Blogs

  • Most Profitable Retail Markets of 2012 6 years ago

    Written by Susan Persin, Managing Director

    Retail real estate performed well during 2012, as sector fundamentals strengthened in spite of a lackluster holiday shopping season. CBRE reported that the national retail vacancy rate was 12.9% in the third quarter of 2012—down from 13.2% in the third quarter of 2011. Rents stabilized in many metro areas and increased notably for the best product in the best markets.

    Demand was driven by retailers and restaurants that sought good locations for expansion and became more receptive to longer term leases. At the same time, limited new construction fueled demand for existing space. Retail REITs outperformed almost every other REIT sector, with a 26.74% return in 2012. With a strong year behind retail real estate and an outlook for further economic strengthening during 2013, investors will evaluate the performance of their holdings and make acquisition and disposition decisions.

    See a retail market analysis and drill downs for for the following MSA's:

    • New York-Newark-Edison, NY-NJ-PA
    • Washington-Arlington-Alexandria, DC-VA-MD-WV
    • Miami-Fort Lauderdale-Miami Beach, FL
    • Los Angeles-Long Beach-Santa Ana, CA
    • San Francisco-Oakland-Fremont, CA

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  • 2012 CMBS Market in Review: The Good, the Bad, and the Ugly 6 years ago

     Written by Joe McBride, Research Analyst

    While I was watching the ball drop in Times Square last week, I couldn't help but reflect on the past year's happenings, whether they were good, bad, or ugly. That's when I realized we better get to work on the annual "The Good, the Bad, and the Ugly" review of the CMBS market.

    Personally, the Good, the Bad, and the Ugly would go something like this (respectively): New York Giants win the Super Bowl, the epic movie flop "John Carter," and the public's sudden obsession with all things Honey Boo Boo.

    In terms of the CMBS market, the most common "bad" or "ugly" themes in TreppWire were the mini-wave of five-year 2007 loans coming due, record high delinquency rates and a constant stream of appraisal reductions. The "good" was the impressive market rally that began in June with across-the-board spread tightening and a marked increase in CMBS issuance.

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  • Transaction Account Guarantee Goes Out with a Whimper. . . We Hope 6 years ago

    Written by Matt Anderson, Managing Director

    While banks have spent the last few months addressing the regulatory impact of Dodd-Frank stress testing, the December expiration of the FDIC’s deposit insurance for transaction accounts was a nettlesome development. The unlimited insurance on non-interest bearing accounts—commonly referred to as “TAG” (Transaction Account Guarantee)—expired on December 31st, 2012. Originally established at the height of the financial crisis in 2008, TAG was renewed once in 2010. 

    The Transaction Account Guarantee (TAG) program was established to backstop non-interest bearing accounts (transaction accounts, such as checking accounts) with unlimited amounts of insurance. In contrast to normal deposit insurance, which now tops out at $250,000 per account, unlimited insurance on transaction accounts was viewed as a means to avoid a liquidity crisis at a time when confidence in the financial sector was low and the viability of many banks was in question.

    The central argument behind letting the insurance expire has been two-fold: first, that it benefits large institutions disproportionately (and therefore perpetuates “too big to fail”); and second, that it exposes the FDIC to losses by mopping up after failed banks.

    As to the first argument, it is true that larger banks have much greater amounts in TAG accounts. As of September 30, 2012, the largest banks (those with over $100 billion in assets) had $1.2 trillion (73.3%) of the $1.7 trillion total in TAG accounts. Conversely, small banks (those with under $1 billion in assets)  only had $77.2 billion (4.6%) of the total amount in TAG accounts. 

    With regards to the second point, the CBO produced an analysis that indicated a potential cost of $110 million to the FDIC through the future failure of banks with TAG deposits. The published analysis only shows annual dollar loss figures, no estimated number of failures or how much this would cost in total, therefore it is difficult to decipher. Since the unlimited deposit insurance was on noninterest-bearing accounts, TAG accounts would not appear to pose the same sort of moral hazard that high-yielding brokered deposits do.

    Ironically, the fallout from the TAG insurance expiration is likely to fall disproportionately on smaller banks. While the largest banks have the greatest exposure to TAG accounts, they are also expected to be the net beneficiaries of the expiration. To the extent that TAG deposit holders have concerns about access to their accounts and smaller banks’ liquidity, TAG deposits are expected to migrate towards larger institutions.

    By Trepp’s tally, there are 931 banks with TAG deposits that account for 10% or more of the bank’s total assets (as of Q3 2012). Of these banks, 725 (78%) are smaller banks, with assets below $1 billion. A further 158 (17%) have assets of $1 billion to $10 billion. If the larger transaction accounts do migrate to larger banks, these smaller banks could experience a liquidity crisis of their own, unless they demonstrate that they have a low fail risk.

    The expiration of Transaction Account Guarantee insurance may turn out to be relatively innocuous. With that said, Trepp will be monitoring trends in non-interest bearing accounts, especially at banks with greater reliance on the accounts. We do not expect a deal to resurrect the TAG insurance now that the expiration date has already passed. Whether this turns out to be a “cliff” of sorts for the banking industry, spurring withdrawals and a liquidity crisis, or a non-event will be borne out in the first few months of 2013 and the trust that the banks can instill in its depositors.


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  • Thinking about the FASB Accounting for Credit Losses 6 years ago

    Written by Tom Fink, Senior Vice President

    Thanks to the American Securitization Forum for providing the links to the Exposure Draft of "Financial Instruments—Credit Losses" this past week.

    As with every Financial Accounting Standards Board (FASB) draft, there is a lot to absorb, think about and evaluate. The big picture change is that institutions (like banks and insurance companies) that invest in financial assets (such as commercial real estate loans and CMBS securities) would have to report "credit losses" in their income statements before such credit losses occur, or become probable (the current practice).

    The rationale is that the financial crisis of 2007 was exacerbated by "the overstatement of assets caused by a delayed recognition of credit losses associated with loans." (Exposure Draft, Financial Instruments—Credit Losses (Subtopic 825-15), p.1) 

    So why does this matter? Because the only way to avoid the new standard would be to value loans at fair market value. I am not aware of any of our major lending clients who apply fair market value to the financial reporting of the commercial real estate loans held in portfolio.  So I would expect all of these lenders, including banks, to be very interested in these proposed standards.

    One of the major changes that FASB would require is that credit losses be based on a projection of future credit losses based on historical experience, current loan book, and "reasonable and supportable forecasts that affect the expected collectibility of financial assets' remaining contractual cash flows." (Exposure Draft, Financial Instruments—Credit Losses, Question 5, p. 6) 

    This lands us right in the quagmire of unexpected consequences. (Or perhaps an invocation of Murphy's Law would be in order.) So, let's say that a bank, in order to satisfy the Dodd-Frank Stress Test requirements, has three economic scenarios which have very detailed loan level losses. I think a case can be made that the proposed standard would require the bank to assign a probability to each scenario, take the weighted average sum of the credit losses in the scenarios, and run any increase or decrease through their comprehensive income statement.

    If you think that one is a stretch, let's go to a simpler example. The Risk Management team at a bank or insurance company reprojects losses every quarter based on their economic forecasts. Changes go through the income statement under the proposal.

    Or simpler yet, the Risk Management team assigns a credit loss probability to each new loan.  So when a bank or insurance company closes a loan, do they now have to book a loss simultaneously with the close? After all, there is an official company expectation of the collectability of the contractual cash flows.

    And how would this affect credit availability?  If a bank or insurance company wants to avoid the immediate charge off, it could just refuse to do a loan, or reduce the leverage to a point where the internal risk model shows no expected loss.

  • November Job Growth Better Than Expected 6 years ago

    Written by Susan Persin, Managing Director

    US job growth was stronger than anticipated in November, with 146,000 new jobs added, according to the Bureau of Labor Statistics. National unemployment moved down to 7.7% during the month, reflecting a decrease in the size of the labor force.

    Several important sectors of the economy are steadily expanding. Trade, transportation, and utilities led November job growth, driven by retail trade. An early Thanksgiving caused retailers to hire temporary help earlier than in years past.

    Professional and business services was another strong sector, with expansion fueled by temporary help agencies and computer systems design. Amusement, gambling and recreation accounted for many of the new jobs in the leisure and hospitality sector, while job growth at hospitals and nursing and residential care facilities contributed most to the education and health services sector.

    The construction and manufacturing sectors both lost jobs during November. Although auto sales and production are strong, the manufacturing sector was affected by thousands of jobs lost when Hostess shut down. In addition, weak international economies and the strengthening dollar have negatively affected international demand for US products. 

    Other sectors of the economy, including finance and government, experienced little change during November.

    The November jobs report was in line with Trepp’s modest growth outlook for 2012.  The impact of Superstorm Sandy was not included as part of the report, although it will be an engine for future job growth as New York and New Jersey rebuild. Economic growth in 2013 will be better than 2012.

    Read the November 2012 Employment Growth report.

  • Even after a Loss to Miami Not All is Bad in Buffalo 6 years ago

    Written by Manus Clancy, Senior Managing Director

    A few weeks ago, we created a table using delinquency rates in CMBS to replace wins and losses to rate NFC teams.

    We promised to do the same for the AFC and today we are back to keep that promise.

    In the AFC East, the Buffalo Bills and New York Jets are bringing up the rear in terms of wins and losses. Both teams are 4-7. However when it comes to the CMBS delinquency rate, Buffalo sits atop the division. Only 5% of their CMBS loans are delinquent as of November. The Jets were the butt of many jokes after their loss to the Patriots on Thanksgiving night. The New York City MSA delinquency rate is stubbornly high at almost 10%. That keeps New York in the cellar in terms of delinquencies. (It should be noted that the score for New York is driven primarily by a host of 2006 and 2007 loans that were underwritten based upon a lousy game plan. The multifamily “pro forma” loans from that era were originated on the belief that the borrowers would be able to convert rent stabilized apartments to market rents. The failure of that plan got many borrowers “fired” over the last few years.)

    In the AFC South, the Houston Texans have established themselves as bona fide Super Bowl contenders with a 10-1 record. In terms of CMBS standings, Houston is also number one with a delinquency rate of under 7%. It has been a surprise year for Andrew Luck and the Indianapolis Colts. Despite an enormous re-tooling of the roster, the Colts are an impressive 7-4 thus far. While that has given the City of Indianapolis a lot to cheer about, the city’s CMBS delinquency rate has not.  It is mired in last with a rate of almost 20%.

    In the AFC North, winning has come easy for the Steel City. While the Steelers have struggled with injuries in 2012, the commercial real estate market as reflected in the CMBS delinquency rate has not. Pittsburgh is number one with a delinquency rate of under 5%. On the other end of the spectrum, a three-game winning streak has put the Bengal smack dab in the middle of the playoff hunt. However if CMBS delinquencies were the yard stick, the Queen City team would be looking to secure a top draft pick in next year’s NFL draft. Cincinnati’s delinquency rate is over 19%.

    In the AFC West, Peyton Manning has brought new energy and hope to Denver, where the Broncos can clinch the division this weekend. Despite dismal win-loss records, it’s San Diego and Oakland which top the standings in terms of delinquencies. Each MSA sports a rate below 5%. (Although we should note the Oakland stats also include San Fran.)

  • Cat's Out of the Bag: Regulators Release Final Stress Testing Scenarios 6 years ago

    Written by Matt Anderson, Managing Director

    It seems that the FDIC, the OCC and the Federal Reserve were feeling particularly giving leading up to Thanksgiving. On the fifteenth of November, the regulators released the official scenarios for running bank stress tests. Prior to this announcement, the Federal Reserve's CCAR stress testing of the 19 largest banks, conducted last March, served as the best estimate for what the impending Dodd-Frank legislation mandated stress testing would entail.

    Upon reviewing the official scenarios, we found no unwelcome surprises from the regulators. Rather, the announcement confirmed that no new macroeconomic variables were added or removed from those used in the CCAR stress tests. Looking at the inputs, it appears that they are modestly less severe than Trepp had anticipated.

    To illustrate this, we compared the official inputs to those that we had previously been using in our Capital Adequacy Stress Testing module, which were created in direct response to Dodd-Frank and used variables based on those from CCAR. Regarding Real GDP Growth, both the Trepp and regulator inputs assume four quarters of deeply negative growth, with GDP flattening out in Q4 2013 before moving into positive GDP. The Trepp severely adverse scenario had called for GDP to bottom out at a level approaching negative 8%. The new inputs call for the Real GDP Growth to hit a lowest level of negative 6.1% in Q1 2013.

    For the unemployment rate, the difference was more subtle. The Trepp model saw a peak of 12.2% while the new inputs call for 12.1% in the severely adverse scenario. Asset price changes (stock market, home prices and commercial property prices) are essentially the same as expected, with only minor differences in cumulative growth over the forecast horizon.

    As the regulators have forfeited their air of mystery, our bank stress testing module has been updated with the regulator’s official inputs.  

    For more information on our bank risk analysis solutions and bank stress test research, you can read about the Capital Adequacy Stress Testing module here.

  • Positive REIT Sentiment Going into Holiday Season 6 years ago

    Written by Joe McBride, Research Analyst

    For all those lucky enough to attend REITWorld in sunny San Diego last week, from all accounts, the mood was decidedly upbeat. The outlook for 2013 seems to be one of tempered enthusiasm across the industry. The Fed’s practically zero interest rate policy has sent investors in search of yield and lowered the cost of capital for REITs throughout 2012. Deal making and IPO activity remains relatively quiet, but the prevailing forward sentiment is positive for the REIT world.

    Last Friday, word from D.C. sent the markets up in renewed hope that both parties would successfully negotiate a plan to avert the fiscal cliff at year’s end. Further, last Monday, a better than expected existing-home sales number, another sign of the recovering housing market, helped the rally prior to Thanksgiving week continue.

    Following the President’s reelection, Healthcare REITs have been garnering a lot of the attention. The no longer uncertain Affordable Care Act coupled with an aging population has many analysts singing the praises of the defensive healthcare sector. The defensive nature simply comes from the fact that people tend not to change their healthcare spending based on economic conditions and, on a property level, healthcare companies often have longer lease periods, which include maintenance and insurance payments. The predictable future cash flows provide for stability in down times but also reduce upside in rising markets.

    On a lighter note, retail REITS breathed a sigh of relief this week when Macy’s dismissed a petition to remove Donald Trump products from their stores. The controversial mop-top mogul drew the ire of many Barack Obama supporters when he offered a $5 million contribution to charity if the president presented his birth certificate and college transcripts. He then called the president’s reelection a “travesty, a total sham.”

    Apparently more than 500,000 people signed the petition that urged Macy’s to remove Trump’s products from their stores because he did not represent the socially responsible philosophy of the department store. Macy’s CEO Terry Lundgren valiantly defended his company, saying that the store’s merchandise offerings are not representative of any political positions. In hindsight, maybe it was just me who was relieved because I am looking forward to buying my first of many bottles of the Don’s new cologne, named simply “Success.”

    For more information on REITs, sign up for REITCafe, a free REIT news source.

  • The Polls Are In for One Segment of CRE 6 years ago

    Written by Susan Persin, Managing Director

    This week marked the end of the 2012 presidential election with Barak Obama winning a second term. What does this mean for commercial real estate and REITs?

    On one hand, the political makeup of Congress is little changed, leading us to expect further gridlock and inaction. On the other hand, now that the election is behind us, politicians can return to focusing on solving issues like the fiscal cliff, which could push the nation back into recession if it is not resolved.

    The Health Care REIT sector is most likely to benefit from the election. Obama’s re-election makes fairly certain that the Affordable Care Act (Obamacare) will be fully enacted, and with millions of additional Americans covered by insurance, demand for services and health care real estate will increase.

    The election’s most significant negative impact will be on Mortgage REITs because of their dependence on housing policies and interest rates. MREIT values have already been pulled down by the Fed’s Quantitative Easing 3 (QE3) plan to buy about $40 billion of agency mortgage backed securities each month, which has already led to increased mortgage prepayments.

    Obama has made it clear that he will pursue housing policies that include debt forgiveness on federally backed mortgages and very low interest rates during his second term. Obama’s policies will lead to increased pre-payments of mortgages that will negatively affect mortgage-bond holders in the Home Financing Mortgage REIT sector, especially those that bought the securities above face value.

    Other sectors will be less directly impacted by the election. Office, industrial, retail, lodging, and residential are more affected by the economy than legislation or interest rates. The re-election of President Obama means that the economy will likely maintain its pace of slow growth and REITs in these sectors will continue their current trajectory. 

    The end of the election is ultimately good news for commercial real estate and REITs because it reduces uncertainty about the nation’s political direction.


    For more information on REITs, sign up for REITCafe, a free REIT news source.

  • Commercial Real Estate Bank Loans Lead Recovery 6 years ago

    Written by Matt Anderson, Managing Director

    Our advance estimates of third quarter 2012 US bank loan delinquencies, which were published on the first of November, indicate a continued recovery in most major loan types. The notable exception to this overall theme of further improvement is single family mortgages, which are still plagued by high delinquency rates.

    -Construction and land loans posted the biggest declines in delinquency rates, as banks work to shed problem loans.

    -Commercial mortgages are also benefiting from problem loan resolution, with delinquencies falling below 4% for the first time since 2009.

    -The non-real estate C&I loan segment is essentially recovered, with strong loan growth and delinquency rates falling to pre-crisis levels.

    -Residential mortgage delinquencies remain stubbornly high, with virtually no net improvement in the last two years. This loan segment is now in the dubious spot of highest delinquency rates among bank lenders. 

    As the economy strengthens, we expect banks to continue to work through problem commercial real estate loans. As the volume of these problem loans decline and as conditions in the commercial market improve, loan demand could actually increase. In contrast, workouts in the residential sector are proceeding at a much slower pace. A "recovery" in the residential loan market is probably still at least a couple years away.

    However, the fiscal cliff could throw a monkey wrench into these forecasts, with a full-blown recession as a distinct possibility. We choose to believe that leaders in Washington will be able to avert disaster, but if not, the hard-won improvements in the mortgage market of the last two years could see a reversal.

    For our exact estimates of Q3 2012 Bank Loan Delinquencies, you can read the full report here.

  • New CMBS Issuance Expectations for 2013 6 years ago

    Written by Shari Linnick, Vice President

    The proverbial Magic 8-Ball has been shaken and the questions remain: what will CMBS issuance be for 2013? Will we surpass issuance for 2012 or will the market stall and disappoint those hoping for an increase in activity? Although 'Cannot predict now' is likely to be the resulting answer from this vague and notoriously noncommittal icosahedron forecasting tool, one thing is certain: both investors and issuers appear ready and willing to fill the void left by commercial banks and insurance companies. They are doing their best to make meaningful progress in a time of continued macro uncertainty and market volatility. 

    CMBS is unusual in that while not perfectly correlated to the stock market because of its unique position as a real estate asset class (real estate generally lags equities due to transaction time and barriers to entry, amongst other factors), it does respond to general market movements. It offers a way for investors to move in and out of the asset class with relative efficiency due to an active and liquid secondary market. These factors are a bit of a double-edged sword, as recent macro events such as the EU debt crisis and ongoing Dodd-Frank legislative efforts have only served to gyrate equity markets and maintain an uncertain outlook for CMBS and CRE in general. Thus, the question of how much paper will make it to market in 2013 is, to a certain degree, anyone's guess. Only time will tell us the answer. 

    What is particularly interesting about this question is that the range of estimates has widened in recent months, with some participants forecasting a flat year-over-year figure of $35B and others predicting a significant increase to the $50B-$75B range. These assessments signal a diverging outlook regarding events that continue to stymie the market.  This in itself is of significance, and in this writer's humble opinion, a positive sign for CMBS, as it demonstrates the frustration and determination of the asset class to return to a sense of normalcy, into whatever issuance volume that may ultimately translate. 

    With significant maturities looming in 2015 and 2016, it is imperative that issuance volumes are able to support the refinancing of these loans, as this will be the final test of whether CMBS can redeem itself from the casualties caused by the excesses of the 2006 and 2007 vintages.  Again, only time will tell, so until then we will continue to shake the Magic 8-Ball for answers and hope the result will be 'Outlook good.'


  • Bracing for the Superstorm: CMBS Remains a Bright Spot 6 years ago

    Written by Joe McBride, Research Analyst

    All the news this week seems to point to a perfect storm on the horizon. Of course I’m talking about tropical storm Sandy which, according to all the weather big wigs, should hit the East coast and form a “superstorm” the likes of which has never been seen. At first glance, some of you may have thought I was talking about the superstorm at the intersection of the election, the fiscal cliff, various twisting and easing, the Eurozone, dour corporate earnings or even the Islanders moving to Brooklyn.

    A friend of mine told me that if he had his druthers, he’d set up a lawn chair outside the nearest Costco and watch the mayhem ensue as shoppers rush to stock up on canned food, flashlights and batteries with vigor not seen since the Tickle-Me-Elmo craze of 1996. I could only laugh at the realization that, during the mayhem that’s likely to occur in the next few weeks and into 2013 in the political and economic landscape, all I can do is sit back, watch, and hope for the best.  

    Among all the conflicting news out there, there seems to be a consensus growing that the CMBS market and CRE lending is headed for solid, steady growth. With property prices on the rise, new CMBS issuance picking up since Labor Day, and investors clamoring for higher yield, all signs point to a continued resurgence in the commercial real estate and CMBS space. Spreads have been on an epic tear and the distressed pipeline is getting cleaned up slowly but surely. The uncertainty of the election and the fiscal cliff are certainly worries on all our minds, but the overall sentiment in this corner of the market is very positive. 

    So please get home safe from both Costco and the voting booth. Then get out your lawn chairs and settle in for an interesting few months, and if CMBS can continue its rally, maybe we can all weather the storm a little easier. 

  • Atlanta: Falcons Fans Rejoice While Office Owners Struggle 6 years ago

    Written by Manus Clancy, Senior Managing Director

    If you’re an Atlanta Falcons fan, it's been a great fall. The team is undefeated and sitting atop the NFC South. No other team in the division is above .500 and the pundits are already punching your ticket to the Super Bowl.

    Similarly, if you are in Chicago, Minnesota, New York, Seattle, or San Francisco, thoughts of playoff games in January are dancing through your head.

    That brings us to this week's posting. We took a look at what the standings might look like if the rankings were based upon the percentage of commercial real estate loans that were 30 days delinquent. Let's just say the results were not nearly as kind to the people of Atlanta.

    That city ranked dead last in the CMBS rankings of the 16 cities that have NFC football teams. Charlotte—which hosts the 1-4 Panthers—can take solace in the fact that its commercial real estate delinquencies trounce those of New Orleans, Tampa, and Atlanta.

    Chicago and San Francisco turned the impressive double—landing first in their respective divisions based upon football victories and modest commercial real estate loan delinquencies. San Fran had the lowest delinquency rate among the 16 cities with a rate of under 5%.

    Washington topped the NFC East with a delinquency rate of just over 8%.

    Below are the standings. The results will not help you with the weekly football pool, but they might help you find some distressed assets to your liking.


  • Trepp Stress Testing Proves True an Age Old Cliché: Bigger is Better 6 years ago

    Written by Matt Anderson, Managing Director

    Back in March, news headlines and twitter feeds were operating on overload with the release of the Fed’s most recent stress test results. The takeaway was not brag-worthy. Under a severe recession, only 15 of the 19 largest financial firms would endure. 

    While most of the banks passed, all banks—those that passed, those that failed, and those that were not tested—immediately turned to the next round of stress testing, which was slated to take place this fall.

    In order to obtain an advance notion of how banks have improved their balance sheets since March, Trepp used its own stress testing model to evaluate the effects of shocking the income statements and balance sheets of more than 6,000 U.S. banks.

    The results revealed that one in eight banks were at risk of failure without additional capital raising.

    Trepp’s stress testing model was adapted from the framework used by the Federal Reserve’s Comprehensive Capital Analysis Review (CCAR) in March. Macroeconomic variables, asset price assumptions and interest rate forecasts all played a part in driving the projected financial health of each institution.

    On a whole, the Q2 2012 Trepp Capital Adequacy Stress Test (T-CAST) results show that most banks have made substantial progress toward capital adequacy, although there is room for further improvement.

    A theme that had surfaced in March re-emerged: bigger is better. Of the banks that failed Trepp’s Stress Test, 92% had assets of under $1 billion. While that sounds ominous for small banks, banks of this size are not yet required to run internal stress testing.

    Our results also identified several pockets of weakness across the country. Florida and Georgia, for example, each had pass rates below 84%. Given the recent history of bank failures in these states, this does not come as a shock. On the other end of the spectrum, Ohio performed best among large states despite a modest recovery.

    There is more good news for banks. In late August, the Fed made a statement that it was reconsidering the time frame for the next round of stress tests for banks with assets between $10 billion and $50 billion in assets. An announcement yesterday confirmed that banks in this asset category will be required to undergo annual stress tests, but this will not begin until next year. While our results suggest most banks are already prepared to undergo stress tests by the Fed, more time on the clock means more time for improvement.

    For our full analysis, read the Trepp Q2 2012 Bank Stress Test Report here.

  • Non-Traded REITs Going Public 6 years ago

    Written by Susan Persin, Managing Director

    Non-traded REITs have become popular in recent years as investors search for products that offer attractive yields in a low interest rate environment. These REITs are similar to publicly-traded REITs in the sense that they are registered with the SEC and are required to file a prospectus, as well as quarterly and annual reports.

    However, non-traded REITs carry additional risk. They do not trade on a national securities exchange and early redemption of shares is often limited, making their shares generally illiquid. Non-traded REITs have been faulted for their high fees, lack of timely valuation of assets, and because the periodic distributions that help make them so appealing can sometimes be heavily subsidized by borrowed funds and include a return of investor principal.

    Their investors are typically individuals, not institutions, which has prompted increased scrutiny from FINRA. The industry has reformed somewhat in 2012, with many non-traded REIT sponsors reviewing and canceling some of their fees, such as internalization fees. However, industry backlash has caused some non-traded REIT sponsors to convert their REITs to publicly-traded status.

    There are several factors driving the conversion of non-traded REITs to publicly-traded status. Most notably, converting to publicly-traded REIT status improves access to capital. It enables the REIT to attract institutional investors that likely wouldn’t invest in the more opaque and illiquid non-traded securities. This also provides current shareholders the opportunity to exit their investment. In today’s challenging market where investors are reluctant to back new REITs with unproven management track records, non-traded REITs have been well received because a track record of their performance is available.

    A number of new publicly-traded REITs in 2012 originated as non-traded REITs:

    CPA 15 merged with W.P. Carey & Co (WPC)
    American Realty Capital Trust (ARCT)
    Retail Properties of America Inc. (RPAI), formerly Western Real Estate Trust
    Healthcare Trust of America (HTA)

    We expect to see more conversions of non-traded REITs to public status in the future. Their comparative success during a difficult time for REIT IPO activity can be attributed to their large pools of assets and management’s proven track record.  Although there is a limited pool of these REITs, they are among the most likely sources of new REIT IPOs. 


  • A Look Back: Summer in CMBS 6 years ago

    Written by Joe McBride, Research Analyst

    According to my favorite local weatherman, the veritable colossus of cloud Joe Rao, today could be the last truly warm day of the year. As appealing as it sounds to start slogging through the muddy sleet we call snow in Manhattan, I took the day to reminisce about the summer that went way too fast.

    My first thoughts, of course, turned to some of the larger commercial mortgage stories from the warm days of yore. Big losses, special servicing, soaring delinquency rates all kept us at Trepp busy, even after they shut off the A.C. at six pm in the dog days of summer.

    A multitude of loans coming due this year, many from the true summer of the real estate market --2007-- brought the Trepp delinquency rate to a record high in July. Luckily though, servicers have picked up the resolution pace and the wave of maturities has subsided (for now) in the third quarter, bringing the rate back down below the 10% Mendoza line in September.

    Beyond the delinquency rate, two memorable loan losses come to mind from earlier this year. The Highland Mall (JPMCC 2002-CIB4) was a $61 million loan on a large mall in Austin, Texas. After struggling with high vacancy, foreclosing, and going REO, the note ended up taking a 104% loss in August (way above the Mendoza loss line). Similar in severity, a $39 million office loan behind the Washington Mutual Buildings (GECMC 2005-C1) in Los Angeles took a 104% loss.

    The common theme among most stories like these was an inflated 2006 or 2007 appraisal that, when brought back to Earth, hurt a borrower’s chances of paying off or refinancing the loan. In hindsight, the gargantuan real estate values from five years ago seem crazy. As they say, when the music is playing you keep dancing. It reminds me a little bit of the way the stock market looks right now. But that’s a story for another day.                    

  • CMBS Spreads Narrow on Quantitative Easing 6 years ago

    Written by Joe McBride, Research Analyst

    Last week’s CMBS trading activity started off somewhat underwhelming, albeit positive.  Monday was mostly flat, ending the day a couple of basis points tighter.  Tuesday saw more narrowing in reaction to high hopes for a third round of quantitative easing from the Federal Reserve.  

    While bid list activity remained muted by mid-week, CMBS spreads continued to narrow and the benchmark GSMS 2007 GG10 A4 bond inched its way closer to a five-year record.

    At the Fed meeting on Thursday, Chairman Bernanke announced the much anticipated QE3.  What had been a sleepy session up until that point suddenly turned into a fire drill. Stock, gold and commodity prices surged on the news and CMBS spreads tightened significantly.  

    The announcement included a commitment to the purchase of $40 billion of mortgage debt each month, as well as the intention of keeping interest rates until 2015. By the end of the day, CMBS spreads had narrowed by about five basis points on average, and even more for dented names.

    As if we didn’t have our own reasons to be excited for Friday, the benchmark GG10 bond finally reached the spread that had not been seen since before the demise of Lehman Brothers in 2008. The bond closed at 165 basis points over swaps, or 33 basis points tighter from the start of the week.  

    The rest of the CMBS market continued to impress, narrowing a total of 17 basis points that week.

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