REO auctions commonplace in commercial real estate
Large note and REO auctions in CRE were happening on a regular basis last year — and February and March will be no different. There are almost $1.2 billion in commercial mortgage-backed securities assets being auctioned in the next two months. 2011 averaged $1.5 billion at auction, by way of comparison.
The first auction, scheduled for Feb. 6-9, lists 82 notes and REO properties spread across multiple states and property types. Barclays Capital (BCS) identified 45 of those as securitized in CMBS trusts, amounting to almost $200 million of the total. Most of those properties are in deep delinquency or REO.
The second will be held Feb. 21-23 and will consist of 58 properties in Arizona, Colorado and Nevada. Barclays identified 32 of these as holding CMBS exposure, totaling $260 million.
The third and final auction will be March 5-8 and is a multifamily-only auction. Barclays estimates a total $720 million in CMBS exposure, the largest of which is the $63 million Emperian Chesapeakein COMM 2006-C8.
“As has been the case with previous auctions, assets out for bid are tilted towards worse performing geographies, with Nevada, Tennessee, Georgia, Arizona and Texas making up half of the CMBS loans in the auctions,” said in an email from Barclays on Thursday.
Among property types, Barclays estimates that apartment buildings make up 69% of CMBS assets, driven primarily by the final auction; restricted to multi-family only.
“Unlike previous auctions, however, a majority (nearly 80% of CMBS properties listed are in REO, while the rest are essentially note-sales on non-performing loans,” said the statement. “LNR remains the dominant special servicer, making up 80% of the collateral.”
Barclays said the majority of the liquidations that will occur as a result of these auctions should occur in the “2005-2007 vintage deals, with the 2006 vintage alone having $600 million of exposure.” They estimate that the GECMC 2006-C1, COMM 2006-C8 and BACM 2006-4 will be the most effected, as each of them has more than $60 million of loans participating in the auction.
Though not all properties out for bid will transact, Barclays said it expects liquidation volumes to remain higher in the coming months as a result — especially in the 2006 vintage.
“Despite a higher share of multifamily properties, which have performed better in recent times, the distressed nature of the assets and geographies in question should keep loss severities elevated,” Barclays said.
Barclays said that could mean “several of the thinner bottom tranches in these deals may be written down” soon, and may in some cases spark a shift in control rights, “typically helped by the most subordinate outstanding tranche,” which would influence any potential transfers in special servicing.
“Faster liquidation activity would also negatively affect IO bonds and the associated unscheduled principal payments could shorten premium-priced front-pay tranches,” Barclays said.