USGC Crude Storage Update: Fairway Houston Caverns
Genscape began monitoring crude inventories at Fairway Energy Partners’ newly developed cavern storage facility at Pierce Junction in Houston, TX, on the April 21 report date. The facility is currently comprised of two brine ponds with a combined capacity of approximately 7.3mn bbls that are connected to underground caverns of an equivalent size. The ponds, and corresponding crude storage capacity, make up Phase 1A of Fairway’s cavern project in Houston. A forthcoming Phase 1B expansion will provide an additional 3.6mn bbls of crude storage capacity at the facility, according to the company’s website.
Currently, only one of the ponds (FC001, 2.19mn bbls), has a significant amount of brine to monitor. As of the April 21 report date, Genscape analysis of this pond calculated just over 1.23mn bbls of stored crude. Significant brine levels were not detected in the second pond (FC002, 5.103mn bbls) as of the latest report, resulting in a storage value of 0 bbls.
The facility is being constructed at Pierce Junction, fewer than three miles south of the Houston Astrodome. Twin 24-inch bidirectional pipelines will connect Fairway’s cavern storage to existing Houston storage terminals at Speed Junction and Genoa Junction, which subsequently feed the Houston Ship Channel, Texas City, TX, and Baytown, TX, markets.
Though the two ponds total approximately 7.3mn bbls of capacity, there is only about 6.8mn bbls that is considered usable capacity, according to Texas Railroad Commission regulatory documents and Genscape imagery.
This cavern storage associated with Phase 1A increases operational crude storage capacity at facilities monitored by Genscape in Houston to nearly 76.4mn bbls. With the additions of the caverns, total operational crude storage capacity across Texas Gulf Coast locations (Houston, Beaumont-Nederland, TX, and Corpus Christi, TX) increases to nearly 149mn bbls.
Now that the caverns are operational, they will always be filled to capacity with some combination of brine and crude. When crude is pumped into the caverns for storage, an equivalent amount of brine is displaced into the connected ponds. Inversely, when crude is needed to be drawn out, an appropriate amount of brine is pumped in to displace the crude. Genscape monitors changes in brine levels via aerial imagery to derive the amount of crude stored in the caverns.
Fairway began developing the underground storage caverns in 2011, and in July 2015, the company closed funding for Phase 1 of the construction, according to a press release. Fairway’s original plans for Phase 1 included 10mn bbls of capacity, which was later updated to 11mn bbls. The same press release stated that the terminal could be expanded to about 20mn bbls.
Phase 1B will provide an additional 3.6mn bbls of crude storage capacity at the facility, according to the company’s website. Fairway has also submitted plans for a third brine pond, which would accommodate the additional crude storage and bring total pond capacity to near 11mn bbls. Genscape aerial imagery on April 20 confirmed that construction on the third pond has not yet commenced.
Underground storage is generally considered more economical and environmentally-friendly than above-ground storage tanks; Fairway storage rates for leases in April were near $0.42/bbl/month in February, according to the Tank Tiger. The Fairway caverns are the first major underground crude storage facility in the Houston area.
Genscape’s U.S. Gulf Coast Crude Storage Report tracks capacity and construction trends to provide a better understanding of market fundamentals. Genscape’s in-the-field monitors provide exceptional accuracy and advance notice of these fundamentals. Click here to learn more or request a free trial of Genscape’s U.S. Gulf Coast Crude Storage Report.
Q1 Issuance Recap: How Did the CMBS Market Respond to Risk Retention?
The year 2017 marked a major turning point for the CMBS industry as the risk retention era ofﬁcially began. Risk retention regulations, which were formulated to hold banks more accountable for their own investment operations and boost credit under writing standards, impose higher capital requirements that force issuers to hold more “skin in the game.”
The implementation of Dodd-Frank provisions and other regulatory frameworks that govern asset-backed securitizations have given rise to anxiety over a potential slowdown of CMBS lending. The fear was that CMBS would become less competitive than other sources of CRE ﬁnancing. With the ﬁrst quarter of the year ﬁrmly behind us, we observe that the industry has digested these changes better than most would have predicted, and the favorable pricing and reception garnered by risk retention deals issued so far bodes well for upcoming CMBS transactions in the pipeline.
Between January and March 2017, 13 traditional private-label CMBS deals closed, tallying a modest $10.5 billion. Conduit loans comprised the overwhelming majority of the ﬁrst quarter’s securitized balance with $7.6 billion, while single-asset/single-borrower loans represented the remaining amount. Seven of the 13 deals issued were structured with a horizontal risk retention holding, which means all of the risk retention classes were at the bottom of the deal waterfall. About 44.6% of Q1 issuance adopted the horizontal structure, while 32.8% of the balance was securitized under the vertical risk retention option. Two loans comprising 22.7% of the issuance total employed the L-shaped strategy. The “vertical” structure requires that a 5% interest in each class of the securitization is represented as a risk retention “slice.” Often referred to as the “hybrid” structure, the “L-shaped” option is characterized by any combination of vertical and horizontal interest such that the sum of the subordinate fair value and vertical interest held.
A total of $5.08 billion issued last quarter – or nearly half of the total Q1 balance – is secured by ofﬁce properties. This is due to the securitization of several large single-asset loans backed by trophy towers in central business districts (CBDs) of cities like Chicago, New York, and Washington, D.C. The largest loan issued during this time period – the $1.02 billion Willis Tower note – is backed by one of those trophy office towers. The note is a reﬁnancing that was used to retire an existing CMBS mortgage secured by the property that was paid off in February. Ranked as the tallest building in Chicago (and the second-tallest in the Western Hemisphere), the 3.8 million-square-foot skyscraper currently serves as the main headquarters for United Airlines. The ﬁrm consolidated its operations to Willis Tower in 2013 and occupies 22.32% of the building’s space with a lease that runs through 2023.
Major markets such as New York City, Chicago, and San Francisco each received over $1.1 billion in CMBS issuance last quarter, with NYC topping the list at $1.57 billion. The Dallas MSA came in ﬁfth with just over $308 million issued, followed by $210 million for San Jose, California. The issuance levels for these two MSAs, along with Houston, Urban Honolulu, Seattle, and other secondary cities are starting to exceed those for some gateway markets, such as Miami and Boston.
Overall, the securitized lending space was met with various new challenges this year as market uncertainty from changes in political leadership, regulatory headwinds, and pending rate hikes have resulted in sector-wide changes. On a positive note, persistent low rates, the large maturing volume coming due, and investors bearing some of the risk in their own deals could help drive future issuance as uneasiness around risk retention subsides. The low market supply and generally heightened underwriting standards have made CMBS products very popular among investors on the whole, and there is hope that the stance of deregulation the new administration has taken could provide some level of overhaul to present Dodd-Frank requirements.
For more info on Q1 CMBS issuance and the impact of risk retention, send us a note at firstname.lastname@example.org.
Rules Surrounding HVCRE to Become Clearer as New Bill Introduced
Since 2015, banks have been hamstrung in their ability to provide construction financing. This hindrance stems from some pesky capital set-aside rules put forth in the Basel III regulatory framework that determine what can be considered as high-volatility commercial real estate, or HVCRE loans.
The framework makes it extremely costly to write loans that would fall under the HVCRE classification, which would affect acquisition, development and construction, or ADC loans.
Historically, lenders were required to set aside 8% of the value of an ADC loan as a risk mitigant. Under the HVCRE rules, the required amount of capital to be set aside increases two-fold to 12% if a loan receives that classification. Of course, the higher costs have been passed along to borrowers, who are said to be paying premiums of perhaps 150 basis points above what they otherwise would have. But the issue that lenders have had with the HVCRE classification is that the rules concerning it are ambiguous.
For instance, there's confusion on exactly what would classify as an HVCRE loan. For instance, ADC loans are often used for the acquisition of a property, even those that generate sufficient cash flow to pay their indebtedness. Because of a lack of clarity in the rules, some banks have been classifying all their ADC loans as HVCRE.
Another sticking point: when can a bank reclassify an HVCRE loan as a non-HVCRE? Current rules are unclear, so banks are simply retaining the classification on loans until they're paid off.
Some lucidity on the rules might be on the way. Late yesterday, Representatives Robert Pittenger (R-N.C.), and David Scott (D-Ga.) introduced legislation H.R. 2148, the Clarifying High-Volatility Commercial Real Estate Loans bill.
This bill would amend the Federal Deposit Insurance Act and for instance, spell out exactly what an HVCRE ADC loan is. Loans used to finance the purchase of "existing income-producing real estate" would not be considered HVCRE, nor would loans made to fund improvements to properties that generate enough cash flow to service their indebtedness. Also removed from the classification would be those loans that meet certain leverage thresholds, or those in which the borrower has invested at least 15% of the equity, based on the collateral property's value when it's completed.
While the bill was just introduced and has a long road ahead of it, lenders breathed a sigh of relief when they saw it.
"This bipartisan bill is an important step in clarifying many of the ambiguities in the final HVCRE rule that the industry has grappled with for over two years," said Lisa Pendergast, Executive Director of the Commercial Real Estate Finance Council.
Rodrigo Lopez, Chairman of the Mortgage Bankers Association, explained that by clarifying the HVCRE rules, banks would be "able to better meet the needs of their borrowers, contributing to the greater overall commercial real estate finance ecosystem." And Jeffrey D. DeBoer, President and Chief Executive of the Real Estate Roundtable, said the bill would encourage "sound lending practices, spurring economic growth and creating jobs in local communities."
Genscape's March 2017 NOPA National Soybean Crush Estimate
Genscape's estimate was right in line with the National Oilseed Processors Association's (NOPA) March 2017 crush number. NOPA's crush came in at 153.1 million bushels, while Genscape reported 152.1 million bushels. Industry news sources reported that soybean futures moved down because the diminished crush was lower than expected.
Based on Genscape monitoring, Genscape accurately detected daily crush rates decreasing from February to March in five of the six NOPA regions:
- 1 percent in Iowa
- 5 percent in Indiana, Kentucky, Ohio, and Michigan (IKMO)
- 5 percent in Minnesota
- 3 percent in the Southwest
- 1 percent in the Southeast
Genscape monitoring indicated multi-day outages at:
- Bunge - Council Bluffs, Iowa
- Incobrasa - Gilman, Illinois
- Bunge – Morristown, Indiana
- Louis Dreyfus – Claypool, Indiana
This accounted for 1.4 million missed bushels. Industry sources indicated additional maintenance outages at:
- Cargill - Cedar Rapids (East), Iowa
- Cargill - Gainesville, Georgia
- Riceland - Stuttgart, Arkansas
Genscape monitoring also indicated that Bunge – Decatur, Indiana, continued to operate at a reduced rate since early February.
Genscape also uses proprietary monitoring to track biodiesel and renewable diesel shipments to the United States. Genscape observed a total of 28 million gallons of biodiesel imported from Argentina and no biodiesel imported from Indonesia. In total, imports last month were up from Genscape’s March 2016 observations when biodiesel imports totaled 21.6 million gallons. Genscape is monitoring even more potential biodiesel shipments on the water from Argentina in April than March and there are currently no potential shipments from Indonesia on the watch list.
Genscape’s Soybean Crush Report provides insight with proprietary, near-real time monitoring of a strong statistical sample of the U.S. soybean processing. The report provides timely, impactful data that assists our clients in making better-informed decisions. To learn more about Genscape’s Soybean Crush Report, please click here.
Major Chinese Expansion for Genscape Vesseltracker’s AIS Antenna Network
Over the last two months, Genscape Vesseltracker has added more than 100 new AIS antenna locations across China, covering major ports, coastal traffic areas, and inland waterways throughout the country. The antennas are strategically placed in high locations to provide optimal shipping coverage, both within port areas and further out to sea, and demonstrates Genscape Vesseltracker’s continued commitment to expanding our AIS antenna network to cover all major ports around the world.
China has one of the world’s largest and fastest-growing maritime sectors. It is a major importer of raw materials for manufacturing and plays a key role in oceanbound container shipping, with seven of the world’s 10 largest container ports, including Shanghai, the world’s largest. Unsurprisingly, the Chinese coast also boasts some of the world’s busiest shipping lanes.
Inland shipping in China has also boomed, especially since the 2012 completion of the Three Gorges Dam. Apart from generating hydroelectric power, the dam has also made the upper reaches of the Yangtze River navigable for vessels over 100 tons and for the first time, allowing shipments from Shanghai to reach Chongqing, over 2,000 kilometers (km) upstream. This inland shipping expansion has led to a drop in transportation costs, attracting investment and industry throughout the Yangtze River basin.
Genscape Vesseltracker’s recent Chinese antenna network expansion has led to improved coverage of vessels in both coastal and inland areas, and saw an immediate increase in the total number of vessels detected in Chinese waters as soon as the new antennas came online.
The new Chinese antenna coverage is a major benefit to Genscape Vesseltracker’s users and clients. Since AIS technology has been mandated by the IMO (International Maritime Organization) for the vast majority of vessels, our users can see a truly global picture of shipping movements. Locally-placed AIS antennas also provide an unmatched level of detail and accuracy, which can be used to optimize port logistics, fleet movements and trading decisions.
In large coastal ports like Shanghai, the new, highly-placed antennas provide excellent coverage not only of the port area, but also anchorage areas and shipping lanes further out to sea (i.e. 50 nautical miles offshore, or in some cases more). Users of Genscape Vesseltracker’s Cockpit Tool can see up-to-minute information on activities in the port and anchorages, including berth availability, terminal waiting times and interactions between large, ocean-going vessels and smaller vessels, such as tugboats and bunkering vessels.
On rivers, canals and other inland waterways, the new Chinese antennas have allowed a new level of detail in planning and analysis. Logistics managers in Shanghai waiting for a cargo from Chongqing, 2,000 km upstream, can plan for their cargo’s arrival weeks ahead and receive updates as the vessel passes key waypoints or check if there has been a delay. Similarly, traders analyzing commodity movements can watch river barge movements at terminals of interest throughout the entire Yangtze River basin.
Genscape Vesseltracker’s Antenna Partners receive full access to all AIS antenna data and information from our ship database, including vessel owners and managers, and technical specifications. We are always working to expand our network, so if you are interested in becoming a Genscape Vesseltracker antenna partner, please let us know here!
CMBS Trading Slows as Market Prepares for More Conduit Issuance
After daily bid list volumes rose and remained elevated throughout most of March and early April, CMBS trading activity slowed noticeably in the past two weeks as the industry gears up for another round of new issuance. Trading volumes in the past few sessions featured a variety of CMBS instruments that included conduit mezz bonds from the 2013-2015 vintages. In the past week, spreads for the CMBS and CMBX markets tightened modestly for the most part, boosted by the equity rally resulting from favorable Q1 earnings reports from the banking and industrial sectors.
While geopolitical uncertainty continued to weigh on equities, reports of the new administration’s plans to implement a major tax reform proposal on Thursday later helped propel stocks, putting major indexes on track for one of its highest weekly gains in 2017 thus far. CMBS spreads came in by up to two basis points near the top of the stack, while CMBX 6/7/8/9/10 BBB- spreads tightened between two and 11 basis points on the week.
No deals have priced since the first week of April, but the outlook for second quarter, private-label issuance remains strong with estimates of up to $18 billion in the pipeline.
Trading and CMBX Spreads
CMBS Swap Spreads
Legacy LCF Price and Swap Spread Movement
Top Credit Stories from the Week
- Bank of America Consolidating, Will Ink Lease at New Chicago Office (CGCMT 2015-GC31 & more)
- Loan for UBS Center in Stamford Resolved with Nine-Figure Loss (LBUBS 2004-C1)
- Borrower Won't Fund Shortfalls for CMBX 7 Office Portfolio Loan (WFRBS 2013-C18)
- Alcoa to Leave New York Headquarters (CSFB 2005-C2)
Data Center REITs Lead the Pack in Q1
According to NAREIT, Data center REITs closed the first quarter of 2017 with 11.45% in total returns. Data center REITs make up about 5% of all REIT indexes. The top-performing constituents in Q1 were CyrusOne (NASDAQ: CONE), CoreSite Realty (NYSE: COR), and DuPont Fabros (NYSE: DFT), which have each posted over 15% returns year-to-date. The sky-high levels of commercial and personal data consumption are expected to continue growing exponentially over the next several years, which sets the data center REIT sector up for robust long-term growth. Hoya Capital Real Estate reports that data center REITs are the second most attractive sector (after residential REITs), as “the sector is expected to grow 10-15% per year over the next three years, compared to the broader REIT average of 6-8%.”
As Q1 earnings season approaches, Seeking Alpha‘s Bill Stoller notes the clear correspondence between data center REIT performance this past quarter versus its performance in Q1 2016. The price change in data center REITs in 2016 indicate an extremely strong first half, though the sector dropped sharply towards the end of the year, particularly around the election. Data for Q1 2017 closely mirror the upward trends seen in early 2016, suggesting that investors should watch the sector closely towards the second half of this year to see if the pattern will continue. As two more rate hikes are expected in 2017, investors should note that this sector is surprisingly sensitive to interest rates. Data center REITs with particularly long lease terms and high dividend yields—such as Digital Realty—will be ones to watch, as that results in high interest rate sensitivity.
In Q4 2016, there was a standstill in large-scale leasing activity for the data center REIT sector within most major markets. To boot, prices went south. Contributing factors to these market changes were fewer vacancies due to high leasing activity in the prior few quarters, as well as uncertainty regarding the changing political climate. Now, price appreciation for the data center sector has considerably outperformed the other property REIT sectors in 2017 thus far. Q1 2017 leasing has also improved, alleviating some supply and demand concerns raised from its drop in activity at the end of last year.
Although data center REITs are on a stable path for long-term growth and are significantly outperforming in 2017 so far, the sector is one to watch for the rest of the year ahead. As previously mentioned, Q1 2017 performance for major data center REITs is mirroring Q1 2016.If it continues to follow last year’s trajectory, the sector may be headed to a peak in the first half, followed by a decline in the second half amidst political uncertainties and interest rate hikes.
Atlantic Basin Hurricane Activity Kicks Off
Hurricane activity in the Atlantic basin is kicking off early this year. Tropical Storm Arlene, the first named storm of the 2017 Hurricane Season, is currently in the central Atlantic and moving towards the northwest. Genscape believes that is not a remote threat to the U.S. and will likely remain so as it is expected to dissipate on Friday, April 21. The official start of the Atlantic Basin Hurricane Season runs from June 1 to November 30.
Forecasts from Colorado State University’s Tropical Meteorology Project (CSU) are predicting slightly below-normal activity for the 2017 Atlantic Hurricane Season. The CSU forecast for the 2017 season is as follows: 11 named storms, four hurricanes, and two major hurricanes, with sustained winds in excess of 110 mph. According to CSU’s 2017 forecast, the probability for at least one major (category 3, 4, or 5) hurricane to make landfall along the U.S. coastline is 42 percent (average for last century is 52 percent). Historically, 3.5 named storms, 1.8 hurricanes, and 0.7 major hurricanes make U.S. landfall per year on average. The National Oceanic and Atmospheric Administration (NOAA) does not put out an official forecast until May.
The 2016 hurricane season was characterized as having slightly above-normal activity with a total of 15 named storms total, including seven hurricanes, with three categorized as major hurricanes. Of these, two tropical storms made U.S. landfalls. One of the most notable hurricanes to make landfall was Matthew, which became the first Category 5 hurricane in the Atlantic basin since Felix in 2007, and was a long-lasting storm (11 days) that impacted Haiti, Cuba, the Bahamas, and the southeastern U.S. coastal states.
Matthew made its way north, traveling parallel to Florida from October 5 to 7, before making landfall on October 8 near McClellanville, South Carolina, as a Category 1 storm. Week over week,September 25 to October 1 verses October 2 to October 8, gas demand in the states that were most heavily impacted by Hurricane Matthew (Florida, Georgia, South Carolina, and North Carolina) dipped roughly 1.8 percent from a weekly total consumption of 51.3 Bcf to 50.3 Bcf. While roughly one million folks were without power, nominations to power plants in Florida stayed relatively flat, while citygate demand dropped roughly ten percent. North and South Carolina saw a slightly more pronounced dip in demand related to the storm. North Carolina citygate deliveries fell 10 percent and deliveries to power plants dipped by 13 percent. In South Carolina, deliveries to citygates remained flat, while deliveries to power plants dropped 18 percent. Genscape's daily NatGas Basis Commentary Report published on October 14, shared further details on its impact.
As production continues to shift to inland regions and hurricane activity in the Gulf remains below average, Genscape is seeing the impact from hurricanes shift from production-destruction to impacting demand through shifts in temperatures. Get insight this hurricane seasons and learn how their affects on U.S. gas demand by checking out Genscape’s NatGas Basis Commentary Report.
Looking at Historical CRE Losses for CECL
Banks and bank holding companies are beginning to assess their ability to comply with the impending CECL (Current Expected Credit Loss) accounting standard coming in 2019 for early adopters. CECL will change the way banks calculate reserves on some of their assets, such as ﬁnancial instruments kept at amortized cost like loans, leases, and held-to-maturity debt securities. To benchmark and fine-tune loss methodologies for CECL, the key for banks will be a four-letter word: data.
Although there is no specific CECL calculation method required by FASB, a few options have been presented in the guidance released over the last few years:
- Loss Rate/Roll Rate: assign losses to different risk categories based on historical loss experience.
- Vintage Analysis: assign losses based on seasoning and vintage characteristics.
- Discounted Cash Flow (DCF): present value of expected future cash ﬂows discounted at the loan’s effective interest rate based on “reasonable and supportable assumptions and projections,” after which reversion to mean estimation and historical loss rates are used.
- Probability of Default/Loss Given Default (PD/LGD) Modeling: regression models applied to either pools of loans, or on a loan-by-loan basis and likely combined with DCF to forecast future, loss-adjusted expected cash ﬂows.
No matter the calculation method selected, historical, granular loss data will be necessary to generate supportable forecasts or average historical loss-based estimates. Unfortunately, many banks have very little in the way of granular historical data, and a number of those that do have good data have taken few to no losses in their history. This has made it difficult for those banks to effectively model future losses.
Banks with heavy commercial real estate exposure often look to the securitized market to augment their internal data, given the depth and breadth of historical information at the loan and property levels. A top-level view of historical losses in Trepp’s CRE history provides useful insight into general CRE loss levels by region, vintage, property type, and term performance over time. These numbers come from Trepp’s historical CMBS data feed. Trepp did not adjust the dataset or perform any manipulations that banks might do on their own when looking for a relevant sample set within the larger data feed universe.
Looking at the entire universe of loans that were ever outstanding from January 1998 through March 2017, average loss rates come in at 3.52% for all loans disposed and still outstanding, and 5.39% for just loans that have been disposed. Unsurprisingly, disposed loans for retail properties incurred the highest losses (6.17%) after the “Other” property type, which is often a catchall for multi-property and portfolio loans, some of which took very large losses during the economic downturn.
State level analysis can lead to outliers in smaller states where a few large losses can shift the averages significantly. Zooming out to the regional level, the Pacific and Middle Atlantic segments have fared best over the years when it comes to average loss rates, driven primarily by the strength of CRE performance in California and New York.
Banks will likely use a combination of approaches, data sources, and forecasting methods to calculate CECL ALLL. Vintage, seasoning, property type, and geographic characteristics are just a few of the variables they will assess when performing either loan level modeling or similar risk characteristic cohort analysis. Underwriting measures like loan-to-value ratio (LTV), debt service coverage ratio (DSCR), debt yield, and internal risk ratings will also play a large part in deriving life of loan loss estimates.
For more info on historical Trepp data for CRE losses and how it can impact CECL preparation, drop us a line at email@example.com.
- Loss Rate/Roll Rate: assign losses to different risk categories based on historical loss experience.
As Seen In The Wall Street Journal: Where High-End Renovations Cost $704,000
BuildFax property insights were recently published in The Wall Street Journal in their article on high-end renovations: Where High-End Renovations Cost $704,000.
Houston was the number one city for high-end renovations, with a median spend of $704,000. Boston came in at number two with a median budget of $528,000. Pittsburgh was third, with $385,000. Newark, Jersey City, Scottsdale, Honolulu, and Oklahoma City were also in the top ten.
Read the full article here.
Want to read more about how much homeowners are spending on remodels? Check out this recent article: 10 Top US States for Residential Remodel Spending.
The post As Seen In The Wall Street Journal: Where High-End Renovations Cost $704,000 appeared first on BuildFax Property Condition.
Non-Traded REITs Raise Lowest Volume of Capital in 14 Years
The departure of AR Global Investments from the non-traded REIT world, coupled with uncertainty surrounding substantial pending regulations, has put a sizable damper on the ability of the non-traded REIT sector to raise capital. According to Summit Investment Research, only $4.8 billion of equity was raised by sponsors of 35 entities last year. That was the lowest volume in 14 years, and pales in comparison to the $10.2 billion of equity that was raised in 2015.
New Millennium, New Sector
Although the non-traded REIT sector has been in existence for more than 25 years, the sector didn't shift into high gear until the mid-2000s. In 2004, $6.3 billion of equity was raised by companies such as Behringer Harvard, Cole Capital Corp., CNL Income Corp., and Hines. The firms that raised equity took advantage of improving real estate markets, as well as a growing appetite among retail investors to put money into the sector. As a result, capital-raising ballooned.
Three years later in 2007, $12.2 billion of equity was raised. Just about every major sponsor in the sector launched a non-traded REIT vehicle that year. Real estate of all stripes, driven by abundant liquidity in both debt and equity, was increasing in value almost daily.
Then the capital markets collapsed. Equity-raising by sponsors of non-traded REITs started declining. In 2008, $10.4 billion was raised. That figure then fell to $6.6 billion in 2009 as liquidity dried up.
Property values started to deteriorate and property owners were reeling, often as a result of having too much debt on their holdings. The confluence of weakened values, dissipating equity-raising, and debt-heavy property owners brought out opportunistic investors. American Realty Capital Trust, formed in 2007, took advantage of the market turmoil as it launched no fewer than five entities in 2010 and 2011.
King of the Equity Hill
With market conditions recovering, American Realty started to orchestrate a series of acquisitions and mergers. The firm often used American Realty Capital Properties Inc., a publicly traded REIT formed in 2011, as an aggregator. The idea was to provide liquidity in previous entities to investors and hope they'd invest in subsequent offerings. To make re-investment more enticing, American Realty formed companies with very specific focuses. It launched a company that only sought properties in New York City, another that pursued hotels, and one that specialized in grocery-anchored shopping centers.
That feeding frenzy resulted in some $20 billion of equity being raised in 2013, the sector's high-water mark. American Realty, by then known as AR Capital, was responsible for more than one-third of that total.
Now known as AR Global, AR Capital is no longer actively raising capital for non-traded REITs, having quit the business in late 2015 because of pending regulations. In addition, AR Global’s flagship company, American Realty Capital Properties Inc., disclosed an accounting irregularity in 2014 that resulted in the departure of its Chief Financial Officer and Chief Accounting Officer.
Regulation: To Pass or Not to Pass?
There are two pieces of pending regulation that likely spurred AR Global’s to stop raising capital for non-traded REITs: the Department of Labor's fiduciary rule and the Financial Industry Regulatory Authority (FINRA) regulatory notice 15-02. The Department of Labor's fiduciary rule would force most financial advisers to adhere to the standards of fiduciaries if they are or were selling financial products or advice to a client for their retirement account. FINRA 15-02 requires sponsors of non-traded REITs to include estimated values of investors' holdings in their regular statements.
The implementation of the fiduciary rule has been postponed and could very well be overturned. That uncertainty is sure to continue impacting the sector. So it’s certainly possible that capital-raising for the non-traded REIT sector will remain subdued this year. Of course, that could all change if the uncertainty is resolved.
Meanwhile, the sector is transforming, providing investors greater liquidity and offering shares, some of which don't have the onerous fees that typical non-traded REIT offerings historically carried. Even with the cloud of uncertainty continuing to loom, the quality of the segment’s offerings are certainly top-notch.
5 Largest CMBS Loans by Balance That Became Delinquent in March
The Trepp CMBS Delinquency Rate ascended once again in March, as another slew of loans turned newly delinquent last month. The delinquency rate for US commercial real estate loans in CMBS is now 5.37%, an increase of six basis points from February. The reading has consistently climbed over the past year as loans from 2006 and 2007 have reached their maturity dates and have not been paid off via reﬁnancing. The amount of new delinquencies remains elevated, as that total reached nearly $2 billion last month. Below is our list of the five largest CMBS loans to become newly delinquent in March.
1. Osprey Pool
Topping the list of March’s largest new delinquencies is the $113.4 million Osprey Pool. This portfolio is backed by two office buildings: First Citizens Plaza in Charlotte, North Carolina (475,043 square feet), and the Sarasota City Center in Sarasota, Florida (249,054 square feet).
The Osprey Pool was transferred to special servicing in February 2017 for an imminent maturity default, and then became 30 days delinquent in March. Due to mature this month, the loan’s most recent financials (through the first nine months of 2016) state that property occupancy is 73% and DSCR (NCF) is 1.25x. With an already lowered occupancy, news came last year that the lead tenant at the Charlotte office would depart upon lease expiration. Westinghouse Electric, Co. (listed as WECTEC in servicer documents) took up 37.4% of the space at First Citizens Plaza, though the firm vacated when their lease ended in October 2016. In a recent development, Business Observer FL published an article that stated the Dilweg Cos. bought both properties behind the Osprey Pool for a combined $115.5 million.
This loan makes up 7.63% of the collateral behind WBCMT 2007-C31, a deal which has 36.33% of its collateral currently marked as delinquent.
2. Hammons Hotel Portfolio (CGCMT 2015-GC33)
The second-largest loan to turn delinquent in March was the Hammons Hotel Portfolio behind CGCMT 2015-GC33. This $97.7 million portfolio is backed by seven hotels across seven different states that fall under the John Q. Hammons corporate umbrella.
In June 2016, The Revocable Trust of John Q. Hammons and its affiliates filed for Chapter 11 bankruptcy and a number of their CMBS holdings were transferred to special servicing the following month on the basis of borrower bankruptcy. This portfolio was included in that group of transfers. The borrower has been making payments since last year, but the loan officially became 30 days delinquent last month. Full-year 2016 financials reflect that portfolio occupancy is 67% and DSCR (NCF) is 1.96x. The loan matures in September.
As the second-largest piece of collateral in CGCMT 2015-GC33, the Hammons Portfolio comprises 10.27% of the deal’s balance. As of last month, the portfolio was the only delinquent note tied to the deal.
3. Rockvale Square
Backed by a 539,661 square-foot retail outlet center in Lancaster, Pennsylvania, the $92.4 million Rockvale Square loan was the third-largest CMBS note to become newly delinquent last month.
The Rockvale Square loan was one of the largest new delinquencies in January 2017 as it became 30 days delinquent that month. Despite late payments being reconciled in February, the loan is now going through the foreclosure process. Due to mature in May 2017, the note was sent to special servicing in July 2016 for a maturity default. March special servicer commentary states that the borrower “submitted…and ultimately rescinded…a modification proposal which was negotiated with [special servicer].” After discussions with the borrower, the servicer has listed the loan’s workout strategy as a “Deed in Lieu of Foreclosure.” Through the first six months of 2016, loan occupancy and DSCR (NCF) clocked in at 85% and 1.07x, respectively. The appraised value of the collateral has been reduced from an as-is value of $107.9 million at securitization to $47.3 million in August 2016.
The loan makes up 6.26% of the remaining collateral behind WBCMT 2007-C32, a deal which currently carries a delinquent balance of 18.77%.
4. Hammons Hotel Portfolio (GSMS 2015-GC34)
Much like the second loan on our list, the fourth-largest newly delinquent note from March is backed by a portfolio of John Q. Hammons-owned hotels which is packaged into a 2015 CMBS deal.
This Hammons Hotel Portfolio totals $70.9 million, but that may be the only factor that differentiates this loan from its counterpart which occupies an earlier spot on our list. Both portfolios are collateralized by the same seven hotels across seven states, and they both became 30 days delinquent in March following the Hammons bankruptcy and subsequent assignments to special servicing.
Both portfolios back 2015 CMBS deals securitized by Goldman Sachs, though this loan makes up 8.41% of GSMS 2015-GC34, not GC33. However, the similarities don’t end as this loan was also the only delinquent piece of collateral behind its corresponding deal last month.
5. 777 Scudders Mill Road – Unit 3
Capping off March’s list is $60.7 million loan behind 777 Scudders Mill Road – Unit 3. The loan collateral is a 231,108 square-foot office located in Plainsboro, New Jersey.
This property was solely occupied by Bristol-Myers Squibb, though the firm stated last year that it would vacate this location (along with the properties behind the $59.2 million 777 Scudders Mill Road – Unit 1 note and the $53.2 million 777 Scudders Mill Road – Unit 2) upon lease expiration in March. The move is part of BMS’s consolidation of its leased locations to a newly constructed facility on company-owned land in Lawrenceville, New Jersey. All three of the Scudders Mill Road loans were transferred to special servicing between March and April 2016. Originally slated to mature in February 2017, the Unit 3 loan is now officially listed as non-performing beyond maturity. The loan now carries an appraisal reduction amount (ARA) of $41.3 million.
As the largest outstanding loan behind BSCMS 2007-PW15, 777 Scudders Mill Road – Unit 3 currently makes up 19.56% of the remaining collateral. 71.52% of that deal’s balance is tied to delinquent loans.
For more information on newly delinquent loans and the current rate of CMBS delinquencies, send us a note at firstname.lastname@example.org.
Despite Earnings Growth, Bank Shares Fall
Editor's Note: Our CRE bank lending commentary recently caught the attention of The Wall Street Journal and ZeroHedge yesterday, who both provided their analysis of recent struggles and risk in the lending market.
Bank share prices plunged last week, as a few large banks reported Q1 earnings. Despite some indications of rising interest margins, investors were disappointed by non-interest income trends, as well as increases in expenses. A flattening in the yield curve also weighed on bank shares. The shares of the largest banks dropped by -3.6% for the week, while regional bank shares fell by -3.8%. The broader stock market dipped by -1.1% for the week, and the 10-year Treasury lost 14 basis points to yield 2.232%.
A few large banks announced earnings on Thursday. Net interest margins for these banks were mixed, with some rising (JPMorgan Chase, PNC) and others flat (Wells Fargo). Credit trends were positive overall, although JPMorgan Chase boosted loss reserves. All of the banks’ earnings announcements from Thursday beat estimates, but investors chose to focus on some negatives, especially the flattening of the yield curve over the last several weeks.
Overall commercial real estate lending growth fell for the week, the first weekly decline so far in 2017. Construction and land development contracted at an annualized rate of -18.4%. Multifamily mortgage lending grew by 10.6%, after a drop in the previous week. Commercial mortgages – the largest component of CRE lending – fell at an annual rate of -3.0%. The growth rates for construction and land loans, as well as commercial mortgages were below the year-to-date trends, while multifamily mortgage growth was above trend. Please note: The weekly CRE lending data here is for the period of 3/29/17 to 4/5/17.
Total commercial real estate lending growth for the year-to-date fell by nearly a full percentage point. The annualized growth rate for construction and land development dropped two percentage points to 9.6%. The multifamily mortgage annualized growth rate for the year-to-date edged up to 9.3%. The annualized year-to-date growth rate for commercial mortgages sagged to 6.6%.
For more CRE lending data, sign up for a free trial of TreppLoan. Trepp offers a suite of products for the entire asset life cycle, from finding and underwriting deals, to managing balance sheet assets and measuring performance, as well as supplying nationwide statistics and trends. The breadth of the system’s capabilities makes it ideal for dealmakers, underwriters, asset managers, and portfolio managers.
Pro-Forma Fallout Puts Kushner-Owned Building in Spotlight
666 Fifth Avenue has been on the radar of CMBS market watchers for at least seven years. Lately, we’ve received increased interest from various press outlets in and out of the CMBS world concerning the massive trophy office building in Manhattan. Bloomberg recently reported that the owners of 666 Fifth Avenue were in talks to sell a portion of the building to Anbang, a Chinese insurance firm. The discussions included plans to reposition the property and convert it to luxury condos, but the deal apparently fell through. Given the size of the proposed rebuild and the fact that one of the owners is the son-in-law of President Donald Trump, the property has made its way into the mainstream media news cycle.
Jared Kushner, like a lot of other Manhattan commercial real estate borrowers in the go-go days of pro-forma underwriting and sky-high valuations, purchased the property in 2007 using $1.75 billion in CMBS and mezzanine financing. The loan was underwritten using pro-forma, or projected, income and valuation measures based on the assumption that rents would be increased to market rates in the first few years of the loan’s life. The original financing included a $1.215 billion first mortgage and $535 million split into two mezz loans (a senior and a junior note). An underwritten appraisal of $2 billion meant the loan-to-value (LTV) ratio of the first mortgage was 60.75%, with the total debt LTV measured at 87.50%. The borrower funded a $100 million interest/rollover reserve account at origination that was used to fund debt service shortfalls, tenant improvements, and leasing commissions.
Although Trepp does not track mezz loan data after origination, various reports state that the mezz notes were paid down after Kushner sold the 95,513 square-foot retail condo portion of the property in 2008. However, the reserve was drawn down to just under $60 million by early 2010, and the loan was transferred to special servicing after actual DSCR had dropped below 0.60x and the borrower requested a loan modification. After almost two years of negotiations, the loan was modified and extended. The CMBS loan was split into a $1.1 billion A-note and a $115 million B-note. The A-note continued to accrue interest at the original loan rate (6.353%), but became payable at a lower, laddered annual rate (2012: 3%, 2013-2014: 4%, 2015: 4.5%, 2016: 5%, 2017: 6.353%). Any accrued and unpaid interest was added to the B-note balance, which also accrues, but does not pay at the original loan rate. The maturity was also extended two years, from 2017 to 2019. In order to get the modification done, Kushner partnered with Vornado, who provided a commitment for $110 million in additional equity capital. A portion of the additional equity accrues a preferred return and will be repaid ahead of the B-note in the event of a sale or refinancing.
Since the modification, the loan has remained current under the new terms despite a 70% occupancy rate as of year-end 2016, with 30% of the rentable area under leases set to expire during the first half of 2017. Watchlist and special servicer comments do not make mention of the possibility that the borrower was intentionally letting leases expire without replacement in anticipation of a repositioning of the property.
Doing some back-of-the-envelope math puts the property value well below the original $2 billion appraisal. Assuming an aggressive 3% cap rate and using the full-year 2016 NOI of $41.3 million gives us a value around $1.35 billion. A sale today at that price might come close to paying down all of the debt, including some of the accrued interest. With a little less than two years remaining to maturity, Kushner and Vornado still have some time to re-tenant, sell, or refinance the property. Given the recovery and continued growth of CRE prices in primary markets like New York City, it would not be surprising to see a bank or non-bank lender willing to step in to provide new financing on the property. The wild card in this situation, and the reason for so much press lately, is Kushner’s involvement. Even if Kushner removes himself from the operations of the investment, will lenders be shy to get involved with an asset that may bring unwanted negative press or the implication of conflict of interest? Will a potential bidder be wary to enter a negotiation for similar reasons? Or will Vornado’s investment and involvement be enough to shepherd the loan safely through maturity come what may PR-wise? In any case, the story is old hat for most in the CMBS space, if only updated with a recent political wrinkle. CMBS investors will wait on the outcome like they did with StuyTown, The Belnord, 280 Park Avenue, and others.
For more info on 666 Fifth Avenue and other CMBS loans issued with pro-forma underwritng, drop us a line at email@example.com.
Clicks to Bricks – The New Retail
Headlines about retail closures are spelling gloom and doom for abandoned stores, but there’s a flip side to this trend that gets far less attention. “Clicks to Bricks,” authored by upcoming PRISM speaker, Kenne Shepherd, Principal at NY-based Kenne …
Pushback Against The Federal Public Utilities Regulatory Policies Act
The federal Public Utilities Regulatory Policies Act (PURPA) was passed in 1978 as way to diversify the country’s energy portfolio and allow renewable energy to compete with fossil fuels, especially in states with weak or no renewable mandates. It requires electric utilities to purchase the output from cogeneration and small power production qualifying facilities (QFs) up to 80 megawatts (MW) at a cost lower than the utility would incur by supplying the power itself, known as the ‘avoided cost.’ Although PURPA has been almost irrelevant to the wind and solar industries because of the steep cost of the technology, the last decade has represented a major decline in costs and therefore, an increased dependency on this regulation by renewable developers. The cost of solar energy in particular has fallen, with utility-scale PV costing approximately $1.42 per watt for a 100 MW fixed-tilt system in Q1 2016, which represents a 20 percent decrease from 2015 and a 68 percent decrease from 2009, according to the National Renewable Energy Laboratory. This reduction has contributed to the fact that PURPA will be a significant driver of utility solar PV capacity additions in 2017.
North Carolina illustrates this emergence of solar growth through PURPA, but also the risk in exclusively depending upon this regulatory construct. The Solar Energy Industries Association has identified the state as the nation’s second largest solar market behind California, with 3016 MW of installed solar capacity through 2016. Coupled with this increase in PURPA projects, however, comes resistance from utilities. Most recently, Duke Energy sought approval from the North Carolina Public Utilities Commission to amend the PURPA rules, as each state has the ability to implement the PURPA rules accordingly. Duke requested to limit fixed price contracts to solar and other non-hydro projects less than one MW, reduce the term length from fifteen to ten years, and adjust the energy rates every two years. Further, they proposed to use a competitive bidding process instead of fixed price contracts for larger projects. Similarly, the Montana Public Service Commission granted NorthWestern Energy’s request to temporarily suspend guaranteed rates for small solar projects in June of 2016, requiring developers to negotiate power purchase agreements on a case-by-case basis.
Despite efforts by developers to prove the PSC and NorthWestern did not act in a way that is consistent with PURPA’s regulations and ask the Federal Energy Regulatory Commission (FERC) to intervene, FERC declined to launch an enforcement action. With more utilities fighting PURPA, there remains uncertainty over whether investors and renewable developers will still have the long-term assurance needed to finance a project. Despite this hindrance, there are other opportunities for developers to originate long-term contracts without PURPA; competitive bidding processes and bilateral transactions with utilities, cooperatives, and municipalities, as well as corporates, all serve as viable alternatives. GP Energy Management, an outsourced trading and risk management desk, specializes in creating unique project origination plans tailoring them to the project specific location and market. Please contact us to learn more, or to receive a free consultation: firstname.lastname@example.org.
Unpacking the Problems with Package Delivery
In between grabbing essentials on Amazon Prime, ordering your weekly Blue Apron fix, and scoring those shoes you just had to have on Zappos, online shopping and delivery is taking over the lives of apartment dwellers – and presenting complex problems to residential managers.
The US Department of Commerce announced that online retail sales in Q4 were estimated at $102.7 billion, 1.9% over the previous quarter. E-commerce sales increased 14.3% from the previous year in total, compared to a 4% overall increase for retail sales.
The increase in sales undoubtedly leads to an increase in package deliveries – USPS alone saw a 15% increase alone in package volume compared to the same period on 2016.
The increased volume is leading to a lack of storage space.
According to DNAinfo, many package rooms are overstuffed with outsized items (think furniture and mattresses), and some are even being redesigned or retrofitted to deal with increasing inventory. Some firms, like Related Management, are standardizing even larger storage spaces depending on the number of units in a building. In some cases, management teams are removing themselves from the package process entirely.
At least one national landlord is no longer accepting or storing packages for residents – all deliveries will be left directly at residents’ doors.
So how much do residents care? According to Multifamily Executive’s Concept Community statistics, over 28% of renters list package lockers as “very important,” or near the top on a scale of 1 – 10. In fact, “a clear majority [indicated] a preference for onsite storage services.” On top of that, nearly 70% of renters said they expect this service to be free.So What to Do?
Several package and concierge-type services have popped up for both managers and residents looking for solutions to the package pile-up:
- Hello Alfred: A high-end concierge service where your “Alfred” – a hospitality professional – cleans house, runs errands, and does much more than ship and receive packages.
- GoLocker: A centralized location to receive and ship packages via multiple carriers.
- Amazon Locker: A similar service to GoLocker, but only for Amazon packages.
- Doorman: An intermediary service that receives packages and re-delivers them at times convenient to the resident. Multifamily properties also use Doorman as a service in lieu of onsite package rooms and storage.
What solutions do you use for package handling, storage, and tracking? How big of a concern is this for your organization?
Genscape Leads in Focused Energy Transfer Rover Pipeline Project Coverage
Just over two weeks ago, as the window for felling trees during the Indiana Bat hibernation season drew to a close, Genscape flew the Rover right-of-way (ROW) for the second time to gauge construction progress.
After analyzing over 1,000 high-resolution aerial pictures, Genscape’s conclusion was positive. With only two days left to clear trees, Rover’s ROW appeared clear of forest, and in most areas construction had progressed to the deployment of construction materials. Heavy machinery was scattered across the state, with pipe delivered to a few locations in central Ohio and several of the 30 Horizontal Directional Drill (HDD) rigs were beginning to take shape. Trenching and ditching had begun in a few places, though whether the ditch was for the pipe itself or for drainage was unclear. If it was for the pipe itself, this trenching affects a very small percentage of the overall line. However, at the time of flight, there were miles and miles of ROW still covered with downed trees that need to be processed and have stumps removed prior to the progression of construction at those locations.
Clients of Genscape’s Natural Gas Infrastructure Intelligence product received access to the full suite of geolocated aerial images and related conclusions one and a half weeks before Energy Transfer filed an updated construction report with the Federal Energy Regulatory Commission (FERC) to confirm that tree felling had been completed. Geolocated images add a wide range of utility to the flights, including specific HDD sites, utility and road crossings, and compression sites easily available for further inspection on demand.
Genscape is supplementing the planned set of monthly flights with a series of on-the-ground cameras to observe work in near-real time at a variety of sites along the pipe project. One monitoring camera on the Clarington Lateral recently observed the arrival of a work crew to the area, while the others watch compressor stations rise from empty fields or heavy machinery dig below a road. Photo sets are delivered to subscribers biweekly with instant alerts from the Infrastructure Intelligence team when major status changes are observed. To learn more about Genscape’s Natural Gas Infrastructure Intelligence, or to request a trial, please click here.
Buzzard Outage Sends Ripple Down Forties Supply Chain
The Buzzard field, the largest contributor to Forties flow, was shut on April 4 due to unplanned maintenance at one of the onshore processing plants. The outage affected vessel loading at Hound Point, one of the delivery points for the Forties pipeline system, and significant flaring activity at the Buzzard offshore platform was observed via satellite. Buzzard resumed operation on April 6, according to Reuters, and by April 9, Genscape saw that the Forties oil balance flow (moving average) had nearly recovered to pre-Buzzard-outage levels.
Following the restart of Buzzard production, between April 7 to 9, the seven-day average Forties oil balance flow, an assessment of pipeline flow via the volumes received at the three delivery points, averaged 375,000 barrels per day (bpd). During the two-day production cut, Forties flow averaged 327,000 bpd, a 20 percent decrease from pipeline rates April 1 to 4 when flow averaged 410,000 bpd.
Flow lower ahead of Buzzard upset
Previously, at the end of March, Genscape saw a significant drop in Forties pipeline flow (Figure 1). Flow only averaged 393,000 bpd for the last nine days of March, compared to 504,000 bpd for the previous nine days. Overall March flows were slightly higher at 452,000 bpd compared to 442,000 bpd for February.
Vessels wait to load at Hound Point
The VLCC Tamagawa finished loading Forties crude at Hound Point late April 7 (Figure 2) and departed the following morning, according to Genscape. She was initially heading towards Brixham, United Kingdom, but changed destination on April 10 to Tianjin, China. Prior to the Tamagawa loading, no tankers had loaded at Hound Point in over a week, which was the longest lull with without tankers docking since October 2016.
Lower Forties flow, due to the Buzzard production disruption, likely delayed loading of the VLCC. Generally, crude oil inventories at Dalmeny, the staging storage location for crude bound for Hound Point deliveries, are near two million barrels (bbls) before a VLCC commences loading. Dalmeny inventories, however, were only 1.7 million bbls prior to the Tamagawa loading.
The Baltic Glory arrived at Hound Point just before midnight on April 10, while the Gener8 Miltiades was expected to arrive at Hound Point on April 11 but had not docked as of April 12, coming from Yanbu, Saudi Arabia, according to Genscape Vesseltracker™ AIS data. With multiple tankers listed on the loading program and in the vicinity (including floating storage), activity is ramping up following the Buzzard outage.
The Forties pipeline system has an oil processing capacity of 1.15 million bpd and flows from the Forties Unity platform to the Kinneil crude stabilization plant. From there, stabilized oil is delivered either directly to ship at Hound Point, to tank at Dalmeny or to the refinery at Grangemouth. Genscape monitors several pumping stations and facilities including Kinneil, Grangemouth, Cruden Bay, and Netherley. Genscape's daily Forties Supply Hub report provides critical insight and daily developments on all key factors of this pipeline system, which is one of the main contributors to the Brent crude benchmark. Please click here to learn more, or to request a free trial of Genscape’s Forties Supply Chain Monitor.
5 Largest CMBS Loan Losses - March 2017
The recent trend of high monthly disposition volumes continued in March as 73 CMBS loans totaling $1.5 billion were liquidated last month, the highest such volume in 15 months. Due to the resolution of several large office and retail notes, average loan size remained elevated at $20.5 million, up slightly from $20.4 million in February. Overall loss severity ticked down for the third straight month, falling to an average loss rate of 32.17% in March from 48.76% in February, and a recent high of 57.83% in January.
Retail loans incurred the highest realized loss amount last month at $225.1 million total. Office and mixed-use loans followed with $162.6 million and $37.6 million, respectively. Office notes alone comprised nearly half of the month’s disposition volume. Retail loans represented 22.3%, followed by the mixed-use segment at 20.3%. Retail loans carried the highest loss severity of the three, climbing 2.6% from February to 67.4% last month. Office loss severity fell from the month prior and clocked in at a modest 24.5%.
Below are the five CMBS loans that incurred the largest losses by amount per March’s remittance updates.
1. Citadel Mall
Backed by a 296,707 square-foot portion of a Charleston, South Carolina shopping center, the $62.7 million Citadel Mall loan was disposed with the largest loss observed in March's remittance data. The outstanding balance of the note was written down in total last month. Big-box retailers Dillard’s, Belk, Sears, JCPenney and Target serve as anchor tenants for the Citadel Mall, but none of those tenants are part of the loan collateral. (The mall’s total square footage exceeds 1.1 million.) The loan was transferred to special servicing in May 2013 for imminent default. Though the collateral was 90% occupied at the end of 2013, DSCR (NCF) clocked in at just 0.54x. DSCR fell from that level to -0.09 at the end of 2015, and then to -0.49x one year later. As of January 2017, the loan collateral was 90% occupied, though about 23% of that figure is made up of temporary tenants. The note backed 3.13% of WBCMT 2007-C32 prior to liquidation, a deal which has had 5.6% of its original collateral written off.
2. Glendale Center
The $125 million note tied to the Glendale Center incurred the second-largest loss last month. Backed by a 382,841 square-foot office in the city of Glendale, California, the $125 million loan was sold off at a loss of $57.6 million, or a 46.09% loss severity. The Walt Disney Company and AT&T are the top tenants at the property. After being transferred to special servicing in October 2011 for a default stemming from cash flow issues, the asset was returned to the lender in August 2012. Bank of America once took up 23.1% of the building’s square footage, but the firm did not renew their lease after it expired in April 2013. Occupancy and DSCR (NCF) suffered as a result of BoA’s departure, with the former metric falling from 100% at year-end 2010 to 77% at the end of 2013. In that same time period, DSCR slipped from 1.37x to 0.75x. Before disposal, the Glendale Center loan comprised 24.1% of WBCMT 2006-C27. 9.72% of that deal’s original collateral balance has been lost to write-downs.
3. Newburgh Mall
The third-largest loss incurred in March belonged to the $29.1 million Newburgh Mall loan. With a realized loss total of $28.0 million, the note was disposed at a loss severity of 95.75%. The loan collateral is a 379,729 square-foot, regional mall located in Newburgh, New York. The note was transferred to special servicing in November 2011 and became REO in September 2014. By the time it was sent to servicing, loan occupancy was 82%. The borrower cited a weak economy as a factor that negatively affected leasing at the mall. DSCR fell from 1.35x at year-end 2009 to 0.72x by the end of 2013, and then to 0.66x for the first nine months of 2016. Top tenants for the loan collateral are Sears (22.1% of the GLA), Bon-Ton (18.0%), Bed Bath & Beyond (6.42%), and Office Depot (4.75%). The loan made up 21.3% of the remaining collateral behind GMACC 2006-C1 before the write-down, a deal which has lost 13.14% of its original balance to dispositions.
4. Great Northern Mall
Another loan backed by a New York mall was closed out with the fourth-largest loss applied in March. The $32.2 million Great Northern Mall note was closed out with a $26.1 million loss last month, amounting to an 81.21% loss severity. Collateral for the loan was a 504,743 square-foot regional mall located in Clay, New York. Dick’s Sporting Goods (12.9% of the GLA), Regal Cinemas (7.0%), and The Shoe Dept. (6.0%) are the leading tenants at the mall. The loan was originally transferred to special servicing in March 2014, but this was a result of a 13-month maturity extension being granted. After it was returned from servicing in June 2014, the loan was sent to servicing again just five months later as the borrower made it known that it would not be able to refinance by the new maturity date. The Great Northern Mall note comprised 65.87% of BSCMS 2004-PWR3 prior to disposal, a deal which has only lost 3.69% of its original collateral balance to write-downs.
5. Siena Office Park
Rounding out March’s list is the $28.6 million Siena Office Park (5), which was disposed with a $26.1 million loss for a 79.01% loss severity. The loan collateral is a two-building, 101,278 square-foot office complex located in Henderson, Nevada. After being on the servicer watchlist for four years, the note was transferred to special servicing in June 2013 due to imminent default. Loan occupancy and DSCR (NCF) were measured at 91% and 1.44x at securitization, respectively. However, those levels dropped to 80% and 1.03x by the end of 2010, and then 56% and 0.46x at year-end 2015. The most recent special servicer commentary stated that “leasing momentum (was) limited as prospects have multiple competitive options.” Prior to the write-down, the Siena Office Park loan made up 79.06% of WBCMT 2007-C32. 5.60% of that deal’s original balance has been lost via dispositions.
For more info on CMBS loans that have been disposed with losses, drop us a line at email@example.com.