Finance  ·  CMBS

Nearly 40% of CRE CLO Loans on Servicer Watchlist

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CRED iQ’s research team has fielded multiple requests to explore the commercial real estate collateralized loan obligations (CRE CLO) ecosystem from a wide array of perspectives. This week we decided to extend the horizon a bit as the marketplace approaches a milestone in the watchlist category to see what we can draw from the latest data and trends.

We subdivided the CRE CLO market from two perspectives: with loans that have been added to the servicer watchlist and the triggers that caused this designation.

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CRED iQ’s latest loan-level analysis as of April 30 indicated that 37.7 percent of CRE CLO loans are currently on the servicer’s watchlist. This is in addition to CRED iQ’s overall distress rate of 8.6 percent for CRE CLO loans that are either delinquent or with the special servicer. Combining these two figures, CRED iQ calculates 46.3 percent of these loans are in some level of trouble.  

An important early bellwether, the watchlist percentage continues to climb to historic levels. The figure of 8.6 percent of CRE CLO loans being currently in special servicing or delinquent reveals a wide gap which could imply that the special serving and delinquency percentages are likely to grow.    

Some of the largest issuers of CRE CLO debt over the past five years include MF1, Arbor, LoanCore, Benefit Street Partners, Bridge Investment Group, FS Rialto and TPG. CRED iQ consolidated all of the loan-level performance data for every outstanding CRE CLO loan to measure the underlying risks associated with these transitional assets. Many of these loans were originated in 2021 at a time where cap rates and interest rates were low and valuations high, and are now starting to run into maturity issues given the spike in rates.

Looking at the causes that drive the distress rating, floating debt service coverage ratio (DSCR) triggers dominate the reason for the distressed classification. Pending maturity or anticipated repayment dates was the largest single category reported.  

Outstanding CRE CLO loans amount to approximately $75 billion in loans as of April 30. The vast majority of these CRE CLO loans are structured with floating-rate loans with three-year loan terms equipped with loan extension options if certain financial hurdles are met. 

One such example is the Desert Gardens, a 307-unit multifamily property in Glendale, Ariz., within the market of Phoenix. The garden-style property is backed by a $40 million ($130,354 per unit) loan that was added to the servicer’s watchlist in April due to decreased occupancy. The asset was 84 percent occupied and performing with a below break-even DSCR of 0.21 as of year-end 2023. The property was built in 1984, and is undergoing renovations. The prospectus reveals renovation plans include all 307 units, common spaces and the exterior. 

Servicer commentary indicates the borrower is interested in extending the June 2024 maturity date of the loan. At the time of origination, the loan had two one-year extension options implying a fully extended maturity date of June 2026. The loan was originated with a 3.5 percent interest rate on a $48 million ($156,352 per unit) appraisal in 2021. The current interest rate for the property has increased to 8.82 percent.

Mike Haas is the founder and CEO of CRED iQ