Trepp LLC

01/07/2021 | News release | Distributed by Public on 01/07/2021 15:18

Monthly Snapshot: A Review of the CRE, CMBS, and CLO Markets at the Close of 2020

With the winter solstice behind us, we officially entered the period of growing daylight hours. While 2020 was a difficult year for all, successful widespread vaccination in 2021 is beaming light at the end of this dark tunnel.

Despite an unexpected breaching of The Capitol in DC yesterday, Congress affirmed Joe Biden's victory as the next President of the United States. In addition, Democrats also turned Georgia blue, resulting in control of the House, Senate, and White House. The markets remained relatively calm and the US stock index futures pointed higher today despite the abhorrent scenes coming out of the nation's capital. The rationale seems to be that the procedural affirmation and senate flip serves to provide further certainty of future economic policy actions.

Investors rushed to price in this outcome with an inflow into renewables and outflow from Tech amongst others.

The focus now seemed to move away from worries of higher corporate taxes to a potentially much larger stimulus package which may provide the much-needed respite to the economy.

Now, let's review what happened in December.

Like others, the commercial real estate (CRE) market is bound to see an impact from the election outcome. A larger stimulus package, eviction moratoriums, the future of 1031s, uncertainty around opportunity zones, and a push towards more environmentally friendly policies continue to be topics of discussion.

Zeroing in on December, the number of employees at U.S. businesses unexpectedly declined for the first time since April. The last month of 2020 saw a decrease of about 123,000 jobs in the private sector. These losses were mainly focused in the leisure, hospitality, and retail sectors, underscoring the impact on these hard-hit asset classes. We hope that an upcoming stimulus package will provide pointed relief to the COVID -battered hotel industry.

On a positive note, US manufacturing activity picked up significantly in December. IHS Markit's manufacturing PMI climbed to 57.1 in December from 56.7 in November. The index finished 2020 at its highest level since September 2014, with December's gain marking the eighth straight month of improvement after plunging to its lowest in more than a decade in April.

Our monthly snapshot here provides an update on the activity in the CMBS, CLO, and CRE markets and the news that made headlines in December 2020.

What Happened in the CMBS Universe?

The Trepp CMBS delinquency rate logged its sixth consecutive monthly decline following two large jumps in the reading in May and June of this year. Hotel loans continued to be the worst-performing segment, with the overall delinquency rate for that property sector climbing for the second straight month.

The percentage of loans with the special servicer dipped to 9.81% in December from 10.16% in November. According to December servicer data, 24.1% of all lodging loans were in special servicing, down from 25.6% in November. In addition, 17.2% of retail loans were with the special servicer, down from 17.5% in November.

Top CMBS Stories

  • Growing Number of Multifamily Loans Show Meaningful Drop in Occupancy - The Trepp research team searched for all multifamily loans from private-label, US CMBS deals where occupancy fell more than 15% from 2019 through partial-year 2020. The search turned up about 50 loans totaling almost $1.5 billion in outstanding balance. That total represents about 3.8% of the loans that have reported partial-year 2020 occupancy thus far.
  • CMBS Surveillance: Four Loans to Watch in December 2020- There seems to be a light at the end of the pandemic tunnel as vaccines have begun distribution across the United States and lawmakers are likely closing in on a new stimulus package. See our coverage of the latest loans to watch in the CMBS universe.
  • Merry CMBS-mas: CRE Properties Featured in Your Favorite Holiday Movies- Much like all aspects of 2020, the holiday season is very different this year. Here at Trepp, we have a tradition of our own. In our annual CMBS-mas blog, we dive into those famous holiday movies you know and love and provide details on the properties making their debut in the back. Here we shout out to a few prominent pieces of CRE that serve as the backdrop for some of cinema's most famous holiday movies.
  • A Toast to Times Square CMBS that Define New Year's Eve -As one of the most renowned celebrations of the New Year, the nationally televised Times Square ball-drop will look a little different this year. What may be surprising to know is that many Times Square buildings involved in the annual New Year's Eve celebrations back loans securitized in CMBS deals. To help our fellow readers bid farewell to 2020 and welcome 2021 in commercial real estate-style, we compiled a list of Times Square CMBS properties.

What Happened in the CLO Universe?

Issuance in the CLO market saw an uptick in the US despite the holiday season. A total of 31 deals totaling $12.5 billion were priced last month in the US, up from 22 deals totaling $8.4 billion in November.

On the other hand, Euro-denominated deals saw a decline in issuance to €1.4 billion in December from €2.0 billion the month prior.

Stories last month focused on many companies looking to build up liquidity amid cash crunch and taking steps to stave off bankruptcy while others refinanced their debt obligations or bought back shares.

Top CLO Stories

  • The Impact of COVID on CLO Deal and Manager Performance - With the CLO new issuance and deal pipeline comeback, coupled with a low-interest rate environment, the cost of CLO liabilities tightened. However, the risk associated with the underlying leveraged loan collateral increased as well. Using TreppCLO, we examine risk, performance, and collateral quality metrics to determine how much increased-risk has permeated CLO deals resulting from the COVID-driven US economic downturn.

  • 99 Cents Only Closes Refinancing Transaction; Lightens Debt Load - Retailer 99 Cents Only announced that it closed $350 million senior secured notes due 2026 (7.5%). S&P Globalnoted that the deal priced at the tight end of the guidance. The proceeds of the offering along with proceeds of a PE financing are being used to repay the outstanding balance of the firm's existing first-lien term loan and other obligations.
  • United Airlines Pledges Certain Boeing Airplanes; Increases Government Loan - Simple Flying reported that United Airlines is pledging some of its Boeing 777 planes to increase its term loan facility with the Treasury Department by $331 million, upping the balance on the facility from $7.16 billion to $7.49 billion. Of the total available amount, United Airlines has only borrowed $520 million under the loan. All loans borrowed under the term loan facility will be due on September 28th, 2025.

  • Peabody Energy Announces $1 Billion in Maturity Extensions - The WSJ reported that Peabody Energy Corporation struck a deal with lenders to extend the maturity dates on nearly $1 billion in debt and credit facilities. The energy company won't have any funded debt maturing until December 2024. The company also announced it was free of a net leverage covenant in its revolving credit facility.

Trepp CRE Research from December 2020

The overall credit performance of CRE loans in bank portfolios continues to show signs of pandemic related stress with increasing delinquency rates and charge-offs and downward migration of risk ratings. While anecdotal feedback from lenders indicates that relief granted through deferrals and forbearance early in the pandemic has kept delinquency rates from spiking further, several market sectors are clearly in distress.

Unsurprisingly, the delinquency rate for loans on hotels more than doubled, jumping from 1.3% in Q2 to 3.2% in Q3. Delinquency rates for loans on retail properties, while down slightly from Q2, are also significantly elevated and currently stand at 1.44%. The decrease in the retail delinquency rate in Q3 was in part driven by many loan charge-offs that effectively reduced the delinquent balance.

Top CRE Stories

  • Q3 Bank CRE Loan Performance: Delinquencies Spike for Big Retail & Small Hotels- At the portfolio level, delinquency rates for CRE loans started reaching levels not observed since the recovery period following the last recession. Delinquencies continue to occur unevenly across property types, have not occurred evenly across the portfolio, and continue to be reflective of the sectors of the economy that have been hardest hit by the economic shutdown.
  • Rethinking Retail: How the Pandemic is Shaping the Manhattan Market - Signs of increased distress have been reflected in CMBS loans backed by Manhattan retail through rising delinquencies, reduced occupancy rates, and lower appraised value assignments, making this a segment that warrants close monitoring. Trepp and CompStak examine the impact on the Manhattan retail sector amid the holiday shopping season.
  • Institutional Investors Increased Allocation to Real Estate, Remain Under-Allocated- Institutional investors increased their target allocation to CRE this year to 10.6% from 10.5% in 2019 and are now 170 basis points higher than they were 12 years ago. But they largely remain under-allocated to the asset class, relative to their target allocations, which should help beef up what so far has been a lacklustre year in terms of sales transaction volumes, which through October were down 40% from last year.
  • ESG in the Commercial Real Estate and Corporate CLO Markets- As millennials represent an increasingly bigger pie of the investor base, the focus on Environmental, Social and Governance (ESG) investing has caught the eye of the financial industry. These factors have now become a key criterion for many money managers.

What Was Everyone Talking About Last Month?

Empty Hotels Get Second Life as Tiny Apartments During Pandemic - 'The share of hotels with securitized mortgages that were delinquent on their loans was 19.66% as of November, up from 1.52% a year earlier, according to Trepp. Even before the pandemic, a surge of hotel construction over the past decade had left some cities with a room glut.' (The Wall Street Journal)Blumberg Joins Rush of Property Firms Raising Funds for Distressed Deals - 'Signs are growing in the current crisis that landlords owning billions of dollars worth of commercial property are having trouble paying their debts. In November, 8.2% of loans that were converted into CMBS were 30 days or more delinquent, compared with 2.3% one year earlier, according to Trepp.' (The Wall Street Journal)Commercial Real Estate's Pandemic Pain Is Only Just Beginning - 'The most glaring distress is in the $529 billion market for bonds backed by commercial real estate loans. The delinquency rate last month for commercial mortgage-backed securities (CMBS) was 20% for hotels and 14% for retail, according to Trepp. Those obligations that will become more difficult to repay as they fall further behind.' (Bloomberg)Mall of America is no longer delinquent on $1.4 billion mortgage - 'The loan has been current since December, according to Trepp. Beginning with the December payment, the loan was converted to interest-only through maturity, Trepp said. Mall of America was closed from mid-March through June due to the pandemic. Retail tenant collections at the property fell to a low of 33% in April and May, according to Trepp.' (CNBC)

Bausch Health, a top CLO obligor, accelerates senior loan paydowns - 'According to data research from Trepp, Bausch Health has a $4.5 billion term loan B held in 390 CLO deals or 38% of all U.S. deals in TreppCLO; and a $1.5 billion first incremental term loan held in 285 CLO vehicles, or 28% of deals, as of November.' (Asset Securitization Report)Questions or comments on any of the content featured in our monthly snapshot? Contact us at [email protected] or at 212-754-1010.

Disclaimer: The information provided is based on information generally available to the public from sources believed to be reliable.