In the monthly CMBS Market Trends update from Fitch we read that the hotel delinquency rate has just passed the psychological 20% delinquency threshold for the first time. As of August, 20.80% of all hotel-backed loans is in some stage of delinquency (up from 18.64% in July): that means that one in five (and rising) hotel-backed loans will likely never be repaid and proceed to liquidation. These and such are the ways, when underlying assets refuse to generate enough cash flow to satisfy interest requirements, let along create equity value... Which should explain why publicly-traded REITs are trading at near record highs.
There was also substantial deterioration in the Multifamily space, where the delinquency rate is nearly 15%. Yet not every sector worsened: there was marginal improvement in the Retail and Office space, at 6.11 and 5.06% respectively. From a big picture standpoint, the climb in delinquencies was mitigated by record loan resolution, as $3.1 billion in incremental delinquencies was offset by $2.1 billion in resolutions. Among the actions that make up the latter category are liquidations, repayments upon refinancing, corrections, and modifications. This will be an interest trend to watch, since the delinquencies will likely not plateau for many months, leaving work outs as the only option for books to pad their books and present an optically slightly better image of overall loan quality. In the meantime, we expect the Norwegian sovereign wealth fund to buy up every piece of hotel CMBS due to the fund's recent brilliant discovery of the "Mark-to-Infinity" concept.
Full Fitch release:
Record Loan Resolutions Stem Climb in Delinquencies
While the pace of defaults remains elevated, a record number of loan resolutions in August again tempered the effect of $3.1 billion of new delinquencies, according to the latest U.S. CMBS delinquency index results from Fitch Ratings.
Recent defaults on five loans greater than $100 million contributed to a 23-basis point (bp) net increase in the U.S. CMBS delinquency rate to 8.48%. Meanwhile, $2.1 billion of loans were resolved or liquidated last month.
'Though special servicers are working out loans at an increased rate, the volume of new delinquencies has not yet subsided,' said Senior Director Adam Fox. 'Highly leveraged loans originated at the market's peak continue to default as borrowers seek modifications or hand back the keys to underperforming assets.'
In August, three loans in excess of $100 million and rated by Fitch Ratings became newly delinquent due to performance issues, including:
--$825.4 million Innkeepers Portfolio (two pari passu notes)
--$140 million Hyatt Regency – Bethesda
--$129.5 million Lynnewood Gardens
The Innkeepers Portfolio loan, secured by 45 hotel properties, is in danger of having several of its franchises terminated due to the borrower's failure to complete property improvement plans. The borrower filed Chapter 11 Bankruptcy on July 19, 2010 and is attempting to secure financing to complete property improvements required to retain the franchises.
The Hyatt Regency – Bethesda loan was a candidate for modification, but the special servicer commenced foreclosure when talks with the borrower reportedly fell through. The Lynnewood Gardens property has been unable to generate adequate cash flow to service its debt since issuance.
In addition to the loans that defaulted during their terms, two large loans last month defaulted at their respective maturity dates and are now classified as non-performing matured. They are the $160 million Highwoods Portfolio loan and the $141.1 million (combined A and B note) Lakeforest Mall loan.
Of the $3.1 billion new delinquencies in August, $1.1 billion (36%) corresponded to hotel-backed loans, pushing the hotel-specific delinquency rate past 20%. Current delinquency rates by property type are as follows:
--Hotel: 20.80% (from 18.64%)
--Multifamily: 14.18% (from 13.87%)
--Retail: 6.11% (from 6.35%)
--Industrial: 5.55% (from 5.20%)
--Office: 5.06% (from 5.08%)
More than 200 loans totaling $2.1 billion that were delinquent in July did not reappear in August's list of delinquent loans due to a combination of liquidations, repayments upon refinancing, corrections, and modifications. Resolutions from the index included three loans with balances in excess of $100 million. Of the three large resolutions, one loan was reinstated due to recapitalization; one loan is in forbearance while refinancing is being sought; and one loan remains the subject of negotiations for a potential modification or foreclosure.
Fitch Ratings' delinquency index includes 2,931 loans totaling $37 billion that are at least 60 days delinquent or in foreclosure out of the agency's rated universe of approximately 40,000 loans comprising $436.9 billion. The Index excludes rated loans that are 30 to 59 days delinquent, which currently total $2.7 billion. Fitch Ratings maintains Stable Rating Outlooks for approximately 76% of its U.S. CMBS portfolio. Most remaining bonds are either considered distressed (3%) or have a Negative Outlook (15%).
Fitch Ratings currently rates approximately 1,900 bonds totaling $69 billion with Negative Outlooks. As defaults are continuing and expected to continue through 2012, the agency expects further negative rating actions to occur, although to a lesser extent than those in the past. Deals from recent vintages with large amounts of specially serviced loans are most susceptible to downgrades, including the A-M (original mezzanine 'AAA') tranches.