Maintaining sufficient liquidity remains the primary credit risk to U.S. equity real estate investment trusts (REITs) in spite of recent opportunistic actions to reduce financial pressures, according to Fitch Ratings.
‘Many REITs have taken advantage of opportunities to bolster liquidity,’ said Steven Marks, Managing Director and REITs Group Head. ‘However, Fitch maintains a circumspect view towards REIT liquidity because these opportunities are company-specific and have not translated to a sector-wide trend.’
However, recent improvements in financial markets indicate some positive momentum. Four Fitch-rated REITs accessed the unsecured debt market since March at yields between 7% and 10.75%. In addition, several REITs have executed bond tender offers in recent months, while common equity issuances of over $12 billion have enabled REITs to reduce leverage and bolster liquidity since the beginning of 2009.
Nonetheless, challenges remain for equity REITs, including tenuous financing available across the capital markets, deteriorating performance in commercial real estate and the sizeable overhang of debt maturities for equity REITs looming in 2011.
Fitch also notes that limited visibility regarding net operating income capitalization rates continues to stress commercial property values, constraining transaction activity and the magnitude of institutional investor secured debt lending volume.
Major challenges ahead noted by Fitch include likely reduced revolving credit facility commitments, limited unsecured bond issuances, a near-dormant U.S. CMBS market, reduced bond tender activity, and uncertainties regarding the recent re-equitization wave in the REIT sector.
For details see U.S. Equity REIT Liquidity Update: Hold the Applause.
Technorati Tags: commercial-real-estate, REIT
Not much to cheer about in the latest Moody’s/REAL Commercial Property Price Indices:
- The National — All Property Type Aggregate Index measured an 8.6% decline in April 2009. The index now stands 29.5% below the peak measured in October 2007.
- Transaction volume continues to fall in both repeat-sales and the overall market.
April’s large price decline on the heels of a 5.5% monthly decline in January hints at an ongoing process of capitulation.
- The repeat sale transactions in the month of April for the first time showed more negative than positive annualized rates of return.
- Apartments are faring better than any other property type in the Eastern region, although all four types measured significant annual declines.
- The South was the worst performing region overall. All four property types saw annual value declines of more than 20%, with industrial measuring a decline of 28.8%.
- All four property types in Southern California underperformed the western market as a whole. Office was the worst performer with an annual value drop of 22.2%.
- The three major office markets measured significant annual declines. In the East, both New York and Washington DC outperformed the eastern office market, with annual declines of 12.9% and 21.1% respectively.
- The Florida apartment market, like the apartment market in the South on the whole, has experienced three straight years of falling prices. Florida apartment values are now down 31% from the peak.
Technorati Tags: commercial mortgage-backed securities, commercial-real-estate
Large loan defaults coupled with declining performance on multifamily and retail properties resulted in a 29 basis point climb to 2.07% for U.S. CMBS delinquencies in May, according to the latest Fitch Ratings Loan Delinquency Index.
This marks the highest percentage of delinquencies since Fitch began its Index in 2001.
Meanwhile, in the first of what will be monthly reports, Moody’s CMBS Delinquency Tracker (DQT) for June (based on data through the end of May) records the aggregate rate of delinquencies among US CMBS conduit and fusion loans at 2.27%.
Moody’s expects the aggregate rate to reach 4% to 5% by the end of this year.By comparison, the aggregate rate was at a low of 0.22% in late 2007.
Declining performance, particularly in oversupplied markets, as well as in secondary and tertiary markets, has pushed Fitch’s multifamily delinquency rate to 4.55%, the highest of all property types. Multifamily properties have been highly susceptible to default in CMBS during the current economic downturn.
Moody’s tracker shows multifamily delinquency rates rising most dramatically in recent months, to a level of 4.56% in May, from a low of 0.51% in August 2007. Its previous high had been 1.53%, recorded in March 2005.
Fitch’s 60 days or more delinquency rate for retail properties is slightly higher than the index at 2.24%. This number is expected to climb. As consumer spending continues to tighten, retail properties will likely lose tenants to bankruptcy or store downsizing. Many of the loans that are currently 30 days delinquent are likely to remain delinquent and be included in the Index in June.
Moody’s says loans for retail properties have seen their delinquency rate nearly triple since the start of the year, reaching 2.47%, well surpassing its previous peak of 0.89% in August 2003.
Loans backed by hotels have thus far withstood economic pressures and continue to slightly outperform Fitch’s Index with a 1.91% delinquency rate. Possible reasons for the relative resilience include generally more sophisticated sponsorship and management teams; slightly lower leverage and shorter amortization schedules at issuance; and a reporting lag whereby many year-end audited financials have not yet been finalized. Fitch maintains its expectation that, as occupancy rates and revenues per available room (RevPAR) continue to decline, putting additional stress on borrowers’ operating margins, defaults could rise precipitously.
Moody’s says the other two core property types – industrial and office — have seen more moderate increases in delinquencies in 2008 and 2009.
Technorati Tags: CMBS, commercial-real-estate, delinquency rate, mortgage-backed-securities, retail
Moody’s expects most ratings of late vintage commercial mortgage-backed securities deals to remain broadly stable. In a new paper, updating Moody’s February ratings review of these outstanding securitizations, Moody’s notes that the underlying assumptions for those ratings remain on track, as long as conditions in the commercial real estate market and the general economy do not significantly worsen.
While the scope and pace of developments in commercial real estate certainly warrant continued vigilance, and further rating actions cannot be ruled out, we expect the ratings of the securitizations that were part of the February sweep to hold up for the most part over the near term,” - Nick Levidy, Moody’s managing director.
Super-duper Aaa-rated classes for late vintage deals, with 30% credit enhancement and a six times multiple of current expected loss, are unlikely to experience downgrades, according to the report. Current mezzanine Aaa classes, with credit support at 20% on average, while stable for now, are very sensitive to further increases in expected loss.
The current projected expected loss estimate of 5% on average for late vintage CMBS pools results in Aaa credit support in the high teens when stressed to an appropriate multiple.
In February 2009 Moody’s undertook an analysis of conduit/fusion transactions issued from 2006 through 2008, and all large loan deals, regardless of vintage. As a result, Moody’s downgraded senior investment grade bonds, including the junior Aaa-rated classes, an average of four to five notches on average. Low investment grade and speculative grade bonds were downgraded from five to six notches on average.
No mezzanine or super-duper Aaa-rated CMBS securities were downgraded in connection with the sweep. Moody’s has now updated that earlier analysis in order to assess the impact of recent performance trends.
Moody’s report notes that specific transactions reviewed as part of the sweep are not necessarily immune to further downgrades in the near and intermediate terms. “In fact, a small number of transactions, particularly those with lower diversity, are likely to come under additional ratings pressure if the downturn deepens appreciably or if, for example, the unexpected loss of major tenants causes a default on one or more of the larger loans in a pool. If individual pool performance deviates substantially from our expected path, even some mezzanine Aaa-rated classes may be subject to downgrade risk.”
The new report can be found on here.
Technorati Tags: CMBS, commercial-real-estate, mortgage-backed-securities, structured-finance
The Wall Street Journal reports today that the US Treasury is considering issuing rules that will make it easier for property developers and investors and their loan servicers to restructure commercial real estate debt.
Tax rules make it difficult for borrowers who are current on their payments to hold restructuring talks with the servicers of commercial mortgages that were packaged and sold as bonds., the WSJ reports.
“At present, developers and investors complain that only those who are delinquent can talk to servicers of these bonds, named commercial-mortgage-backed securities, or CMBS. But now the Treasury is considering issuing guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, possibly at least two years ahead of the maturity date of a loan, these people said. ”
Reuters reports that the default rate of U.S. commercial real estate bank loans reached its highest level in 15 years and is not expected to peak until 2011, according to a report by Real Estate Econometrics.
Meanwhile, Standard & Poor’s announcement of a proposed new ratings model for CMBS is adding to the headaches of the commercial real estate market. FT Alphaville has a good rundown of the story so far.
S&P’s move is seen as a threat to the Federal Reserve’s TALF program since the central bank says only “AAA” bonds are eligible, whereas S&P’s model is likely to result in downgrades of many CMBS below that level.
In a June 4 report on the the potential rating impact of its proposed methodology changes S&P said transactions from the 2007 vintage are likely to experience the greatest impact if the criteria are adopted, “as most tranches currently rated ‘AAA’ with 30% credit enhancement (”super dupers”) would likely be downgraded. The downgraded classes would have a weighted average rating (WAR) of ‘A’. Under our ‘AAA’ stress, losses from this vintage range from 12.3% to 60.4%.”
Linda Lowell at Housing Wire takes S&P to task for the proposed changes:
“Just as markets were beginning to firm, S&P yells fire sale. Investors take losses if they sell, and those who mark to market (money managers, mutual funds, hedge funds, etc.) take losses even if they don’t sell. And crushing the market for credit tranches does nothing to improve prospects for issuers of new, TALF or not, deals hoping to place subordinate cash flows.”
Technorati Tags: CMBS, commercial-real-estate, mortgage-backed-securities, structured-finance, TALF
CreditSights sees signs of recovery in Real Estate Investment Trusts, but also cautions that less than half the companies they follow have sufficient cash and credit capacity to meet all unsecured maturities and put options through 2012. “Overall credit profiles have improved and major liquidity holes have been plugged on the back of a sector-wide re-equitization and deleveraging that began in late March, ” CreditSights says in REIT Liquidity: Adventures in Deleveraging.
The improvement in leverage and liquidity and the market’s realization that a near-term REIT sector apocalypse may not be in the cards has in turn resulted in strong equity returns and much tighter credit spreads though the sector is not quite out of the woods yet on the liquidity front.
“With roughly $15 billion of unsecured debt maturities, revolver expirations, and putable converts facing our coverage list alone through 2011 and about $11 billion more in 2012, REITs will still need to raise more equity, monetize and/or sell assets, begin issuing unsecured debt again, seek joint venture financing, or otherwise shore up liquidity in order to survive and meet obligations.”
“Our conclusion is that less than half of our companies currently have sufficient cash and credit capacity to meet all unsecured maturities and put options through 2012 though many are on the cusp of full coverage. If the sector continues to experience the pace of deleveraging seen year-to-date, many REITs in our coverage list should be able to accumulate enough liquidity to meet these obligations by year-end using some or all of their liquidity levers.
Technorati Tags: commercial-real-estate, REIT
US Commercial real estate prices as measured by Moody’s/REAL Commercial Property Price Indices (CPPI) fell 1.7% in March, leaving the index at 20.8% below its level a year ago and 22.8% below the peak in prices measured in October 2007.
Commercial real estate sales volumes were down 75-80% in March, by both count and dollar volume, compared to their levels a year earlier.
Moody’s expects continued weakness and possibly further declines in volume in the coming months.
Moody’s quarterly indices by property type show national office prices have now fallen 30% from peak levels, after a nearly 20% decline in the first quarter. National retail properties saw values fall 13% in the first quarter, while apartment and industrial prices remained relatively flat.
Among the top-ten metropolitan statistical areas (MSAs), retail was the underperformer, with prices falling 14% in the first quarter of 2009.
Western apartment prices saw a slight gain in the first quarter of 2.7%. Office was the hardest hit property type in the West with values falling over 16% in the first quarter, the single largest drop to date for this sector.
Moody’s notes that so far this downturn, the top-ten markets have not seen prices fall as much as the nation has overall. Office prices in the top-ten, for example are down 14.3% from their peak, compared to the 30% decline nationally.
For details see Moody’s/REAL Commercial Property Price Indices, May 2009.
Technorati Tags: commercial-real-estate
In a new analysis, Moody’s explains why bank loans are more vulnerable to commercial real estate losses than mortgage securities backed by CRE or life insurance company CRE loans.
According to the results from the recently announced US government “stress test”, bank holding companies’ cumulative two-year loss rates for commercial real estate loans will be between 5.0% and 7.5% in a baseline case and between 9.0% and 12% in a more adverse case. In rating US commercial mortgage backed securities (CMBS), Moody’s uses a cumulative ten-year expected loss rate of 3.0% to 4.0% on average across all vintages for our baseline case and a 7.0% to 9.0% rate for a more
adverse case.
Moody’s says that “Given where we are in the economic cycle, it is important to point out that there is a marked difference in performance by loan vintage and term. For example, CMBS loans are typically ten year loans, and the current lower delinquency rates encompass performance of those loans originated as early as 2000. These early vintage loans have seasoned and benefit from cash flow and value appreciation over the years.”
“Thus, CMBS loans originated earlier in the cycle are likely to help offset higher delinquencies from more recent vintage originations. A similar situation exists for life insurance companies as they hold loans with longer maturities. Bank loans tend to have maturities of five years or less. As a result, bank loan portfolios exhibit greater concentration in years representing the peak of the real estate cycle. They lack seasoned loans on their books to offset the higher delinquency rates expected from this time period.”
“Bank loans have an additional burden over CMBS at refinance due to their shorter remaining term. The economic downturn is just beginning to have a negative impact on real estate loan performance. As a lagging sector, real estate delinquencies are expected to rise over the next two years. For a bank loan with less than five years remaining, the potential to refinance in a more robust economic period is lower than for a comparable CMBS or life insurance company loan, with more than five years remaining.”
A higher level of refinance risk for bank loans should contribute to higher delinquency rates over time.
For the full anlysis see:Comparing Bank, US CMBS and Life Insurance Company Commercial Real Estate Expected Loss and Delinquency Rates
Technorati Tags: banks, CMBS, commercial-real-estate, life insurance companies, structured-finance
The aftermath of the government stress tests has been the hot topic of recent days, topped by Standard & Poor’s gloomy assertion that the Banking Crisis Could Go On For Another 3 or 4 years and CreditSights‘ prediction that Smaller Regional Banks May Slide into Junk Bond Status.
Meanwhile Fitch saw another shoe continuing to drop in US Credit Card Losses Will Be Meaningfully Higher in 2Q and S&P observed that Commercial Real Estate Under Stress as Refinancing Dries Up.
Moody’s added insult to injury with Global Junk Bond Default Rate to Hit 14.8% but also offered a sliver of better news for some with New Accounting Rule a Boon for Bank Bargain Hunters.
Still, the most popular recent post was the news that France leads OECD nations in Eating and Sleeping. Is there a correlation? No wonder freedom fries didn’t catch on.
The French spend more time sleeping than anyone else in OECD countries. They also devote more time to eating than anyone else and nearly double that of Americans, Canadians or Mexicans.
But did they factor in that Americans have learned how to eat and sleep at the same time?
Research Tweetgeist:
Deloitte Spending Index (tax burden, unemployment claims, wages, home prices) fell 1.46% in Apr after 1.95% rise in Mar http://bit.ly/Yfu6o
Which is the better deal: the $700 bn TARP or the TRAP (Treasury Relief Art Project) 10,000+ works of art for $873,784? http://bit.ly/KbGWf
MIT US commercial real estate index for Q1 down 5.8% from Q4, placing the index 26.4% below its 2007Q2 peak. http://bit.ly/HRhHf
Weekend listening while contemplating the stress tests: The Fix Is In, by Elbow. http://bit.ly/4mEEm
Technorati Tags: accounting, Bankrate, commercial-real-estate, credit card debt, demographics, junk-bonds, stress test, TARP, Zeitgeist
Following a substantial jump in first-quarter-2009 (1Q’09), loan defaults for U.S. CMBS are expected to exceed 5% by the end of this year, according to Fitch Ratings.
In its latest annual default study of commercial mortgages underlying its rated CMBS transactions, Fitch says 1Q’09 defaults reached $2.6 billion, compared to $3.2 billion for all of 200 As of year-end 2008, the cumulative default rate increased to 3.29% from 2.71% in 2007. Fitch expects the rate of defaults to increase consistent with the levels of defaults in the last six months. Larger loans in the 2006 and 2007 vintages have begun to default, and Fitch expects this trend to continue in 2009 as the slow economy and lack of financing contribute to cause stress in commercial loan performance.
Multifamily properties represented the highest of all property defaults in 2008 with $1.06 billion in new defaults and a default rate of 5.21%. Retail defaults increased significantly to $1.03 billion with a default rate of 2.52%.
Fitch expects both multifamily and retail to lead defaults by the end of 2009.
The 2006 vintage had the highest dollar balance and number of defaults in 2008 with $742.9 million and 78 loans. Loan defaults among 2007 CMBS transactions will lead all other vintages by year end as larger loans within these deals have begun to default in late 2008 and early 2009. For details see U.S. CMBS Loan Default Study: 1993-2008.
Technorati Tags: CMBS, commercial-real-estate, mortgage-backed-securities, structured-finance
