$39bn of CMBS loans can’t cover debt with cash flow

A study of US CMBS deals reveals that more than 3,500 loans currently have debt service coverage ratios of 1.0x or less. That figure could quickly grow to $75bn as less than half the CMBS universe has reported 2009 financials.

CMBS deals in the US are struggling against their debt loads with more than 3,500 loans – valued at $38.9 billion – admitting a debt service coverage ratio of 1.0x or below.

A survey by CMBS data provider Trepp, said of the more than 26,000 CMBS conduit deals to have reported 2009 financials, roughly 13.5 percent reported a DSCR of 1.0x or less based on net cash flow. Of those loans, around $6.2 billion, or 441 loans, had already made their way to special servicing.

Since most of these [CMBS] loans are current, it appears that many property owners have been willing to reach into their own pockets to keep a property afloat.

CMBS data provider Trepp

That means $32.7 billion of CMBS loans reporting a 1.0x DSCR or less have still not made their way to special servicing. If the current trend continues, the firm said, there could be $75 billion of loans with a 1.0x DSCR or less needing the attention of special servicers in the coming months and years.

“Since most of these loans are current, it appears that many property owners have been willing to reach into their own pockets to keep a property afloat,” a Trepp research note said.

In some cases, reserves may also be funding shortfalls in interest payments. This happened in the case of Tishman Speyer and BlackRock Realty’s Stuyvesant Town deal, in New York, when rental income failed to cover the monthly interest payments, believed to be around $16 million.

An initial $650 million reserve was set aside by Tishman and BlackRock when they closed the deal in 2006. However that was seriously impacted by the inability to convert rent stabilised units to market rates quickly. Within three years, the interest reserve account, originally $400 million, had just $98.9 million remaining. The general reserve account, which originally boasted $190 million of capital, had $358 left in it, while the replacement reserve account, initially funded with $60 million, had just $3.74 remaining.

Trepp said though there was “no easy way” to judge which loans would get worked out and which would face a “downward spiral”.

Sitt Asset Management’s purchase of the Two Herald Square office property in New York City has a current DSCR of 0.84x, however that is an improvement over the 0.75x debt service coverage ratio at the time of securitisation in 2007, Trepp said.

A $391 million loan, securitised across two deals, was underwritten with a 1.25x DSCR. Trepp added that a new tenant taking 16 percent of the space had also started paying rent in January, which could help push the DSCR higher in future reports.

Meanwhile Trepp noted that a Marathon Asset Management JV with RXR Realty “might have more reason for concern”.

A $187.3 million loan for the 1.1 million-square-foot TIAA RexCorp Plaza office in Uniondale, Long Island, New York, has a current DSCR of 0.80x against a 1.2x DSCR at the time of securitisation in January 2007. Marathon and RXR acquired the property, valued at roughly $270 million at the time of the deal, as part of a 38-property portfolio. The two firms paid REIT SL Green a rumoured $2.1 billion for the portfolio of offices across New York and New Jersey, according to real estate data provider Real Capital Analytics.

Trepp said occupancy at the office property had fallen to 89 percent by the end of 2009, compared to 92 percent at the time of securitisation in 2007. That could fall further amid special servicer suggestions that Citibank, which occupies 20 percent of the space, “will apparently relinquish about two-thirds of the space when its lease expires later this year”, Trepp said.