This article is from Trepp, which is an industry analytics company used by most Wall Street trading desks, and reveals troubling stats in securitized CMBS deals.. The amount of loans that were late, but not yet considered 30 days late increased from 1.9% to ~10%. So, these are loans that are basically in their grace period, but haven’t gone 30days delinquent yet.
This is only with 25% of deals reporting. So, this is something I will update as the numbers come in. However, this is a potentially catastrophic situation for Commercial Real estate. Scary stuff.
April CMBS Remittance Data Reveals 10x+ Increase in Non-Payment of Hotel Loans; Almost 5x for Retail Loans
While many in the CMBS industry had last Friday off, those responsible for paying bondholders and posting remittance reports for deals that pay on the 10th of the month did not. In fact, about 25% of the private-label CMBS universe was slated to “remit” on Friday and Trepp’s bond modeling team spent the day loading data and updating models. That gave us a chance to sift through all the numbers.
First, a little background.
Because the coronavirus headlines really took off around mid-March, most borrowers had made their March 1 payments. It was assumed that many borrowers would withhold their April payments – especially in the hard-hit lodging and retail segments. However, failure to make an April 1 payment would not make a loan 30 days delinquent if the borrower had made the March 1 payment. The status – according to CREFC guidelines – would place the loan in a category of either “late but within grace period” or “late beyond grace period.” (These two categories correspond to the status codes ‘A’ or ‘B’, respectively.)
The industry has never really had reason to look at this status in the past since these loans were generally considered “current.” For some, this would be a passing status on the way to becoming delinquent. In the past, about 2% of all private-label CMBS loans were in this category on average – while some were due to administrative reasons (i.e. the check was in the snail mail), others were placed in this category because the loan was on its way to becoming delinquent.
Prior to looking at the data, we expected the numbers to be much higher than usual, but the actual numbers surpassed our expectations.
Now, the data serves as an early indicator for what could become 30 days delinquent a month from now.
When we first ran the numbers over the weekend, the results looked like this. We had about $6.7 billion in loans that had been current in March but had gone into or beyond grace period in April. That number reflected that about 20% of the loans have reported. That has since grown to $12.9 billion with over 65% of the loans still yet to report.
For lodging loans – in March 2020 – the percentage of loans categorized as A or B was about 1.5%. In April, that percentage is now 19.9% – a number that has seen a modest uptick over the last few days as more data have rolled in and more loans have reported for the month. If this percentage holds up over the rest of the month, the dollar amount of loans in the A/B category could reach $15 billion in April based on the total outstanding universe of $76 billion for the hotel sector.
For retail loans – in March 2020 – the percentage of loans categorized as A or B was about 1.7%. In April, the percentage is now 9.6% with the updated data. If this percentage holds up over the rest of the month, the dollar amount of loans in the A/B category could reach $12 billion in April based on the total universe of more than $124 billion for the retail sector.
While it is known that multifamily and office will be less severely impacted by the pandemic’s economic impacts, there will still be signs of stress. Here are the numbers for the multifamily and office property segments. Multifamily: March, 2.7%; April, 5.3%. Office: March 2.6%, April 2.2% (yes, a small drop.)
We are loading new data almost every hour of the week as new servicer data comes in – so these numbers will likely change frequently over the next few days.
A review of March’s watchlist and special servicer comments showed there was no mention of COVID as far as we could tell. The watchlist and special servicer comments in April saw many references to that term.
Unfortunately, these numbers above could be on the low side of what’s to come. There are many examples of loans for which the April 1 payment was made, but for which the watchlist comments now indicate a forbearance has been requested.
An example would be the $58.9 million Omni Royal Orleans loan which makes up 5.59% of COMM 2014-UBS2. The property is a 345-room full-service hotel in New Orleans. First-time servicer watchlist notes indicate that “this loan is being monitored for hardship. Borrower reports collateral operations have been impacted by COVID-19. A forbearance is in progress.” As noted, the servicer data shows that the April 1 payment for the loan has already been made.
The take away that perhaps most people expect given the rebound in real estate securities is expressed in the last paragraph: “To save the market, the nonbanks will have to be bailed out either by the Fed or by the U.S. Treasury. ”
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.