This week in a nutshell:
AAA losses = big headline = more focus on CRE risks
Our takeaways...
1. 1740 Broadway:
-- Blackstone borrowed $308M to buy an old office building for $605M.
-- The building's major tenant left and BX defaulted.
-- The servicer received only $117M in liquidation proceeds.
-- 80% value decline
-- 60% loan loss
2. Are AAA bonds bulletproof?
-- BX's loan was financed by a SASB CMBS issuance.
-- $150M of the SASB bonds were rated AAA by S&P.
-- $117M liquidation proceeds were insufficient to cover AAAs.
-- AAA bondholders (with 3% promised coupons) took losses.
3. Absurdity
-- AAA corporate bonds almost never default (99%).
-- But AAA CMBS bonds have defaulted in the last few cycles.
-- How can something be AAA when backed by a "single" anything?
-- The media understandably focused on this absurdity last week.
4. Pulling on the SASB threads
-- 1740 Broadway was absurd but not a complete surprise.
-- We've been tracking 20 or so similar troubled SASB loans.
-- Recent appraisals confirm there is significant distress.
5. Value declines
-- Recent appraisals suggest $7.1 billion of value loss across 17 SASB loans, representing a 59% decline from origination.
6. Themes
-- Old office buildings
-- B malls
-- San Francisco and DTLA
-- Lodging
7. More AAA bonds at risk?
-- Only 3 of the 17 SASBs on our list appear to be on track for AAA losses (all B malls)
8. Distress is the eye of the beholder
-- Bears would tell you this is only the beginning, and that these problems will spread to higher quality collateral.
-- Bulls would point to the extreme idiosyncracies of this collateral and the absurdity of AAA-rated SASB bonds.
9. Our takes
-- There will be significantly more distress.
-- But it seems episodic, following property-level imbalances.
-- Distress will almost certainly play out over years not months.
-- The difference between winners and losers will grow.
10. Correction
A previous post about 1740 Broadway erroneously labeled investment-grade bonds as AAA.
Reminder: We strive to share perspectives that (i) begin to explain how the CRE world functions and (ii) spark insightful dialogue to make our industry more accessible/understandable and less reliant on narratives.
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