Newsworthy News
Signs of the Times? For as many who say that the capital markets crises is easing or ending or whatever, there is daily evidence that things are not quite that rosy as shoe after shoe continues to drop. A number of this week’s shoes included the following:
Retail Center Loan Sold at “Big” Discount
No names; just the facts as we understand them: The 340,000 square foot lifestyle shopping center was acquired in 2007 for $275 million, and was subject to a mortgage equal to slightly less than a 50% loan-to-value ratio. The term of the loan was 10 years; the interest rate was 5.8%.
The property, which opened in late 2005, performance was affected by the loss of a number tenants as well as competition from nearby retail centers.
The loan was sold for between 25 cents and 30 cents on the dollar, or approximately $35 to $42 million.. Obviously, the equity invested in the property is worthless.
The following article appeared in the February 20, 2009 issue of Commercial Mortgage Alert
‘Debt Yield’ Emerges as Lender Gauge
Because the market downturn has clouded property valuations, lenders are moving away from loan-to-value as their key underwriting benchmark in favor of ratios that measure property income. Banks and insurance companies have always relied on debts ervice coverage—the ratio of net operating income to debt payments—as an important measure of creditworthiness. But now that gauge and a related yardstick, “debt yield,” are becoming the most important factors in lenders’ due diligence.
In fact, debt yield, which measures net operating income as a percentage of the loan amount, is emerging as the main tool because it is viewed as the most direct method for calculating risk. The higher the debt yield, the more attractive the mortgage is to the lender. When the market was hot and properties were trading actively, the loan-to-value ratio was the go-to benchmark for lenders, and negotiations with borrowers typically hinged on the degree of leverage that would be employed. But now, the sales-market freeze is making it hard to pinpoint how far property values have fallen. What’s more, there’s no sign that property values have hit bottom yet. Against that backdrop, lenders are turning to the debt yield. “It makes sense in a market like this,” one commercial banker said. “Even if you had an appraisal on the property a couple of months ago, who knows that it’s still good? Nobody can fix the value of anything right now.”
Lenders are now setting minimum debt-yield levels, which determine the maximum amount they are willing to lend. “It depends on the risk tolerance of the lender,” an insurance executive said. “But I would say generally, people are looking for at least an 11 percent debt yield, and many are looking for 12 percent or higher.”
For example, if a lender had a minimum debt yield of 12 percent, it would lend no more than $100 million on a building with annual net operating income of $12 million. While debt yield and the debt-service-coverage ratio both measure property income, lenders increasingly are embracing debt yield because it is a cleaner benchmark. Debt-service coverage is more complicated because it takes into account such factors as the interest rate and amortization. Debt yield, on the other hand, is directly comparable to the “cap rate” that property buyers use to gauge their return. The cap rate is net operating income divided by a building’s purchase price. Unlike loan-to-value ratios, which can be a moving target in a volatile market, debt yield allows for little wiggle room. “It’s very straightforward,” another banker said. “You get the amount of money a property is producing right now, with no provision for any future increase, and then you have something to go by.” In addition to being more objective, lenders say, debt yield tends to produce more conservative underwriting. It also has a tendency to cut off arguments with borrowers about loan proceeds.
“It’s funny, when you tell somebody you’re only willing to go up to 60 percent leverage, he’ll argue with you, even now,” another insurance company lender said. “But with the debt-yield formula, nobody ever argues with you.”
Monday’s Numbers
Year-to-Date Equity Market Performance (as of February 22, 2009):
DJIA(1): -16.07%
S & P 500(2): -14.75%
NASDAQ(3): -8.61%
Russell 2000(4): -17.72%
MSCI U.S. REIT(5): -30.21%
(1) Dow Jones Industrial Average.
(2) Standard & Poor’s 500 Stock Index.
(3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe.
(5) Morgan Stanley REIT Index.
U.S. Treasury Yields: (as of February 21, 2009)
3-month: 0.27%
6-month: 0.47%
2-Year: 0.94%
5-Year: 1.83%
10-Year: 2.79%
Pricing of Various Tranches of Commercial Mortgage-Backed Securities (as of February 22, 2009)
Rating; Term; Spread to U.S. Treasury Bonds
AAA; 5 years; +1310 basis points
AAA; 10 years; +1132 basis points
AA; 10 years; +4632 basis points
A; 10 years; +5332 basis points
BBB; 10 years; +8982 basis points
BBB-; 10 years; +10032 basis points
BB; 10 years; No Quote Available
B; 10 years; No Quote Available
Source: Various Investment Banking firms such as Lehman Brothers, JP Morgan, and Morgan Stanley
Indicated Spreads for Conventional Commercial Mortgages (as of February 4, 2009)
| Property Type | Mid-Point of Commercial Mortgage Rate Spreads for 5-10 Year Fixed-Rate Mortgages | ||||
| 11/24/08 | 12/23/08 | 1/7/09 | 1/21/09 | 2/4/09 | |
| Multifamily | +325 | +388 | +388 | +388 | +400 |
| Regional Malls | +400 | +425 | +475 | +438 | +513 |
| Strip/Power Centers | +425 | +450 | +475 | +525 | +525 |
| Multi-Tenant Industrial | +363 | +425 | +475 | +525 | +513 |
| CBD Office | +375 | +425 | +500 | +500 | +500 |
| Suburban Office | +400 | +425 | +500 | +500 | +500 |
| Full-Service Hotel | +425 | +450 | +525 | +525 | +575 |
| Limited-Service Hotel | +425 | +450 | +550 | +550 | +550 |
| 5-Treasury | 2.41% | 1.36% | 1.55% | 1.55% | 1.74% |
| 10-Year Treasury | 3.30% | 2.17% | 2.46% | 2.46% | 2.94% |
| Source: Cushman & Wakefield Sonnenblick-Goldman, LLC. | |||||
Don't feel bad... The Architectural Billing Index is at a (13-year) historic low! This leading indicator has absolutely no good short-term news.
http://info.aia.org/aiarchitect/thisweek09/0220/0220b_otb.cfm
When it rains it pours, but we are optimistic in the face of all opposition.
[1016] Architecture
http://www.1016architecture.com
Posted by: Andrew Wilson | February 25, 2009 at 12:19 AM