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Thursday, 16 January 2020

CMBS Conduit Loans Maturing Through 2021 Face Few Refinancing Hurdles

A total of $109.6 billion of CMBS loans are up for refinancing over the next two years. Calm waters are forecast, even if interest rates climb.

By Catherine Liu, Trepp LLC

A total of $109.6 billion of CMBS mortgages are up for refinancing over the next two years, with $57.6 billion coming due in 2020 and $52 billion the following year.

A total of 65.8 percent of the maturing loans serve as collateral for single-asset, single-borrower CMBS transactions. Conduit loans make up 29 percent of the total.

Short-term loans against hotels account for $31.7 billion, or 28.9 percent of the total coming due. That's the result of the heavy acquisition and brand consolidation activity within the hotel segment in recent years.

Office and retail comprise 21.6 percent and 23.2 percent of the total coming due, respectively.

Underwriting Overview of Recently Originated Conduit Loans

 

Coupon Rate %

Cap Rate %

LTV

Debt Yield %

DSCR

Industrial

4.26

6.69

60.85

11.69

2.08

Lodging

4.53

8.72

62.16

15.07

2.16

Multifamily

4.15

5.57

60.91

11.28

2.02

Office

4.13

6.74

62.30

13.03

2.17

Retail

4.30

6.58

63.86

11.76

1.93

Other

4.11

5.50

49.51

20.13

3.81

All

4.23

6.47

59.11

14.44

2.50

*Based on average underwritten values for CMBS conduit
loans securitized from June to December 2019
Source: Trepp LLC

While interest rates have remained extremely low for the past two years, helping keep the incidence of maturity defaults low, the risk is that rates would increase, which could lead to a rise in such defaults.

We've reviewed the $31.6 billion of conduit loans maturing from now through 2021 and examined whether they would pass certain refinancing thresholds based on prevailing loan-to-value and debt-service coverage ratios and debt-yield requirements. We removed from our universe loans marked as delinquent, fully-defeased and those tied to properties generating negative net operating income, leaving a sample size of $26.3 billion.

To generate updated DSCR and appraised collateral value for the maturing loans, we calculated average coupons, based on property type and geography, and paired that with the most recently reported NOI data. In each case, the geographic thresholds were used only when they were less restrictive than the average rates for the property type overall.

We assumed maturing loans would be taken out by loans that do not amortize and calculated appraised collateral values using average capitalization rates from recent loan originations. Those appraised values were also used to make LTV calculations. As an additional test, current debt yields were computed using most recently available NOI data and outstanding loan balances.

With these new loan performance metrics calculated, new DSCR and LTV figures were then determined according to several rate hike assumptions. In the case of the debt-yield test, the threshold for qualifying for a full refinancing was raised by the assumed interest-rate increase. The criteria used for passing each refinancing test were customized based on lending trends specific to the corresponding metropolitan statistical area and property type. Generally speaking, property values decline and debt service requirements increase as interest rates increase, assuming all other variables remain the same.

 

 

                                    Cap Rate Distribution

 

CapRate

                                 Debt Yield Distribution

DebtYield

 

                                   DSCR Distribution

 

DSCR

Source: Trepp LLC

On average, conduit loans issued over the second half of 2019 carried a coupon of 4.23 percent, down from 5.11 percent during the latter half of 2018, while cap rates have fallen about 51 basis points during this period to 6.47 percent. At the same time, underwriting metrics strengthened in 2019—the average conduit debt yield climbed to 14.44 percent, while DSCR trended up to 2.5x, just as leverage dipped to 59.11 over the past six months. This compares to origination averages of 11.67 percent, 1.76x and 61.95 for these respective categories during the second half of 2018.

If current rates hold steady, 85.31 percent of conduit loans maturing through 2021 (by balance) would meet their respective DSCR requirements. From the same pool of loans, 64.36 percent would pass their debt-yield thresholds and 69.57 percent would clear their LTV hurdles, with more than 64 percent qualifying for refinancing under all three tests.

This is a notable improvement from a similar analysis conducted at year-end 2018, which examined the refinancing outlook of outstanding loans that were scheduled to come due by 2020. The pass rates for DSCR, debt yield and LTV based on prevailing rates at the time were 74.09 percent, 59.19 percent and 63.50 percent, respectively, while almost 60 percent of conduit loans were considered refinanceable by all three measures. While the outcome may be surprising given the higher refinancing thresholds that must be met, based on 2019's underwritten metrics, it could be reflective of the stronger credit performance of today's outstanding loans as somewhat weaker legacy securitizations continue to be resolved.

           CMBS YoY NOI Growth & Issuance Volume

YoYCMBS

Source: Trepp LLC

If interest rates increased by 50 to 100 basis points, however, the volume of maturing CMBS loans that would meet each refinancing measure would fall by 5 to 15 percent. Increases in interest rates would result in the most significant percentage of loans being eliminated from the LTV refinanceable bucket, while the debt-yield hurdle has the lowest pass rates for each interest-rate assumption. The DSCR test proved to be the qualification barrier that was easiest to hurdle.

From a property-type standpoint, any 25-bp increase in interest rates would shuffle the largest percentage of multifamily assets out of refinance potential while hotel loans generally had the most difficulty in reaching any origination parameter used. Industrial, on the other hand, boasts the highest share of loans that would be eligible for new financing.

As the credit characteristics of CMBS loans remain at sound levels and property fundamentals continue to hold up, the mortgage sector, and CMBS specifically, should remain in calm waters, even if interest rates climb.

Comments? E-mail Catherine Liu or call her at (212) 754-1010.





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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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