Even as the count of delinquent commercial mortgages has continued to skyrocket over the past couple years, frustrated would-be buyers of small-balance non-performing loans (NPLs) have long lamented the paucity of attractive assets priced to move.
Many banks have remained reluctant to mark assets to prevailing market values and take what they can get. And special servicers working with securitized mortgage pools have generally preferred to restructure and/or extend delinquent loans rather than auction them off.
Meanwhile, the assets being offered have tended to require considerable hands-on effort and patient capital to resolve profitably: i.e., hard-to-value land loans, acquisition and development loans, debt on badly busted condo conversions and the like.
And then there’s that pretty cavernous gap between what holders of distressed debt think the assets are worth and what investors have actually been willing to pay.
"It hasn’t exactly been an attractive environment so far" for the many would-be opportunists seeking to control solid assets at bargain pricing, observes Chicago fund manager Rick Williamson, principal with WLJ Partners.
But over the past few months, it seems pretty clear that greater volume and higher quality product is making its way to market - finally. And a lot of small-balance NPLs are included among the new offerings, which are being marketed through various platforms providing smallish investors with better opportunities to compete with well-heeled expert ventures.
Which begs the question: will buyers and sellers now come to terms on price more frequently?
As note sale advisors have indeed managed to close a higher percentage of deals offered amid a hungry market, more sellers are willing to list assets for sale - including loans secured by more attractive collateral, says Tom McCarthy, managing director with active intermediary Carlton Advisory Services.
With CMBS special servicers in particular becoming more active offering assets, investors are seeing an increasing selection of loans secured by physically sound, but financially struggling, apartment buildings, shopping centers and various other commercial properties.
"The close rate will be higher with ‘vertical’ assets," relates McCarthy, who's based in Palm Beach Gardens, Fla. Pricing even seems to be nudging upwards at least slightly as the ranks of active bidders continue to grow – not to mention generally improving market fundamentals in some metro areas.
Predictably, pricing remains all over the board, with debt selling anywhere from 20 to 95 cents on the principal dollar depending on wide-ranging distress-related factors, McCarthy adds. Distressed loans sold by special servicers have traded at an average of roughly 55 percent of balance over the past year, according to the Realpoint data and ratings service.
Of course, investors are focusing more on yield, and savvy bidders who've developed sophisticated asset management and exit strategies tend to target annual returns in the low- to mid-teens for sub-performing loans up to perhaps 25 percent or so for non-performers, McCarthy calculates.
Williamson notes that special servicers get paid primarily to improve collections from under-performing assets, rather than auction them off. And, indeed, three of four conduit loans entering special servicing ultimately end up restructured at little or no loss to bondholders, according to the Fitch ratings service.
Nevertheless as the number of conduit loans entering special servicing continues upward, it appears some special servicers are motivated to place more sub-performing loans on the market - including some hefty pools of small-balance mortgages.
CWCapital has been something of a pioneer testing the note-sales waters. But reports now have the CMBS market's largest special servicer, financially struggling LNR Partners, about to offer a $1 billion portfolio through Eastdil Secured. The average balance is said to be about $4 million, with all the collateral generating some amount of rental income.
One of Carlton's latest assignments covers 66 NPLs and foreclosed properties to be sold on behalf of special servicers. The combined principal balance is $307 million, with some 70 percent of the underlying assets either retail or multifamily.
And it helps that loan sale advisors have developed formats that more effectively help investors acquire highly targeted small-balance loan pools or even individual assets.
For instance in addition to its more traditional sealed-bid auctions, Carlton Group's Carlton Exchange note trading platform is also operating what it describes as a multiple listing service allowing investors to bid "real time" on any offered asset.
"The better you can match a bidder with an attractive asset, the more able you are to bridge the bid-ask gap," McCarthy stresses.
Similarly, Jones Lang LaSalle's joint venture with auctioneer Real Estate Disposition Corp. allows investors to continue bidding on a given asset online over a designated period (48 hours is typical). The JV has already registered more than 1 million investors interested in participating in its online auctions.
But traditional advisory platforms remain busy as well today. In disposing of 95 particularly small apartment loans (average balance below $1 million), Holliday Fenoglio Fowler tapped clients of its vast network of offices around the country. Eighteen separate buyers ended up acquiring all the assets through 26 transactions.
But with assets so accessible and competition for same so heavy, Williamson offers a word of caution to would-be over-bidders. "We’re already seeing some bad deals being made."