Hotels Continue to Lead CMBS Loan Auctions
“Properties and mortgage notes securing more than $300 million in outstanding CMBS debt was auctioned during the second quarter of 2022,” wrote Marc McDevitt, a senior managing director at CRED iQ.
“The volume of CMBS auctions during the last quarter increased compared to the first quarter of 2022, when 30 auctions tied to approximately $217 million in CMBS debt took place, according to CRED iQ’s observations of impending losses for investors. Sales through an auction can take two to three months to close; however, sale transactions can be delayed or even fail to close after a due diligence process. Of the 30 auctions from the previous quarter, there were nine auctioned assets backing $68.3 million in CMBS debt that remained unresolved as of the June 2022 reporting period.
“CRED iQ monitored 28 individual CMBS property and note sales through their respective auction processes during the second quarter. A little more than half of those auctions, 15 in total, involved distressed sales facilitated by a special servicer. Of the 15 specially serviced assets, there were 10 real estate owned (REO) properties with titles that transferred to respective CMBS trusts. Special servicers are tasked with liquidating these properties, sometimes after a period of stabilization, for maximum proceeds on behalf of CMBS certificate holders.
“Of the 10 REO properties that were auctioned, the average holding period between title acquisition and auction date was approximately 2.1 years. The shortest holding period was three months, and the longest holding period was nearly six years.
“The quickest sale from REO title date to auction date was the 181,285-square-foot mixed-use (office/retail) property in Fort Worth, Texas, known as The Tower. The property transferred to special servicing in June 2021, shortly after a major tenant terminated its lease, causing occupancy to fall to 48 percent. The special servicer acquired title on behalf of the CMBS trust in January 2022, and the property was auctioned three months later in April 2022. The property reportedly sold for less than the asset’s $18.4 million outstanding debt amount. Additionally, net proceeds available to the CMBS trust will likely come in lower than the asset’s sale price to account for the repayment of servicer advances, interest on servicer advances, and other liquidation expenses.
“By deal vintage, auctions over the past three months were most prevalent among 2014 and 2016 vintage securitizations. Comparing to the prior quarter, 2015 vintage securitizations had the most auction activity. Similar to the previous quarter, hotels represented the majority of auctions with 15 attempted sales during the second quarter.
“By market, the assets that were auctioned were geographically dispersed. Only three metropolitan statistical areas had exposure to multiple asset auctions — Chicago, Cleveland and New York.
“CRED iQ observed insights into pricing discovery for properties that resulted from assets’ final bids. The majority of the second quarter 2022 auctioned CMBS properties (approximately 70 percent) were appraised in 2020 or later. Excluding assets with pre-2020 appraisals, we found that 55 percent of the auctioned assets received final bids that were higher than most recent appraisals. One notable final bid premium over a recent appraisal was the Hilton Garden Inn Shreveport; the 142-key hotel had a final bid that was greater than 100 percent of its February 2022 appraisal.
“When properties traded at a discount to the most recent appraisal, the average difference was approximately minus 24 percent. The most severe discount from appraisal to final bid, equal to roughly minus 54 percent, was Commerce Park IV and V, a 229,459-square-foot office property in the Cleveland MSA. The property was liquidated during the June 2022 remittance period, resulting in a $10.4 million principal loss to CMBS certificate holders.
“In summary, the average difference between final bid prices and most recent appraisals was approximately plus 18 percent. Isolating for specially serviced assets resulted in a smaller average difference of plus 8 percent. Lodging properties, on average, exhibited the highest positive difference (plus 47 percent) and office properties exhibited the highest average deficit between final bids and recent appraisals (minus 37 percent).
“Concerning lodging properties, many hotels were last appraised in 2020 or early 2021, which was during the immediate ascension of COVID-related disruptions when cash flows were severely impacted. Many of those reduced valuations may not have been reflective of current hotel operations if substantial recoveries in occupancy and average daily rates had occurred.
“As for office properties, results may be reflective of perceived property type risk for lower-tier office buildings in an environment where space availability is rising across markets and firms are continuing to shed office space.”