By: Joy Wiltermuth
NEW YORK: Some investors are ditching commercial property bonds with exposure to Texas amid concerns about losses in the aftermath of Hurricane Harvey.
Investors in bonds backed by loans on commercial property in the state – including hotels, retail, apartment and office blocks – are looking to cut exposure to the region that has also become vulnerable due to weaker oil prices.
One seller put a US$63m list of mezzanine CMBS bonds up for sale on Wednesday, according to bond tracking platform Empirasign. Those securities are backed exclusively by Freddie Mac apartment loans.
Exposure to Texas apartments ran high in most of the bonds that were put up for bid. One had as much as 14.15% of its collateral in the state, according to presale reports viewed by IFR.
The full extent of devastation caused by the storm is still unclear but the governor of Texas has estimated the damage could be as much as US$180bn.
“Even before Harvey hit, people were worried about Houston,” one CMBS analyst told IFR.
“Now it’s definitely at the forefront of investors’ minds.”
Multifamily and retail properties are among the chief concerns. Worries about both have been on the rise ever since oil prices took a tumble in 2014, and the potential impact that might have on employment, rents and occupancy rates.
But those concerns appear to have turned up a notch.
WIDER SPREADS
Four of the five bonds on the bid list traded, but levels were significantly wide of where they were before Harvey made landfall in late August.
The biggest parcel up for bid was a US$17.1m block of Triple B minus notes from a US$1.3bn bond deal, called FREMF 2016-K58, which Freddie sold to investors just last October.
The notes saw talk from four dealers on Wednesday that averaged 240bp over Swaps. That compared to just 205bp on average from an August 18 list, according to Empirasign.
Included in the bond deal is a US$9.6m mortgage on the Trailwood Village apartments in Kingwood, Texas, a community in northeast Houston that was badly flooded after the hurricane.
The property was one of more than 1,800 loans totaling US$26.1bn that Kroll Bond Rating Agency recently reported as in state-declared disaster areas in Texas and Louisiana.
Calls to the property were not returned. But a notice on the property’s website said it incurred minimal damage from Hurricane Harvey.
DOUBLE BLOW
Spreads on mezzanine slices of Freddie Mac CMBS deals – which often have high exposure to Texas apartments – have widened about 10bp-20bp since Harvey hit and worries about default risks rose, CMBS investors and analysts told IFR.
As another big storm – Hurricane Irma – ravaged parts of the Caribbean on Wednesday before potentially making its way to Florida, investors have become even more nervous about their exposure to commercial property.
“What people will often do in these situations is see where the bid is, and if close to where it was, they’ll just sell the bond,” said Zach Cooper, CIO and senior portfolio manager at Semper Capital.
“They can always buy it back later.”
But some analysts cautioned that it was too early to know the full extent of potential losses stemming from damaged properties – at least in case of Harvey.
“That was just a knee-jerk reaction,” a second CMBS analyst said of the recent widening in Freddie CMBS bonds.
“The reality is that it’s hard unless you know something specific to a property, like it’s been shellacked and has no insurance.”
JP Morgan CMBS analysts said in a note published Wednesday that uncertainties over property owners’ insurance coverage was just one issue that made it hard to assess risks faced by investors.
“Especially for those properties outside flood hazard zones, the purchase of flood coverage insurance is both optional and, even if negotiated, typically capped at a sub-level to the full policy amount,” they wrote.
“The lack of access to pertinent insurance documents in this case does currently limit our room for maneuver.”
EYE ON IRMA
While Texas is still in recovery mode, properties in the Caribbean and Florida are now on the radar. Puerto Rico, the Bahamas and the Virgin Islands are home to about 37 CMBS loans that total US$2.01bn, according to another recent report from Kroll sent to clients.
By far the largest exposure is a US$1bn mortgage on the Atlantis Resort in the Bahamas. The loan was securitized as a single-borrower deal in 2014, called BHMS 201-ALTS.
“It’s not like people expect immediate losses,” Paul Norris, head of structured finance at global investment firm Conning, told IFR.
“People are just treading very cautiously because the market is trying to figure out how to handicap this.” (Editing by Natalie Harrison and Shankar Ramakrishnan)
Source: Reuters