Commercial real estate will never be the same again ...

David Goldsmith

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Colony Capital may lose control of 2 largest CMBS hotel portfolios
Negotiations with lenders on the portfolios that total 15K rooms have only yielded short-term forbearance

When Colony Capital revealed in May that it was in discussions with lenders after having defaulted on $3.2 billion in hotel loans, the Tom Barrack-led firm cautioned “there can be no assurances that the company will be successful in such negotiations.” In fact, at the time the Los Angeles-based investment firm had already defaulted on a forbearance agreement following earlier negotiations with one lender.
Now, Colony is in jeopardy of losing control of its two largest CMBS-financed hotel portfolios — the 89-property, 8,585-key Tharaldson portfolio and the 48-property, 6,402-key Inland portfolio. Both are on track to be transferred to the control of receivers as negotiations with lenders have failed to yield long-term solutions, court filings and servicer commentary show.

The fate of the Tharaldson (or THL) portfolio still depends on the outcome of a lawsuit. In mid-June, CMBS trustee Wells Fargo sued Colony Capital over defaults on the $768 million loan on the portfolio. Special servicer KeyBank National Association is acting on behalf of the trustee in the suit.

Due to the economic impact of coronavirus, the suit notes, the operating deficit at the properties is expected to total between $15 and 25 million over three months, a deficit which Colony is “unwilling or unable to fund.” These deficits also put numerous franchise agreements at risk, which would further impact the properties’ value, and will require the lender to make protective advances.

The Tharaldson and Inland portfolios are two of seven hotel portfolios Colony Capital currently owns, and which the company considers to be “legacy” assets as it focuses increasingly on digital properties like cell phone towers, optic fiber networks and data centers.

Both portfolios stretch across the country: Tharaldson hotels are in the Midwest, West Coast and parts of the Northeast and the South; while Inland properties are scattered around the Northeast, South, Southwest and West Coast. The larger hotels in the Tharaldson portfolio include the 206-key Courtyard Dunn Loring Fairfax in Virginia and the 203-key Courtyard Newark Elizabeth in New Jersey. The Inland portfolio includes the 229-key Sheraton San Jose Hotel and the 214-key Four Points by Sheraton Pleasanton, both in the Bay Area.

According to the suit, Colony first defaulted on a monthly loan payment in April, after which Wells provided a very short forbearance period of just one month. Colony then defaulted on the forbearance agreement as well by failing to make the subsequent May payment.

“Given the precarious position of the hotels and the millions of dollars [Wells Fargo] will be required to advance to maintain hotel operations,” Wells seeks to appoint a receiver to operate the hotels, KeyBank’s lawyers note. The special servicer nominated JLL’s receivership practice to take over the properties.

Once in receivership, the Tharaldson portfolio properties would then be foreclosed on or sold, according to the suit. That process could take several months, given the scores of hotels in nearly two dozen states.
Colony and KeyBank did not respond to requests for comment. Colony has until the end of this week to respond to KeyBank’s complaint.

As for the Inland portfolio, Colony and the lender on that $780 million CMBS loan have agreed on a receivership transition without having to go to court. The two sides have not been able to negotiate a loan modification. But the note said Colony “has agreed to an orderly transition of the properties to a receiver since agreeable terms for a loan modification could not be reached.”

Colony was previously a junior mezzanine lender on the Tharaldson portfolio, which at the time included 135 hotels in 28 states, and took control of the hotels in 2017 after prior owner Whitehall defaulted on the debt.
Colony owns a 55-percent stake in the Tharaldson portfolio alongside “certain managed investment vehicles.” According to loan documents, those vehicles include Colony Distressed Credit Fund II, Colony THL Co-Investment Partners, and a partnership of South Korean co-investors.

The Inland portfolio, meanwhile, is one of two portfolios that Colony owns 90-percent stakes in alongside minority partner Chatham Lodging Trust.
The U.S. hospitality industry continues to face serious uncertainty, as occupancy rates declined last week amid growing concerns about a second wave of coronavirus infections. CMBS loans are likely to be a major stress point because servicers have little leeway to make meaningful loan modifications, industry experts say.

 

David Goldsmith

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Market Extra
The open secret in commercial real estate is that owners regularly take cash out of properties — here’s a look at how much

There is nothing to ‘stop the hammer from coming down,’ says one lender

It’s an open secret that commercial real estate owners take cash out of buildings.
When they do, unlike homeowners, criticism often is sparing. After all, hotels, shopping centers, office towers and other commercial buildings are run as businesses, where the whole point is to reap a profit.
“The real-estate industry is all about taking cash out, and on a tax-deferred basis, at that,” said Scott Tross, co-chair of real estate litigation and dispute resolutions at Herrick Feinstein, a law firm. “That’s nothing new. But in may respects, what’s happening now is reminiscent of what happened ten years ago or so.”

By that, Tross was referring to the deluge of late payments, defaults and foreclosures that swept up some of the biggest names in U.S. commercial real estate in the wake of the 2007-08 global financial crisis, and saddled their investors will losses.


“You had people borrowing as much money as they possibly could, none of it on a recourse basis. And if things move in their direction, that’s great,” he said. “If they don’t move in their direction, they just hand back the keys.”
‘If you want the upside, you need to take the downside too.’
— Shlomo Chopp, managing partner of CPS, a commercial real estate workout firm
That threat of borrowers walking away once again looms over the commercial real-estate market. But instead of financial institutions spreading toxic assets across the globe, it’s now because of the coronavirus, which forced much of the U.S. economy to shutter in March, and months later still is spreading unabated in many American cities, as well as in Brazil and is rising again in parts of Europe.

Another new twist is that borrowers, ahead of this downturn, pulled more equity out of U.S. commercial buildings than ever before, when they have refinanced in the commercial mortgage-backed securities (CMBS) market, a key source of loans for hotels, skyscrapers, warehouses and other business properties that end up packaged into bond deals.
MarketWatch asked credit-rating firm DBRS Morningstar for a historical look at cash-outs on properties refinanced in the CMBS market, a source of funding that took off in the mid-2000s.
They tracked $136 billion worth of total cash-outs, versus nearly $47 billion of equity put into refinanced properties over the last 17 plus years. The bulk was extracted not during the last decade’s real-estate boom as might be expected, but between 2013 to 2019, a period when CMBS financing came roaring back and commercial real-estate prices skyrocketed.

Cashing in on rising prices
DBRS MORNINGSTAR, A CREDIT-RATING FIRM
Why does any of this matter now? Debt relief conversations already started in April, a month into the first round of coronavirus lockdowns, between the hardest-hit commercial property borrowers and their lenders.

Since then, delinquent CMBS loans have climbed to nearly 10%, rivaling the worst levels of the global financial crisis, as shown in this Deutsche Bank chart.

Bank-held loans likely follow the climb
DEUTSCHE BANK
And it’s likely not only borrowers with CMBS loans that are falling behind. Deutsche’s analysts said they expect bank-held commercial property loans to follow the delinquency spike already evident in CMBS, in a client note this week.
Furthermore, the commercial real estate finance industry, and now lawmakers wielding a draft bill from U.S. Rep. Van Taylor of Texas, detailed here, want the Treasury Department to help relieve commercial property stress by offering landlords direct equity injections.


that it may be construed as “a bail-out for large landlords, a group of rich and well-connected beneficiaries.”
Shlomo Chopp, managing partner of CPS, a commercial real estate workout specialist, said it is the prerogative of property owners to take cash out of buildings. “If you increase the value of the property, you have the right to take cash out,” he told MarketWatch.
“But we also live in a capitalist society. If you want the upside, you need to take the downside too.”
 

David Goldsmith

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Staff member
International real estate investment tumbles in Q2 with US hardest hit
Americas CRE deal volume collapses to $43B in Q2 2020 from $141B in Q2 2019

Real estate markets worldwide saw investment sales fall in the second quarter, but none as much as the U.S.
The Americas region saw deal volume fall to $43 billion in the second quarter of 2020, a 70 percent drop from $141 billion a year ago, according to a new CBRE report. That’s the biggest drop of any major market.
Hotels were the hardest hit sector in the Americas, with deal volume collapsing by 90 percent. Even the relatively resilient industrial sector saw a 50 percent decline. Deal volume in the office and apartment sectors both fell by 72 percent.

Globally, commercial real estate deals totalled $109 billion in the quarter, a 57 percent decline from the total of $251 billion a year ago, according to the report.
“The continued surge of Covid-19 cases in the U.S., Brazil, and parts of Latin America will hinder the rebound of investor activity in those areas,” the report says, although “as testing, tracking and treatment capacities grow, and confidence improves, H2 is expected to be stronger. Increased clarity on pricing and the rental outlook will also tempt discount-seeking investors to re-enter the market.”

In the Europe, Middle East and Africa (EMEA) and Asia Pacific (APAC) markets, where initial waves of infection were more successfully suppressed, CRE investment saw a somewhat less severe slowdown. EMEA deal volume fell 38 percent year over year in the second quarter, while the APAC region saw a 46 percent decline.

Outcomes also differed at the country level, with markets like Germany and Poland declining less than the U.K. and France in Europe, and markets like Australia and South Korea outperforming China, Japan and Singapore.
For the full year, CBRE has revised its global investment forecast downwards from a 32 percent decline to a 38 percent decline, “in light of recent sluggishness in the Americas pandemic control and economic recovery.”

But “a global rebound of activity is still expected to arrive before the end of year, given the general improvement in the ability to manage Covid-19,” the report concludes.
 

David Goldsmith

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Lenders overstate some commercial properties' ability to repay mortgages - WSJ
Aug. 11, 2020 10:27 AM ETUBS Group AG (UBS)By: Liz Kiesche, SA News Editor16 Comments
  • A study of $650B of commercial mortgages that were originated from 2013 to 2019 found that even during a normal economy, mortgaged properties' net income often trailed the amount underwritten by lenders.
  • While the underwritten amount should be a conservative estimate of how much a property earns, the actual net income falls short of the underwritten net income by 5% or more in 28% of the loans, according to a study of almost 40K loans by two finance academics at the University of Texas at Austin.
  • The numbers were higher for loans originated by UBS (UBS +0.7%), Starwood Property Trust (STWD +3.2%) and Goldman Sachs (GS +3.1%), the study found — income was overstated by more than 5% in more than 40% of the loans those companies originated.
  • Starwood told the Wall Street Journal that it has "consistently experienced strong performance across its portfolio of originated loans."
  • The UT-Austin study's findings suggest that loans sold to investors before the pandemic often overstated income and could have more trouble keeping up with payments in the event of a recession.
  • One of the industry's associations, the Commercial Real Estate Finance Council, asserts that the UT-Austin study is flawed. It should use long-term cash flow to assess the underwriting, said CREFC chairman Adam Behlman, who is also a Starwood executive.
  • Furthermore, originators identified in the study had lower-than-average default rates on their loans. "Defaults are the ultimate barometer of the quality of the underwriting," he said.
  • The research comes as the commercial mortgage-backed securities industry has been seeking help in the wake of the pandemic and large parts of the market have been excluded from the Fed's $2.3T economic rescue package.
  • John Griffin, a finance professor and co-author of the study, notes that the originators appear to be aware of the practice of overstating net income — loan originators charged higher interest rates for loans with overstated income, which implies that the loans are seen as riskier.
  • The UT research isn't the first to notice the discrepancy. In February 2019, the SEC received a complaint that pointed to a pattern of inconsistent numbers in different financial reports providing income for the same property in the previous year.
  • Interested tickers: BXMT, CLNC, LADR, HASI, CLNY, ARI
 

David Goldsmith

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How a co-working firm’s bankruptcy endangers CMBS loans
Properties’ cash-flow risks would trickle up the chain, report warns

Hit hard by its subtenants’ inability to pay on time, an affiliate of executive suites and co-working company International Workplace Group has filed for Chapter 11 bankruptcy protection.
The bankruptcy filing, by RGN-Group Holdings, does not augur well for properties where IWG, the company behind Regus and Spaces, is the biggest tenant. The sites’ cash flow risk will likely also spread to CMBS loans backed by IWG-leased properties, according to a recent report from Kroll Bond Ratings Agency.

Nearly $13 billion across 151 CMBS loans is backed in part by offices where IWG is a tenant, according to the Kroll report. The Kroll analysts warn that even though IWG has proactively sought rent deferrals and lease modifications from its landlords, the bankruptcy filing means the company can seek to have rents dismissed.

IWG is the largest tenant at 30 properties backing $493 million in CMBS debt and is the sole tenant at three properties backing $69.4 million in CMBS debt, according to the report. The biggest loan secured by a property where an IWG affiliate is the only tenant is 1800 Vine Street, a recently renovated 60,000-square-foot office owned by Archway Holdings in Los Angeles.

Still, the late-August bankruptcy filing does not spell doom for all loans backed by Regus or Spaces locations. IWG also tends to sign leases and file bankruptcy petitions through single-purpose limited liability companies. That allows part of IWG’s portfolio to enter bankruptcy without affecting other, financially stable locations.

Bankruptcy filings also show that Regus, the executive suites arm of IWG, is one of the biggest creditors of RGN-Group Holdings and the dozens of other single-location companies tied to IWG that have filed for bankruptcy in the last few months, according to the report.

The coronavirus pandemic and subsequent shutdowns have raised concerns about the coworking industry’s immediate future, with some industry experts speculating about what a WeWork bankruptcy would mean for commercial real estate. But WeWork Chairman Marcelo Claure said the coworking giant is on track to be profitable (as he defines the term) by the end of 2021.
 

David Goldsmith

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Hotel and retail mortgages dragging down recovery
Spreads on the BBB-rated CMBS market are higher than prior to the pandemic

Mortgages backed by hotels and retail properties are struggling — and attracting yield-hungry investors willing to tolerate the risk, the Wall Street Journal reported.
As the risk that the loans will fail increases, so does the yield of the securities into which they are bundled. One way to measure that risk is to compare that yield to what super-safe 10-year Treasury notes pay. At the moment, the difference between those two numbers, called the spread, is high.

Consider lower-rated commercial mortgage-backed securities — those rated BBB, or one level above what’s commonly called junk status.
The spread for an index tracking the BBB-rated CMBS market and the 10-year Treasury note was 5.1 percentage points on Thursday. Although that’s a far cry from the 11.2-point spread in April, it is still more than twice the 2.4-point spread before the pandemic, according to the Journal.

For CMBS indexes that include more hotel and retail properties — CMBX 9 and CMBX 6, respectively — the spreads reached close to their April and May highs on Wednesday.
The spreads are rising as more loans run into trouble. About 8.8 percent of outstanding commercial loans were delinquent as of last week, according to Trepp, the Journal reported.

Some investors are seeing the higher spreads as an opportunity. KKR recently closed a $950 million fundraising round for its second real estate fund that is investing in single-B newly issued deals. Matt Salem, KKR’s head of real estate credit, told the Journal he is optimistic because the commercial real estate market has rebounded quickly.

CMBS loans are viewed as riskier than traditional loans because the agreements that the servicers of the loans have with bondholders make them more difficult to restructure.
 

David Goldsmith

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Troubled commercial properties see values fall 27%: report
Recession triggered by Covid-19 has devastated hotels, malls and other commercial properties

Commercial properties such as hotels and malls may have lost as much as a quarter of their value as the pandemic devastated the retail and hospitality businesses, along with other sectors.
The value of the collateral for commercial mortgage-backed securities has been written down by 27 percent on average when properties get into trouble, the Financial Times reported, citing data from Wells Fargo.
New appraisals are done when commercial real estate property owners fall behind on their mortgage payments, and the loans are handed to a special servicer.

Wells Fargo’s data also shows that the number of appraisals is going up, with 68 triggered in September alone.

Hotels, which have been struggling thanks to the collapse of the tourism industry, have experienced big losses in value. A Crowne Plaza hotel in Houston, for example, was valued at $25.9 million, down by 46 percent from its valuation in 2014 when its loan was bundled into a CMBS deal. The Holiday Inn La Mirada outside of Los Angeles was recently valued at $22.1 million, a dip of about 27 percent since its loan was securitized in 2015.

“The longer this crisis goes on, we will move into a valuation problem,” said James Shevlin, president of special servicer CW Capital.
 

David Goldsmith

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Manhattan CRE deals hit lows not seen since 2009
Just 21 commercial sales recorded in the borough in Q3

Commercial real estate sales in Manhattan have taken a major hit because of the pandemic.
There were just 21 commercial real estate transactions in the borough in the third quarter of 2020, according to Bisnow, citing Avison Young’s quarterly report. That’s the lowest number of deals recorded since the third quarter of 2009, in the aftermath of the Great Recession.
And even between the second and third quarter, sales slid by 30 percent, according to Bisnow.
Sales volume in Manhattan in the third quarter declined to $1.1 billion, a 74 percent decrease from the previous year. Two deals accounted for a good chunk of that: Savanna’s deal to buy 1375 Broadway for $435 million in July from Westbrook Partners, and RFR Realty’s purchase of 522 Fifth Avenue from Morgan Stanley for $350 million. Those deals were under contract prior to the coronavirus.

There were also big drops for property types within the commercial sector: Development sales volume totaled $141 million, a 56 percent drop from the previous year. Retail saw only one transaction during the quarter, a $1.5 million deal sold in foreclosure, according to Bisnow.
And in the multifamily market, there were just nine sales in the third quarter totaling $121 million, an 82 percent decline from the previous year.
If this downward trend continues, commercial sales volume could total $8.4 billion in 2020, according to Avison Young principal James Nelson. That would be a 69 percent drop from the 10-year average.
 

David Goldsmith

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Hudson’s Bay, Simon Property Group hit with $846M foreclosure lawsuit
Lawsuit alleges nonpayment at 24 Lord & Taylor and 10 Saks locations

Wilmington Trust is suing a joint venture between Simon Property Group and Hudson’s Bay Company for allegedly failing to make mortgage payments.
Ten Saks Fifth Avenue and 24 Lord & Taylor locations are named in the lawsuit, which was filed earlier this month in Miami-Dade County Circuit Court, the South Florida Business Journal reported.

The lawsuit alleges that the borrowers have not made any payments since March. Wilmington, which filed the complaint as part of a commercial mortgage-backed securities trust, is suing Saks Dadeland Leasehold LLC, which leases the Saks Fifth Avenue at Dadeland Mall in Miami.

JPMorgan Chase, Column Financial and Bank of America provided the $846.2 million loan in 2015 for 36 properties in Florida, New York, New Jersey, Illinois, Massachusetts, Michigan, Maryland, Pennsylvania, Virginia, Connecticut, Ohio, Texas, California and Georgia.

A spokesperson for Hudson’s Bay told the Business Journal that the lawsuit has “no impact on Saks Fifth Avenue, its stores or its operations” and that the company is disappointed that “in the context of a global health crisis, the lenders would choose litigation over cooperation.”
Hudson’s Bay acquired Saks Fifth Avenue in 2013, and previously owned Lord & Taylor before selling the chain to Le Tote in 2019.
Lord & Taylor has been hit hard by the pandemic; the parent company it filed for bankruptcy in August, and announced that it would close all of its remaining locations.
 

David Goldsmith

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New York’s CRE woes could spread nationwide: investors
$3B in loans backed by NYC commercial real estate is delinquent

Investors are betting that trouble in New York City’s commercial real estate market will spread nationwide.
Prices for debt backed by hotels, restaurants and retail in New York City — among the hardest-hit sectors as the pandemic emptied out tourist destinations this year — have fallen and new loans have slowed, leaving bankers and the real estate industry bracing for further declines, the Wall Street Journal reported.
Daniel McNamara, a principal at MP Securitized Credit Partners, said he is betting prices for some CMBS indexes will fall, according to the Journal.
“Distress in financial markets was all about residential mortgage-backed securities in 2008 and energy in 2015,” McNamara told the Journal. “In 2021 it will be all about commercial real estate and the securities linked to it.”

Citing Trepp, the Journal reported that more than $3 billion worth of loans backing commercial property in the five boroughs are delinquent, and loans in creditor negotiations amount to an additional $4 billion.

Other investors say trouble may be more property-specific. For example, a subsidiary of Brookfield Asset Management in September successfully placed a $1.8 billion loan backed by One Manhattan West into CMBS. The 67-story tower is more than 90 percent leased with major tenants including consulting firm Accenture and the National Hockey League.
“Any property that looks destabilized needs to lease up,” Matt Salem, head of real estate credit at KKR, told the Journal. “That doesn’t mean we’re redlining parts of New York City, but we need to make sure there’s durable cash flow for the near future.”
 
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