CMBS Realized Losses Dip in March as Loan Workouts Continue
By Marc McDevitt April 17, 2023 10:54 am
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CMBS transactions incurred approximately $36.7 million in realized losses during March via the workout of distressed assets.
CRED iQ identified 10 workouts classified as dispositions, liquidations or discounted payoffs in March. Of these, only one was resolved without a loss. The nine workouts resulting in losses involved severities ranging from 2 percent to 95 percent, based on outstanding balances at disposition.
Aggregate realized losses in March were approximately 72 percent lower than February due to the lower quantity of distressed workouts. The aggregate realized loss total of $36.7 million was the lowest level of realized losses for any month over the past year. On a monthly basis, realized losses for CMBS transactions averaged approximately $124 million during the trailing 12 months.
By property type, workouts were concentrated in lodging, which comprised half of the distressed resolutions in March. Distressed workouts for lodging properties had the highest total of aggregate realized losses ($25.6 million), which accounted for 70 percent of the total for the month.
The largest distressed workout featuring a lodging property was the real estate owned (REO) liquidation of the Crowne Plaza Houston Katy Freeway, a 207- key full-service hotel in Houston. The hotel transferred to special servicing in May 2020 due to COVID-related distress and became REO in June 2021. The property had outstanding debt of $28.3 million, and the liquidation resulted in a loss of $24.2 million, equal to a severity of 86 percent. The liquidation was also the largest workout in March by outstanding debt balance.
The largest loss severity among distressed workouts in March was from the REO liquidation of IUP Pratt Studios, a 139-unit student housing property at Indiana University of Pennsylvania (IUP). Prior to liquidation, the property had been in special servicing since July 2020. The IUP student housing complex had outstanding debt of $4 million prior to its liquidation. The REO sale of the property resulted in a 95 percent loss severity on outstanding debt.
Excluding defeased loans, there was roughly $5.4 billion in securitized debt among CMBS conduit, single-borrower large-loan and Freddie Mac securitizations that was paid off or liquidated in March, which was approximately a 54 percent increase compared to $3.5 billion in February. In March, 2 percent of the loan resolutions were categorized as dispositions, liquidations or discounted payoffs.
The percentage of distressed workouts was 8 percent in February. Roughly 5 percent of the loans were paid off with prepayment penalties, which was significantly less than in prior months. Loan prepayment has declined significantly in recent months given the relatively high interest rate environment.
Further excluding Freddie Mac securitizations, lodging had the highest total of outstanding debt payoff in March with approximately 36 percent of the total by balance.Multifamily had the next highest percentage of outstanding debt payoff with 27 percent of the total.
Among the largest mortgages to pay off was a $560 million loan secured by 59 La Quinta Inn select-service hotels. A total of 109 hotels were encumbered by the mortgage, which had a balance north of $1 billion at origination.
Marc McDevitt is a senior managing director at data analytics firm CRED iQ.
