing owned by Brookfield is at “heightened risk” of default following a doubling of interest rate payments on the transaction, according to credit rating agency Fitch.
In a note on 14 July, the agency identified “material risks” for EMEA CMBS transactions securitised in 2021 but singled out the German loan, which financed thousands of properties owned by the Toronto-based manager, as being “the most severe case” of heightened credit risk.
The transaction, Haus (European Loan Conduit No. 39), which was arranged by US bank Morgan Stanley in 2021, is secured by 6,281 multifamily housing units across 92 sites in Germany. It completed with a debt yield of 4 percent.
In addition to a two-fold increase in interest repayments since issuance, the interest expense on the €318 million five-year senior loan is set to increase further when the interest rate on the loan expires in 2024. All interest payments are, however, up to date Fitch said.
Fitch explained that Brookfield’s business plan had been hinged on what it described as an “aggressive upgrading and re-letting of the assets”. However, the required refurbishment works were delayed due to the pandemic.
It added: “Meanwhile, budgeted capital expenditure costs have doubled as a result of an underestimate of the scope of works, alongside rising labour and material costs.
“The entire business plan is now entirely reliant on out-of-pocket financial support from the sponsor, a proposition that we expect to be severely tested by the rising interest rate environment.”
Brookfield declined to comment. But a source close to the situation disputed Fitch’s view of the company’s business plan, saying it was “conservative”, with significant upgrade potential for the units in areas where housing demand is strong against very low vacancy rates. “The loan is not due for refinancing for another three years, which provides them with significant time to execute on the business plan,” the source added.
The source added that the company is renovating 100 units a month, with projected income from the rents expected to cover any future interest payments, adding that Brookfield had “the necessary capital available to meet the obligations of the loan”.
Fitch said Brookfield is currently subsidising operating income on the property by 50 percent of gross income, as the vacancy rate on the portfolio remains at 42 percent. The manager acquired the portfolio with a vacancy rate of 33 percent.
Fitch said Brookfield would need to inject €8 million in equity at the expiry of the interest rate cap in order to meet its annual loan obligations.
It added that loan default probability is “elevated” given refinancing risk, adding: “If the sponsor withdrew its financial support, noteholders would be in an extremely weak position in our view, facing significant loan losses capable of eroding class A principal. We do not consider any of the notes to be investment grade.”
In the same note, the agency also highlighted two other transactions secured by properties owned by Brookfield – Atom Mortgage Securities DAC, a £307.8 million (€357 million) securitised loan backed by four business parks and two logistics properties in the UK, and Viridis (European Loan Conduit No. 38) DAC, a £192 million transaction backed by London’s Aldgate Tower in the City of London.
The two transaction, Fitch said, had “underlying issues”, which made the loans vulnerable to the rising costs of financing, given its heavy exposure to the office sector combined with a low debt yields.
It also identified Taurus 2021-3 DEU DAC, a €530.88 million five-year, interest only CMBS loan backed by a mixed-use office and hotel property connected to Frankfurt International Airport and a nearby parking complex. The properties are owned by ACG Equity Partners Investment Management, an alternative asset management firm.