Mortgage REITs See Big Loan Repayments

Many recent reports on commercial real estate focus on loan maturity, delinquency, and special servicing. It’s easy to forget that these are not the majority of loans. Trepp brings that out in a surprising report of success that has left lenders needing to decide what to do next.

Mortgage REITs in the second quarter of 2023 saw a jump in loan repayments of nearly 80% compared to the first quarter. “This contributed to the 2.5% reduction in their collective portfolios to $92.67 billion,” wrote Orest Mandzy, managing editor of Trepp’s CRE Direct.

What seems strange is that with all the talk of CRE deals needing refinancing, loan originations by the REITs was “nearly non-existent again during the second quarter,” Mandzy wrote. “Instead, their liquidity has jumped by 14% from the first quarter to $11.18 billion. If market conditions were in their favor, they could use that liquidity to originate at least another $20 billion of loans.”

Out of 14 “major mortgage REITs” that Trepp analyzed, 10 had smaller loan portfolios in Q2 than in Q1.

In Ladder Capital Corp’s Q2 earnings call in July 2023, BTIG commercial mortgage REITs analyst Sarah Barcomb asked CEO Brian Richard Harris about the loan origination environment “and why you didn’t bite on anything during the quarter.”

“I think similar to what I said last quarter, we’re not having necessarily trouble with somebody who wants to borrow money yet at the rates that we want to charge for it,” Harris said. “Where we’re having trouble is the principal comp. A lot of refinances are simply over levered. And if they don’t have capital to commit to de-lever their situation, they’re at risk of losing their property.” He said that lending was “picking up” and that they had been quoting but missed the business “because our loan amounts were too low.”

“And I don’t think we’ve changed much on the rate side, even though spreads have tightened a little bit, but I do sense that people are waking up and realizing they’re just not going to be able to borrow as much as they used to, given the 500-plus basis point move in short-term rates,” he added.

Additionally, Harris pointed to “being beaten by companies I’ve never heard it, kind of speaking to the emergence of private credit in the sector.”

Given recent yields on short-term Treasurys, having excess liquidity have been able to gain decent annualized returns with next to no risk.

“Granite Point Mortgage Trust stated they are ‘maintaining a cautious stance on new loan origination and continue to have a preference to carry higher liquidity levels,’ explained Jack Taylor, president and chief executive of the company,” according to the analysis. “Most REITs have maintained a relatively defensive posture, aggressively dealing with problematic, or potentially problematic loans on their balance sheets. They are also making efforts to reduce their exposure to the office sector, as take-out financing becomes more challenging.”

And there has also been reassessment of loans to the office sector and reduction of exposure to the area.