In continuing with the trivial approach of actually caring bout fundamentals instead of merely generous (and endless) Fed liquidity, we peruse the most recent RealPoint June 2010 CMBS Delinquency report. The result: total delinquent unpaid balance for CMBS increased by $3.1 billion to $60.5 billion, 111% higher than the $28.6 billion from a year ago, after deteriorations in 30, 90+ Day, Foreclosure and REO inventory. This represents a record 7.7% of total outstanding CMBS exposure. Even worse, total Special Servicing exposure by unpaid balance has taken another major leg for the worse, jumping to $88.6 billion, or 11.3%, up 0.7% from the month before. And even as cumulative losses show no sign of abating, average loss severity on CMBS continues being sky high: June average losses came to 49.1%, a slight decline from the 53.6% in May, but well higher from the 39.6% a year earlier. Amusingly, several properties reported loss % of 100%, and in some cases the loss came as high as 132.4% (presumably this accounts for unpaid accrued interest, and is not indicative of creditors actually owning another 32.4% at liquidation to the debtor in addition to the total loss, which would be quite hilarious to watch all those preaching the V-shaped recovery explain away. Of course containerboard prices are higher so all must be well in the world). Putting all this together leads RealPoint to reevaluate their year end forecast substantially lower: "With the combined potential for large-loan delinquency in the coming months and the recently experienced average growth month-over-month, Realpoint projects the delinquent unpaid CMBS balance to continue along its current trend and potentially grow to between $80 and $90 billion by year-end 2010. Based on an updated trend analysis, we now project the delinquency percentage to potentially grow to 11% to 12% under more heavily stressed scenarios through the year-end 2010." In other words, the debt backed by CRE is getting increasingly more worthless, even as REIT equity valuation go for fresh all time highs, valuations are substantiated by nothing than antigravity and futile prayers that cap rates will hit 6% before they first hit 10%.
We dare all the V-shapists to point out where precisely on the chart above is one supposed to look for this ephemeral economic improvement.
And an even scarier dynamic is currently occurring in the Special Servicing space, where after a slight decline in the rate of deterioration, June once again saw a surge in this forward looking indicator.
RealPoint has this to share on the role of special servicing:
Special servicing exposure continues to rise dramatically on a monthly basis, having increased for the 26th straight month through June 2010. The unpaid balance for specially serviced CMBS under review in June 2010 increased on a net basis by $5.23 billion, up to a trailing 12-month high of $88.6 billion from $83.38 billion in May 2010 and $81.38 billion in April 2010. Special servicers will play a key role in the level of delinquency reached in the next 12-24 months as large loan modifications, lender financing (through discounted assumptions and modifications prior to foreclosure), maturity extensions and approved forbearance have the potential toslow down or mitigate delinquency growth and delay losses. In addition, while vacancies across most if not all property types are near historic highs, optimism has recently surfaced regarding asking rents and vacancy across distressed loans. Some experts believe that increased interest for vacant retail space and pent-up demand may fuel a recovery for the sector.
We hope for the sake of all those value investors who have bought into the GGP resurrection story, that they are right, although if one actually goes by such things as fundamentals, which value investors presumably track as well, things are not looking good:
- Special servicing exposure increased for the 26th straight month to approximately $88.6 billion across 4,830 loans in June 2010, up from $83.38 billion across 4,755 loans in May 2010 and $81.38 billion across 4,689 loans in April 2010.
- For the 31st straight month, the total unpaid principal balance for specially-serviced CMBS when compared to 12 months prior increased, by a high $48.07 billion since June 2009. Such exposure is up over 119% in the trailing-12 months.
- Conversely, for historical reference, special servicing exposure was below $4 billion for 11 straight months through October 2007.
- Exposure by property type is now heavily weighted towards office collateral at 24%, followed by retail at 22% and multifamily at 21%.
- Unpaid principal balance noted as current but specially-serviced decreased to a low of $1.44 billion in July 2007, but has since increased to $30.9 billion (up slightly from $29.73 billion a month prior).
- Within the 3.9% of CMBS current but specially-serviced, we found 257 loans at $27.28 billion with an unpaid principal balance at or over $20 million, compared with 266 loans at $26.04 billion with an unpaid principal balance at or over $20 million a month prior.
- Unpaid principal balance was at or above $50 million for 128 current but specially-serviced loans in June 2010, and was at or over $100 million for 68 loans. The largest of such loans included the current but specially-serviced EOP Portfolio loan at $4.93 billion in the GSM207EO transaction, the $1 billion CNL Hotels and Resorts loan in COM06CN2, and the $775 million Beacon Seattle & DC Portfolio Roll-Up loan in MSC07I14.
The neverending deterioration has forced RealPoint to reduce its already bleak outlook for future delinquency trends, noting the following dynamics:
- Balloon default risk remains an issue form both highly seasoned CMBS transactions as loans are unable to payoff as scheduled. In many cases, collateral properties that have otherwise generated adequate / stable cash flow results are not able to refinance their balloon payment at maturity, due mostly to a lack of refinance proceeds availability. This continues to add loans to those with distressed collateral performance in today’s credit climate.
- Five-year and seven-year balloon maturity risk is growing for more recent vintage pools from 2003 through 2005 where little or no amortization has taken place due to interest-only payment requirements, while collateral values have also declined. Within this area of concern, large floating rate loan refinance and balloon default risk continues to grow, as many of such large loans are secured by un-stabilized or transitional properties reaching their final maturity extensions (if they have not done so already), or fail to meet debt service or cash flow covenants necessary to exercise in-place extension options.
- Declined commercial real estate values and diminished equity in collateral properties continues to prompt more struggling borrowers with marginal collateral performance to claim imminent default and ask for debt relief.
- The aggressive pro-forma underwriting on loans originated from 2005 through 2008 vintage transactions, comingled with extinguished debt service / interest reserves required at-issuance, has led to an increasing number of loans underwritten with DSCRs between 1.10 and 1.25 with an inability to meet debt service requirements. This is especially evident with the partial-term interest-only loans that will begin to amortize or those that have recently converted.
- A cautious outlook for the hotel sector remains as many sizeable hotel loans from 2005-2008 vintage pools have reported poor or declined results in 2009 (especially on the luxury side) and / or continue to be transferred to special servicing for imminent default. Many properties had to significantly lower rates to maintain an acceptable level of occupancy across the country and in some cases have experienced severely distressed net cash flow performance as a result. Our expectations are that more of these loans may be asking for debt relief in the near future and may ultimately default if a resolution is not reached.
The 5 and 7 Year cliff refi issue is particularly notable in a delinquency exposure chart by vintage, where it is all too visible that 10 Year paper in need of rolling is going delinquent at an alarming rate: well over a quarter of all outstanding 1999 CMBS is in delinquency as there is nobody willing to fund a roll of the underlying debt!
And when looking at the most important category of all: liquidations and loss averages, these show no improvement either, as prevailing loss averages amount to about half of total outstanding principal (a finding confirmed recently by Chicago Real Estate Daily, which confirmed that a development site in the South Loop was auctioned off for $11.3 million on total debt of $25.3 million: a less than 50% recovery).
- Both liquidation activity and average loss severity for these liquidations has been on the rise over the trailing 12-months, especially in the past few months of 2010. An additional $762.9 million in loan workouts and liquidations were reported for June 2010 across 126 loans, at an average loss severity of 49%
- Since January 2005, over $10.9 billion in CMBS liquidations have been realized, while only 48 of the last 61 months have reported average loss severities below 40%, including 21 below 30%.
- Annual liquidations for 2009 totaled $2.18 billion, at an overall average severity of 42.1%. The overall average was clearly brought downward by the number of loans that experienced a minor loss via workout fees and / or sales or refinance proceeds being near total exposure, while the true loss severities by our definition averaged 62%.
- Comparatively, annual liquidations for 2008 totaled $1.297 billion, at an overall average severity of only 24.9% while liquidations in 2007 totaled $1.094 billion at an average severity of 32.8%.
- Liquidations in 2006 totaled $1.93 billion at an average severity of 30.2%, while 2005 had $3.097 billion in liquidations at an average severity of 34.2%.
A table of montly average losses shows that there is little to be cheerful for if one is a CMBS investor: in fact half of little may be the best bet (especially for multifamily, industrial and retail property types).
Full RealPoint report here.