Cracks Widen in Maturity Wall

Morningstar Credit Ratings’ headquarters at 4 World Trade Center. (Photo: Joe Woolhead)

NEW YORK CITY—Two of the leading ratings agencies have used variations on the “wall of maturities” metaphor this week to describe the current status of CMBS loans coming due. Although Fitch Ratings notes that the wall is shrinking, with just $23 billion in Fitch-rated securitized commercial mortgages set to reach maturity in the balance of this year—compared to $54 billion that was due to mature in 2016 at this time a year ago—Morningstar Credit Ratings observes that “the cracks in the maturity wall are widening.” Prompting Morningstar’s assessment was the July payoff rate for maturing CMBS. It fell to its lowest level in more than two years, declining to 62.7% from 68.0% in June. That resulted in the year-to-date payoff rate for CMBS declining to 76.0% from 78.5% last month. Morningstar now estimates by the end of the year, the payoff rate will fall to about 70%. “As the crest of the maturity wave looms next year, Morningstar expects difficulties to continue this year and next, as many of the maturing loans, underwritten with overly optimistic cash flow assumptions during the market’s peak of 2006-07, may have trouble refinancing because of challenging loan metrics, impending regulations, and a stricter lending environment,” according to a report issued this week. In July, 466 loans with a combined balance of $4.44 billion paid in full at maturity. Matured loans reported as delinquent in payment status accounted for 24.6% of July’s total, marking the second time in three months it rose above 20%, and including five loans with balances of more than $100 million. Among the major collateral types, Morningstar says, weakness was concentrated in retail and office collateral. Neither sector posted a payoff rate of more than 62%; they represented the majority of maturing loans with more than 60% of the unpaid balance combined. Specifically, the five retail properties backing the $240- million Westfield Centro Portfolio loan in JP Morgan Chase Commercial Mortgage Securities Trust 2006-LDP7 have been underperforming since 2012 and in February 2016 became REO. “We project a loss of more than $140 million based on a May 2016 appraisal,” according to Morningstar’s report. The ratings agency also believes the $130-million Alhambra loan, representing 7.7% of GS Mortgage Securities Trust 2006-GG8, will face difficulty in securing take-out financing. “The Alhambra loan is backed by an 846,541-square-foot office park in suburban Los Angeles, which was fully occupied five years ago,” the Morningstar report states. “Now occupancy is in the upper-60% range, primarily because of the loss of several tenants. Although the commercial real estate website GlobeSt.com reported in March that the borrowers signed new tenants, bringing occupancy up to 70%, we do not expect the debt service coverage ratio to improve beyond 1.0x unless additional tenants are signed.” After topping $9 billion in June, the volume of maturing CMBS loans declined to $7.09 billion in July, but remained above the YTD monthly average of $6.66 billion. The ’06 vintage, with a 58.7% payoff rate, represents the majority of maturing loans, with nearly 85% of July’s balance. Next year will bring $97.8 billion in maturing CMBS, and Morningstar sees challenges in refinancing many of these loans because of their lower credit quality. “Many have loan-to-value ratios above 80% and debt yields below 8%, which we believe are reliable barometers of a loan’s likelihood to pay off on time,” according to the report. “Morningstar expects refinancing marginal loans to become progressively more difficult because property owners and developers face the potential of higher rates on loans and diminished property values as debt issuance slows and financing becomes more expensive,” the report states. “The uncertainty around risk-retention rules, scheduled to be adopted in December, also may hamper refinancing borderline 2006 and 2007 loans into CMBS deals.” For an in-depth discussion of the outlook for maturing CMBS as securitized commercial mortgages from the peak of the previous cycle come due, be sure to attend the “CMBS Report Card: Is The Upturn Ending? Plus! A Closer Look at Today’s Special Service Providers” panel discussion at RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City.