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October CMBS Performance Worsens, Loan Backing Union Square W Hotel To Default Imminently

Tyler Durden's picture





 

It really is time for the our central planning banking system, aka the Fed, to start thinking about enforcing CRE bailout strategies. Aaron Bryson over at Lehman, pardon, Barclays, has released his monthly CMBS remittance report, and things are getting worse ever faster. In disclosure that is sure to keep the market rally going for month, BarCap looks hard for CMBS green shoots and finds only their (near) homophone equivalents:

Credit performance for CMBS worsened at an accelerated pace this month versus the recent trend. Thirty-plus day delinquencies across the fixed rate universe increased by 41bp, to 5.50%, partly owing to the deterioration of loans that were current but transferred to the special servicer last month. This compares with the trailing three month average of 34bp. We expect this trend of accelerating delinquencies to continue throughout 2009 and early 2010, given the long lag times associated with commercial real estate.

By vintage, we notice a growing divergence between more recent and seasoned vintages. The 30+ day delinquency rate on 2005+ vintages jumped 47bp to 5.63%. More seasoned pre-2005 vintages saw a 27bp pickup to 5.17%. In particular, 2007+ vintage was a notable laggard, with delinquencies surging by 69bp to 5.32%.

The worst performing category was hotel, which hit a record overall 30+ delinquency rate, and a stunning 10.71% for the 2007 vintage. Close behind were Multifamily and Retail, at 7.55% and 7.11%, respectively.

The table below summarizes all the various data points:

Visualizing the various credit metric trends demonstrates just how bad the deterioration is especially in the near vintages (2006-2007).

And below are selected properties by CMBS class that have become delinquent or moved to special-servicing:

CMBX 1:

  • The $217mn World Market Center (8.57% of deal, SS-Cur), backed by the first newly constructed building in the World Market Development, was transferred to the special servicer.

CMBX 3:

  • The 270-room W Hotel in Manhattan is the collateral for the $115mn W New York-Union Square loan (3.38% of deal, SS-Cur), which was transferred to special servicer for imminent default.

CMBX 4:

  • The $150mn Hyatt Regency – Jacksonville loan (2.79% of deal, 30 day) backed by a 966-room full service hotel located in the Jacksonville, Florida, went 30 days delinquent this month.
  • the $50mn Palm Beach Gardens Marriott loan (1.59% of deal, 30 days), went delinquent this month. The 279-unit property is located in Palm Beach Gardens, Florida, and financials reported monthly from June to August showed a steady decline to 0.52x from 0.70x versus 1.41x since underwritten.
 


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Wed, 11/04/2009 - 16:51 | Link to Comment lizzy36
lizzy36's picture

bots doing everything they can to keep spy in the green

Wed, 11/04/2009 - 17:55 | Link to Comment Hephasteus
Hephasteus's picture

Move it around before someone notices it's dead.

Wed, 11/04/2009 - 19:18 | Link to Comment Sqworl
Sqworl's picture

+100 LOL

Wed, 11/04/2009 - 20:05 | Link to Comment Anonymous
Wed, 11/04/2009 - 16:57 | Link to Comment MyKillK
MyKillK's picture

How much longer before this commercial real estate bubble pops? What's the breaking point? Been hearing so much about it for so long yet no matter how bad commercial real estate keeps getting, it doesn't seem to be affecting markets at all really.

Wed, 11/04/2009 - 17:04 | Link to Comment Whizbang
Whizbang's picture

It's not impacting the market because these loans and collateral are still being held at par on the balance sheet. It will impact the market when banks go to forclose, realize 50% losses on the note and implode.

Wed, 11/04/2009 - 17:30 | Link to Comment Anonymous
Wed, 11/04/2009 - 18:12 | Link to Comment cougar_w
cougar_w's picture

Which only brings us to the question: how long can extend-and-pretend continue?

With creative accounting, the answer might be "until the heat death of the universe"

So what happens to a bank that NEVER writes off a bad loan? Is there any limit to make-believe? So long as the banks and the government are in agreement on the idea, can't these broken balance sheets simply sit there -- broken -- and everyone stands around and whistles like its just fine?

They've crossed some kind of line. The market is theirs now, not ours. We're just spectators. I don't see where it ever has to end. If they like it the way it is, then it just stays that way.

cougar

Wed, 11/04/2009 - 18:40 | Link to Comment walküre
walküre's picture

Every business needs cash flow.

Even a business that is operating on the basis of 'make believe' has payments to make.

There is a ceiling to this process and they're touching that ceiling. On the other hand, there's no floor when the bottom literally falls out.

What is anything worth anymore when you've accepted to temper with the value of something? A half vacant mall or office building is just not worth anything unless it's paid. If there's a loan on the property, the loan has to be paid or written off. When the loan gets written off, someone is hurting.

 

 

Wed, 11/04/2009 - 19:19 | Link to Comment Sqworl
Sqworl's picture

10K constant Reocurring loss...lol

Wed, 11/04/2009 - 19:24 | Link to Comment Froggy
Froggy's picture

It is happening "quietly" in the "small cap" CRE space right now. 

Example: Boutique office building in SoCal sold for $27.5MM in 2007 using a $24MM loan (not a typo).  The buyer strategy was to run off all of the tenants at lease expiration and sell the suites as condos for $600+/ft.  Buyer got rid of 50% of the tenants before the bank punched his ticket.  Meanwhile, one of the existing tenants offered the bank $18MM for the note (50% vacant) and the bank said, "No thanks". 

The bank is Taiwanese and just instructed the California office to sell that property REO ASAP in an auction format.  They looking at getting $10-12MM for it now.  The broker told me that in the past 6 weeks or so the home office in Taipei basically instructed their CA branches to liquidate NOW!

Another CMBS deal that transacted at ~$15MM in '07 with a $10.3MM note just got punched out and the lender ate $6.3MM on the note.  So we have two deals that are trading at 60-75% discounts on the NOTE!  You won't read about these deals in the WSJ, but they are happening.

Thu, 11/05/2009 - 00:51 | Link to Comment Anonymous
Wed, 11/04/2009 - 18:48 | Link to Comment Anonymous
Wed, 11/04/2009 - 18:40 | Link to Comment Rama V
Rama V's picture

Here is a letter from my Senator.  One can tell that a politicain is lying if his lips are moving!

Dear Rama V:

Thank you for contacting me about the Federal Reserve Sunshine Act of 2009. I appreciate having the benefit of your comments on this matter.

The Federal Reserve Sunshine Act of 2009 (S. 604)—which I am proud to cosponsor—was introduced in the Senate on March 16, 2009. This legislation would require the Comptroller General of the United States to complete an audit of the Federal Reserve before the end of 2010 and report findings to Congress. Blah, blah, blah, ...blah, blah....

Sincerely,

JOHN CORNYN
United States Senator

Wed, 11/04/2009 - 17:09 | Link to Comment Anonymous
Wed, 11/04/2009 - 17:11 | Link to Comment lizzy36
lizzy36's picture

csco - yipee!

look @ the qqqq's run

Wed, 11/04/2009 - 17:21 | Link to Comment ptoemmes
ptoemmes's picture

Never mind...can't read a clock.

 

Pete

 

Wed, 11/04/2009 - 17:21 | Link to Comment Anonymous
Wed, 11/04/2009 - 17:34 | Link to Comment anynonmous
anynonmous's picture

Buffett’s Burlington Breakup Fee Shows Confidence

( I wonder if the agreement has any triggers that relate to the health of the equity markets, which I believe he has had in other deals )

 

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=alQZZ4EMOFTI

Wed, 11/04/2009 - 18:02 | Link to Comment Green Sharts
Green Sharts's picture

According to ZH's 10/14 article on the Union Square W Hotel, it was purchased for $285 million in 2006.  The $115 million mortgage that is about to default according to today's article is the first mortgage, so the market value of the property has dropped by more than 60% in 3 years.  $117 million in mezzanine financing and $53 million in equity are a total loss.  

The debt service on the first mortgage is $7.5 million annually so apparently the hotel is generating less than that in pre-tax cash flow.  Or is it just a function of the first mortgage coming due and a lack of equity to secure new financing?

Wed, 11/04/2009 - 18:30 | Link to Comment jhadev@gmail.com
jhadev@gmail.com's picture

 

See the following released Nov 2. It is likely not the mortgage coming due, but lack of cash flow. Mez piece will take over and wipe out the equity.

 

The Federal Deposit Insurance Corporation (FDIC) has released a policy statement, FIL-61-2009, on prudent commercial real estate loan workouts. According to the statement, the financial regulators recognize that prudent commercial real estate (CRE) loan workouts are often in the best interest of financial institutions and creditworthy CRE borrowers. The guidance focuses on the elements of prudent workout programs. It also provides illustrations of the analytical review process to ensure the credit risk in a loan workout is accurately identified and the arrangements receive appropriate regulatory reporting and accounting treatment.

Highlights of FIL-61-2009 include:

? Institutions and borrowers face significant challenges when dealing with diminished operating cash flows, depreciated collateral values, or prolonged sale and rental absorption periods.
The financial regulators recognize that prudent CRE loan workouts are often in the best interest of the financial institution and CRE borrowers.

? Performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.

? Institutions that implement prudent CRE loan workouts after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse classification.

? Examiners will take a balanced approach in assessing the adequacy of an institution's risk management practices for loan workout activity.

? The guidance includes a series of examples of CRE loan workouts, which are provided for illustrative purposes only.

? This guidance replaces the Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans (November 1991).

 

Wed, 11/04/2009 - 18:46 | Link to Comment Careless Whisper
Careless Whisper's picture

Hey maybe 'W' Hotels can sell their tax loss to Goldman and Warren.

Wed, 11/04/2009 - 18:25 | Link to Comment walküre
walküre's picture

Mark to myth will have dire consequences.

Eventually someone wants to collect on the loans. What are they thinking? That all creditors just roll over and play dead? Forgive the outstanding loans and pretend it never happened? This CRE loan business is so complex, if it gets worse it will take down every bank, every insurance company, every national social security fund and so on.

People cannot comprehend how vicious the cycle is going to be.

How does an insurance company pay their claims? They hold CRE "assets" and have to sell once in a while to get cash flow.

Shit this is going to get really ugly.

Wed, 11/04/2009 - 19:21 | Link to Comment jhadev@gmail.com
jhadev@gmail.com's picture

The Federal Deposit Insurance Corporation (FDIC) has released a policy statement, FIL-61-2009, on prudent commercial real estate loan workouts. According to the statement, the financial regulators recognize that prudent commercial real estate (CRE) loan workouts are often in the best interest of financial institutions and creditworthy CRE borrowers. The guidance focuses on the elements of prudent workout programs. It also provides illustrations of the analytical review process to ensure the credit risk in a loan workout is accurately identified and the arrangements receive appropriate regulatory reporting and accounting treatment.

Highlights of FIL-61-2009 include:

? Institutions and borrowers face significant challenges when dealing with diminished operating cash flows, depreciated collateral values, or prolonged sale and rental absorption periods.
The financial regulators recognize that prudent CRE loan workouts are often in the best interest of the financial institution and CRE borrowers.

? Performing loans, including those renewed or restructured on reasonable modified terms, made to creditworthy borrowers will not be subject to adverse classification solely because the value of the underlying collateral has declined to an amount that is less than the loan balance.

? Institutions that implement prudent CRE loan workouts after performing a comprehensive review of a borrower's financial condition will not be subject to criticism for engaging in these efforts, even if the restructured loans have weaknesses that result in adverse classification.

? Examiners will take a balanced approach in assessing the adequacy of an institution's risk management practices for loan workout activity.

? The guidance includes a series of examples of CRE loan workouts, which are provided for illustrative purposes only.

? This guidance replaces the Interagency Policy Statement on the Review and Classification of Commercial Real Estate Loans (November 1991).

 

Wed, 11/04/2009 - 18:28 | Link to Comment Anonymous
Wed, 11/04/2009 - 18:42 | Link to Comment walküre
walküre's picture

When you consider CRE, also consider commercial assets like ships, airplanes, trucks, equipment and so on. Much of it is sitting idle either in the oceans of the world or parked in the desert. Loans on those are increasingly being defaulted on as well.

Wed, 11/04/2009 - 19:19 | Link to Comment SpartanTnT
SpartanTnT's picture

superwallmart near my home closed...green shoot eh

 

dallas , tx baby

Wed, 11/04/2009 - 19:56 | Link to Comment Green Sharts
Green Sharts's picture

Municipalities are having a hard time figuring out what to do with vacant big box sites like that, plus it's a huge loss of tax revenues.

Wed, 11/04/2009 - 20:39 | Link to Comment geopol
geopol's picture

I will provide for these hungry and strapped municipalities the solution that will make their day, and that they never would have thought of..

 

 

RAISE TAXES

Wed, 11/04/2009 - 19:36 | Link to Comment Anonymous
Mon, 06/21/2010 - 07:45 | Link to Comment Adam33
Adam33's picture

The situation seems to get better now however not the best one though. There are too much expenses and too less profit for our country to get out of this unfortunate financial crisis. We still don't have an ability to get loans. At least Alabama loan lenders don't want to give them for me. Few years ago there were no problems with loans and mortgage payments at all. I think that when the crisis will go away we will be able to get those again. However I believe in Obama's government and I hope that everything will be all right in the nearest future. Thanks for the interesting article and nice tables. by the way.

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