Fortress: 20% of upcoming CMBS maturities are impaired

The New York-based firm has said in an interview with PERE that there is a significant opportunity in the US as one in five loans may default upon maturity.

Fortress Investment Group, the New York-based firm, is eyeing a ‘second wave’ of opportunity in the US resulting from fractured CMBS transactions originally structured before the global financial crisis.

In a Blueprint interview published in this month’s PERE magazine, the firm’s new co-chief investment officers of the global real estate business, Thomas Pulley and Anthony Tufariello, say the firm is geared up for the opportunity.

Specifically, Fortress is eyeing $1.2 trillion in maturing US commercial real estate loans through 2018 with much of the debt issued pre-crisis with high loan-to-value ratios, often exceeding 90 percent. The decline in national property values since peak levels has led to what the firm says is a “continuing financing shortfall” with more than $300 billion of CMBS contractually maturing between 2014 and 2017. 

Notwithstanding resolutions to date, the scale of maturities remains “enormous” and is expected to reach a new, higher peak in the coming years, say Pulley and Tufariello. Based on a loan-by-loan review of CMBS transactions managed by affiliates, Fortress thinks 20 percent of upcoming maturities are impaired and may need restructuring. Based upon this analysis and also previous default experience, the firm has arrived at the conclusion that one in five loans may default upon maturity.

Pulley says: “We haven’t been through the experience of so much paper hitting the wall at the same time. It may be a shallow part of the market right now. People are not yet looking at the underlying collateral (but) we think that is a substantial opportunity.” 

The two real estate professionals were speaking after being formally made global chief investment officers last year. The interview also took place as Fortress is said to be closing in on raising a total of around $5 billion of equity for various real estate-related funds. Though the company declined to discuss fundraising, it is known to be in the market not only with its second US and Europe dedicated opportunistic RE fund, but is also close to the finish line for Fortress Credit Opportunities IV. The first real estate fund, Fortress Real Estate Opportunities Fund, raised $567 million in 2012 while Fortress Credit Opportunities Fund III attracted $2.7 billion of commitments the same year. It is also in the market with Fortress’ third Japan Opportunity fund. The predecessor, Fortress Japan Opportunities Fund II, closed also in 2012 on $1.65 billion. 

One US limited partner PERE spoke with that has just invested in Fortress Real Estate Opportunities Fund II said the big question was how Fortress could replicate its success with Fund I given the current US market. However, the limited partner has re-upped with Fund II.

In the interview, Pulley and Tufariello reveal the company has expanded headcount within its credit and real estate team by around 20 percent in the last year, with a major focus on asset management and Europe.

They also highlight how their game plan has altered in key markets. In the US, for example, it is concentrating on non-major gateway markets that have generally recovered less at 91 percent since 2008 and are still trading at healthy discounts to replacement cost. 

Meanwhile in Europe, three and half years ago Fortress indicated it did not see the same level of opportunity as in the US. But that has changed given the increased level of liquidation of loans and properties in Europe. 

Finally, in Japan where much of the CMBS opportunity has already occurred, Fortress has been investing in the hospitality sector fuelled in part by the Olympics which arrive in Tokyo in 2020. Fortress started buying hotels in Japan from 2010 and assembled a portfolio of 67 hotels with a disposal value of $2.5 billion including the Sheraton Tokyo Disneyland, Narita Hilton and 40 business hotels primarily in Tokyo. Around 14 months ago, it exited a big portion of its hotels via an affiliated J REIT called Invincible Investment Corporation.