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U.S. CMBS Update Q2 2021: SASBs Front And Center As Pandemic Impact Evolves


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U.S. CMBS Update Q2 2021: SASBs Front And Center As Pandemic Impact Evolves

This is S&P Global Ratings' sixth quarterly update on U.S. commercial mortgage-backed securities (CMBS) transactions published in the midst of the COVID-19 pandemic. Conditions continue to generally improve, with falling delinquencies (DQs) and growth in issuance.

As of the end of June, the overall DQ rate for U.S. CMBS transactions was 5.2% and has steadily declined since peaking around 9% in the summer of 2020. Although the overall DQ rate has declined, the share of delinquent loans that are 60-plus-days delinquent (i.e., seriously delinquent) is high, at just over 90%. In fact, some 43% are over 120 days DQ. A substantial majority of the total population of arrears remains in the lodging and retail sectors, while the 30-plus-day DQ rate for multifamily, office, and industrial is below 1.8%. The forbearance rate, likewise, has come off a peak (just over 8%) and stands at 7.2% as of midyear. Nearly 90% of the total population of loans in, or requesting, forbearance, are from the lodging and retail sectors.

SASB Volume Dominates Private-Label Issuance

One of the defining hallmarks of the private-label CMBS market's recovery out of the pandemic has been its reliance on the financing and securitization of large loans via single-asset, single-borrower (SASB) transactions. While the share of SASB issuance has grown through the years, accounting for just under half of 2019's total private-label volume (and about 45% of 2020's), SASB's share of issuance now stands at over two-thirds of the total as of the end of second-quarter 2021. There are many reasons for this increase, including the preferability of floating-rate debt in the current rate environment for both borrowers and investors. Also, the greater prepayment flexibility is ideal for borrowers with properties not primed for long-term debt, as their cash flows may be temporarily hampered while still in recovery from the pandemic.

Property-type exposure

The property-type exposure for SASBs has evolved in some notable ways over the years (see chart 1). By 2015, SASB issuance volume had grown to around $30 billion annually, and its property-type composition was evenly split between office (28.6%), lodging (27.5%), and, to a slightly lesser degree, retail (20.3%). The remainder was primarily a mix of industrial, self-storage, and mixed-use asset types.

Chart 1


By 2018, lodging had become the most common asset type in SASBs, accounting for close to 40% of issuance, mostly in the form of multi-property portfolios. Office was a distant second at 27.1%, followed by retail at 15.4% and industrial and self-storage at 10.2%. The pandemic's outsized impact on lodging and retail became evident in the first half of 2021, as they accounted for less than 15.2% and 5.9%, respectively. Office, at 44.3%, has dominated issuance, followed distantly by industrial and self-storage at 19.0%.

LTV ratio and other trends

Issuance volume in the first half of 2021 was record setting for the sector at $30.5 billion. Forty-three SASB transactions priced in first-half 2021; however, we only provided preliminary feedback on 35 and rated 12--five in the first quarter and seven in the second (see table 1). While the average deal size for SASBs has been decreasing in recent years, several mega-sized deals, with trust balances ranging from $2.0 billion to $4.6 billion (all in the second quarter), helped raise the average to $710 million for the first half.

Table 1

Summary Of S&P Global Ratings-Reviewed SASBs(i)
Weighted averages H1 2021 Q2 2021 Q1 2021
No. of transactions reviewed 35 20 15
No. of transactions rated 12 7 5
Average deal size (mil. $) 710 853 513
S&P Global Ratings' LTV (%) 119.5 114.9 122.9
S&P Global Rating's cap rate (%) 7.6 7.8 7.3
S&P Global Rating's NCF haircut (%) (18.4) (19.5) (16.8)
S&P Global Ratings' value variance (%) (42.8) (43.3) (42.2)
Floating rate/fixed rate (%) 82.9/17.1 85.0/15.0 80.0/20.0
Primary markets (%) 70.4 62.0 81.6
Secondary markets (%) 23.8 29.8 15.9
Tertiary markets (%) 5.8 8.2 2.5
Source: S&P Global Ratings and Commercial Mortgage Alert. (i)Forty-three SASB transactions priced in the first half of 2021; however, we only provided preliminary feedback on 35 of them. LTV--Loan-to-value. NCF--Net cash flow.

The SASBs we reviewed in second-quarter 2021 had a lower weighted average S&P Global Ratings' loan-to-value (LTV) ratio (114.9%) than the ones reviewed in the first quarter of the year (122.9%), though the metric remains highly elevated, in our view. Our LTVs, which are higher than issuer LTVs, were driven by trust debt levels and the combined effects of our cap rates and haircuts to issuer net cash flows.

As previously mentioned, floating-rate debt issuance has been driving the market's recovery and represented close to 83% of SASBs we reviewed in the first half of year. Notably, office was the only asset type encumbered with fixed-rate debt, as offices can benefit from having strong tenants signed to longer-tenor leases. Of the six deals in total, two (SLG Office Trust 2021-OVA and DOLP Trust 2021-NYC) accounted for a little more than three-quarters of the fixed-rate issuance volume.

While the vast majority of SASBs we reviewed were in primary markets (as defined by S&P Global Ratings), we did notice an increase in assets located in secondary and tertiary locations between the first and second quarters. The share of properties located in primary markets dipped to 62.0% from 81.6%, while the share of properties located in secondary markets doubled to 29.8% from 15.9% and, for tertiary assets, more than tripled to 8.2% from 2.5%. (We note that these percentages are greatly influenced by the asset types being securitized in each quarter.)

Returning to LTV ratio trends, we have noticed that trust balance leverage in SASBs has been increasing when viewed from a longer historical period (see chart 2). SASBs in 2015 had a weighted average issuer trust balance LTV at just under 55%. The rate increased to just under 60% by 2018 and now stands at 68.6% as of the first half of 2021. Moreover, the share of SASBs with issuer trust balance LTVs greater than 75% has also been increasing since 2015 and now stands at over 23%.

Chart 2


Clearly, the current historically low-yield environment has made it preferable to place more debt into trusts rather than utilize subordinate/mezzanine debt as part of the capital structure. That might partly explain the steep increase in trust balance LTVs, particularly in this most recent quarter, but the long-term trend remains. Moreover, we have started to see proposed instances where all-in LTVs (trust and non-trust subordinate debt) have exceeded 80%, or do so until the encumbered asset in question has been stabilized. Although we acknowledge that SASB performance has historically been strong relative to conduits, we do feel growing levels of leverage, combined with assets with considerable near-term challenges, warrant caution and, in some instances, leave us unable to assign preliminary ratings on proposed SASB transactions.

Few Changes In Conduit New Issue Credit Metrics This Quarter

The loan metrics for U.S. CMBS conduit new issuance transactions in the second quarter were roughly the same quarter over quarter (q/q):

  • Leverage rose mildly.
  • Debt service coverage (DSC) ratios fell slightly.
  • Combined IO percentages remained high, but fell back somewhat from first-quarter 2021.
  • Our average cash flow and value variance to issuer values both decreased modestly.
  • Effective loan counts (as measured by the Herfindahl-Hirschman Index score) and actual loan counts increased, while the average deal size fell back from near the $1 billion mark.

Our 'BBB-' Credit Enhancement Levels Remain Well Above The Market Average

Our 'AAA' credit enhancement level was nearly flat to the market level in second-quarter 2021, but our 'BBB-' credit enhancement level was still 350 bps higher. We continue to believe these 'BBB-' rated classes could prove relatively more vulnerable to event risk--especially with more concentrated pools--until the ultimate economic impact of the COVID-19 pandemic on CMBS performance becomes clearer. As a result, we have not rated many of these classes in recent vintages.

Our average cash flow and value variance to issuer underwritten values declined on a quarterly basis by 40 bps and 70 bps, respectively, to 15.2% and 40.7%.

Of the nine U.S. CMBS conduit transactions that priced in second-quarter 2021, we rated seven (see table 2). The nine offerings had an average of 55 loans, with top-10 loan concentrations coming down 260 bps q/q to 52.5%. The average effective loan count climbed q/q to 26.6, from 24.1 in Q1.

Table 2

Summary Of S&P Global Ratings-Reviewed Conduits(i)
Weighted averages Q2 2021 Q1 2021 2020 2019 2018 2017 2016
No. of transactions reviewed 9 5(ii) 28 52 42 48 40
No. of transactions rated 7 4 14 36 19 10 3
Average deal size (mil. $) 953 991 888 926 915 930 856
Average no. of loans 55 53 44 50 50 49 51
S&P Global Ratings' LTV (%) 93.4 93.2 93.7 93.5 93.6 89.1 91.3
S&P Global Ratings' DSC (x) 2.48 2.58 2.39 1.93 1.77 1.83 1.71
Final pool Herf/S&P Global Ratings' Herf 26.6/29.2 24.1/25.7 24.1/33.1 27.7/33.7 28.1/36.3 26.3/34.9 25.4/36.0
% of full-term IO (final pools) 73.1 72.1 70.7 61.6 51.7 46.6 33
% of partial IO (final pools) 15.7 19.5 17.9 21.4 26.2 28.4 33.9
S&P Global Rating's NCF haircut (%) (15.2) (15.6) (15.8) (13.4) (13) (11.9) (10.8)
S&P Global Ratings' value variance (%) (40.7) (41.4) (40.0) (36.0) (35.3) (33.0) (32.1)
'AAA' actual/S&P Global Ratings CE (%) 21.3/21.4 20.6/20.5 20.4/22.9 20.8/24.3 21.0/26.0 21.2/23.5 23.0/25.6
'BBB-' actual/S&P Global Ratings CE (%) 7.1/10.6 7.1/10.4 6.8/11.4 7.0/10.8 7.1/10.9 7.1/9.3 7.8/10.2
(i)S&P Global Ratings' credit enhancement levels reflect results for pools that we reviewed. Actual credit enhancement levels and other market statistics within the table represent every deal priced within a selected vintage or quarter, not just the ones we analyzed. (ii)Six conduits priced in Q1, but we only reviewed five of them. LTV--Loan-to-value. DSC--Debt service coverage. Herf--Herfindahl-Hirschman Index score. IO--Interest-only. NCF--Net cash flow. CE--Credit enhancement.

The conduit deals priced during first-quarter 2021 had somewhat higher LTV ratios and slightly lower DSCs on a quarterly basis. The average LTV was 93.4%--a 20 bps increase q/q. Average DSC fell 0.1x to 2.48x in the second quarter, maintaining an elevated level. This likely reflects low interest rates and a lot of full-term IO loans. For the purposes of our DSC analysis regarding partial-IO periods, we utilize the figure after the IO period ends, but partial-IO percentages remain somewhat low.

IO as an overall percentage of the collateral pools fell to about 89% in the second quarter from nearly 92% in the first quarter. Full-term IO loans make up 73.1% of the collateral pools--a 100 bps increase q/q, while partial-term IO exposures dropped by 380 bps to 15.7%. The CMBS 2.0 record for full-term IO percentage remains 73.9%, set in first-quarter 2020.

In our review, we make negative adjustments to our loan-level recovery assumptions for all IO loans. In some conduit transactions, we make additional pool-level adjustments when we see very high IO loan concentrations or when an IO loan bucket has no discernible difference in LTV versus the average (i.e., it is not "pre-amortized"). The average S&P LTV for full-term IO loans issued in the first-quarter 2021 was 92.0%, about 140 bps below the overall average.

Effective loan counts, or Herfindahl-Hirschman Index scores, which measure concentration or diversification by loan size, rose 250 bps to 26.6. We consider this level to be well diversified, but still below the recent pre-pandemic vintage range (2018/2019 vintages average about 28). The average deal size fell by $38 million to $953 million in second-quarter 2021 q/q, while the average number of loans rose to 55 from 53.

Property Type Exposures Continue To Shift Within Conduits

We continue to see quite a bit of movement in property type exposures within conduits, not only q/q, but also year over year (y/y) (see chart 3).

Chart 3


Industrial exposure rose again, and now stands at 15%, well above the 6%-7% range in recent pre-pandemic (2018 and 2019) vintages. The property type continues to post outsized y/y appreciation figures (up over 27% y/y per Green Street Advisors).

Retail exposure was 15% in the second quarter, up from 14% in the fourth quarter, and remains above the 8%-9% lows set in mid-2020. There continues to be wide bifurcation in retail performance, with grocery anchored centers (some big-box) and home improvement tending to outperform regional malls.

Lodging fell to 3%, with several deals at zero. For the year through May, U.S. lodging revenue per available room (RevPAR) was up 12.6% over 2020 levels, but remains 34.7% below 2019 levels. S&P Global ratings doesn't expect RevPAR to recover to 2019 levels until at least 2023. While leisure travel has rebounded significantly this year, corporate and meeting-and-group demand levels are significantly depressed. They will likely recover more gradually as companies return to the office and resume corporate travel, and as larger group meetings, both corporate and social, recommence more fully.

Office remains number one by a wide margin, at 39% for the second quarter, up four points q/q. There remains a considerable amount of uncertainty for the sector in the near term as the return-to-office trend unfolds (see "Property In Transition: Zooming In On The Global Office Reboot,: published May 6, 2021). Values remain down about 8% versus pre-COVID prints, according to Green Street.

Meanwhile, multifamily exposure climbed three percentage points to 14%. Apartments, especially in major cities, have been fighting headwinds from renters moving away during the pandemic. However, these seem to be subsiding, at least somewhat, as institutional quality values have returned to pre-COVID levels, per Green Street's index.

SASB Driving Issuance Levels Up

There was about $46 billion in first-half 2021 private-label CMBS issuance, excluding commercial real estate collateralized loan obligations (CLOs). The breakdown between single-asset single-borrower and conduit was roughly two-thirds/one-third (over $30 billion SASB and $15 billion conduit and a couple of other deals). The overall total was up about 60% versus first-half 2020's $28 billion figure. Our forecast is now $80 billion for the full year, up from $70 billion previously. There still remain headwinds for conduit formation, and some $7.5 billion of that higher first-half issuance was from two jumbo SASBs, which is why we're shying away from annualizing that $46 billion first-half figure for our full-year forecast.

Related Criteria

This report does not constitute a rating action.

Primary Credit Analyst:Senay Dawit, New York + 1 (212) 438 0132;
Secondary Contact:Rachel Buck, Centennial + 1 (303) 721 4928;
Global Structured Finance Research:James M Manzi, CFA, Washington D.C. + 1 (202) 383 2028;

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