Is 1740 Broadway an Anomaly, or an Indication of What is Ahead for SBLL?
This week, the CRED iQ research team conducted a thorough data analysis for the Single Borrower, Large Loan (“SBLL”) segment to better understand the asset, its exposure to market risks, and loan performance within this category that is under extreme volatility.
Our readers were surprised by last week’s reporting that AAA bond investors in 1740 Broadway, a loan backed by a 621,000-SF office building in New York City received less than three quarters of their original investment back earlier this month. This marks the first such loss of the post-crisis era (according to Barclays). Gross sales proceeds from the distressed sale of 1740 Broadway amounted to $179.5 million ($289/SF), which ended up being slightly above the most recent as-is appraised value of $175 million ($282/SF) and significantly below its updated stabilized appraised value $465 million ($749/SF). The asset originally appraised for $605 million ($1,002/SF) in December 2014, when the property was 98.3% occupied.
Special servicing workout fees, servicer advances, and other expenses totaled $62.3 million, which left only $117.2 million of net proceeds available to the Class-A investors, which had an unpaid principal balance of $157.5 million. This resulted in a $40.3 million loss (25.6% loss severity) to the A tranche and wiped out all subordinate tranches. CRED iQ and Commercial Observer first broke the news in March 2022 of the upcoming transfer of this loan to the special servicer as Blackstone signaled it was no longer interested in the property and would be handing the keys back. Despite common market knowledge of the degradation of value, 7% occupancy, and the unwillingness of Blackstone to invest in the stabilization of the building, the rating agencies maintained lofty ratings as recently as November 2023, where Morningstar DBRS / DBRS Morningstar had a high “A” rating and S&P had a “BB+” rating for the saftest Class A bonds, which were originally rated AAA.
Flawed Ratings by Morningstar/DBRS and S&P?
Are last week’s revelations an anomaly, or an indication of what is ahead for the AAA SBLL sector? Are these two rating agencies hesitant to downgrade their AAA rated classes since they have weak market share compared to Fitch & Moody’s? Are they still texting each other about key ratings decisions trying to stay off the record? Will the SEC fine them again? Only time will tell. Our analysis seeks to answer that fundamental question. We examined the overall health of current SBLL deals. Our team then looked at some of the issues that impacted 1740 Broadway – such as office sector exposure. CRED iQ provides real-time data and independent research with valuation and refinance models.
Office Exposure
Looking more deeply into the segment, we explored the office exposure within the SBLL category. Across the entire SBLL deal universe, 152 deals have office exposure. A total of 629 office buildings are currently financed via SBLL deal structures with a total allocated loan balance of $67.5 billion.
Current State of SBLL Loans
Across the SBLL landscape, our analysis found that ~15% of all loans are reporting a DSCR below 1.10. 13.5% of SBLL loans operate at sub-breakeven DSCR levels. A few examples from CRED iQ data uncovered the Willis Tower in Chicago, that recently reported a 0.28 DSCR with 90.7% occupancy and also 5 Bryant Park in NYC, that reported a 0.73 DSCR with 81.3% occupancy. Stay tuned for an analysis of office buildings in distress that have not received updated appraisals.
About CRED iQ
CRED iQ is a commercial real estate data, analytics, and valuation platform providing actionable intelligence to CRE and capital markets investors. Subscribers use the platform to identify valuable leads for leasing, lending, refinancing, distressed debt, and acquisition opportunities.
The platform also offers a highly efficient valuation engine which can be leveraged across all property types and geographies. Our data platform is powered by over $2.0 trillion in transactions and data covering CRE, CMBS, CRE CLO, Single Asset Single Borrower (SASB), and all of GSE / Agency.
