CRE CLO Distress Rates More Than Quadruple in Last 12 Months

Arbor Realty Trust’s recent earnings report for the fourth quarter of 2023 admitted to some financial strain. It had “sixteen non-performing loans with a carrying value of $262.7 million, before related loan loss reserves of $27.1 million, compared to twelve loans with a carrying value of $150.5 million, before loan loss reserves of $12.6 million at September 30, 2023.”

That made CRED iQ to sit up. The company typically doesn’t consider CRE CLO deals from its regular delinquency reports. But it decided to take a “deep dive” into CRE CLOs to understand what might be happening with other CRE CLO issuers. The answer in short: “Arbor is not alone.”

CRE CLO distress rates jumped from 1.4% in January 2023 to 7.4% in December, and then another leap to 8.6% in January 2024, which they said was a 440% increase in 12 months. “This metric includes any loan that reported 30 days delinquent or worse as well as any loan that is with the special servicer,” they wrote.

There were $80 billion in CRE CLO loans. The “vast majority” used floating-rate loans with three-year terms. There were also optional term extensions, depending on qualifying financial conditions. Since 2019, big issuers included MF1, Arbor, LoanCore, Benefit Street Partners, Bridge Investment Group, FS Rialto, and TPG.

Many of the loans originated in 2021. That meant low interest rates and availability of high leverage terms along with record valuations and low cap rates. Now the rollovers are happening, interest rates are much higher, and the prospects of refi, far more challenging.

“CRED iQ’s analysis uncovers that in the course of 12 months, the amount of CRE CLOs under distress ballooned from $1.3 billion in February 2023 to over $6.8 billion as of the latest January 2024 reporting period,” they wrote. “Distress levels grew over 440% over the past 12 months. The sudden spike up started happening in July and August 2023 when distressed rates were around 1.7%, and then each month started increasing by an average of 1.2% each month. The latest distressed levels total 8.6% for all of CRE CLO loans as of January 2024.”

The firm provided two examples: a nearly 1.3 million square foot high-rise office in Houston, with an initial $232.0 million interest-only loan with fully funded commitment of $252.0 million. The maturity date of September 2023 came and went without payoff. With two-thirds occupancy in April 2019, it appraised at $403.0 million. Last September, occupancy was down to 65.8%.

The other building is listed as current but faces upcoming distress. Arbor originated the $98.9 million loan on the 768-unit apartment building in Orlando. Maturity is slated for October 2024 and an extended maturity date of October 2026. “The most recent financials from year-end 2022 reported a 0.65 DSCR (NCF), down from 1.56 at contribution in September 2021,” CRED iQ wrote. “The property was 96.2% occupied and valued at $120.1M in September 2021, at underwriting. Occupancy at the property fell to 85.6% as of November 2023.”