January 29, 2018: California interest/cap rates; loan recap investment opportunities

This week we compare the median interest and cap rates for California properties for 2018 year-to-date and 2017 using data from CMBS presale reports:

2018 year-to-date has a relatively small sample size from only two securitizations but we can see that the median cap rate for all properties of 5.36% is down 25 basis points from the 2017 median cap rate of 5.61%. As a spread over the median interest rate, the 2018 median cap rate is 92 basis points greater compared to the 2017 median cap rate being 110 basis points greater. It may be premature to draw conclusions at this point given the small sample size.

We have partnered with a former director of one of the leading special servicers to offer advisory services on loans in special servicing. This has created opportunities to invest in these properties as a principal. The investment profile is as follows:

January 7, 2018: CMBS and REIT performance update

This month we use public data to take the temperature of the commercial real estate market. To start, we look at transfers to special servicing and CMBS issuance. We feel these are the best real time metrics for commercial real estate activity because they are published on a monthly basis.

US CMBS issuance for 2017 was $95.7 billion, a 26% increase from the 2016 amount of $76.0 billion. Most of the activity was refinancing the wave of 10 year maturities from the 2006-2007 vintage. Issuance for 2018 will probably decline significantly as Morningstar forecasts only $12.8 billion of maturing CMBS loans in 2018.

Looking at the credit quality of CMBS loans, the average monthly transfer to special servicing for the last three months was $797 million, a 35% decline from the 2016 average of $1.2 billion. Special servicers managed to resolve more loans than they received in 2017, resulting in a 14.0% decline in the special servicing balance from $28.5 billion at year end 2016 to $24.5 billion at November 2017.

Another metric we like is the spread of REIT dividend yields over the 10 Year Treasury. This is a daily reading of investor enthusiasm for the real estate class. This month we looked at REIT stocks with a market cap over $100 million and compared their current dividend yields with the 10 Year Treasury yield on January 5, 2018, which was 2.47%.

The REIT industry underperformed the S&P 500 over the last 12 weeks, showing a decline of 1.50% compared to the S&P 500’s increase of 7.44%. For another point of comparison, Bitcoin increased 200.12% over the same 12 week period.

For yield investors, the market cap weighted average REIT dividend yield was a 1.80% spread over the 10 year Treasury. Mortgage REIT stocks trade at a much higher spread of 7.28% over the 10 year Treasury.

The best performing REIT stock over the last 12 weeks was Innovative Industrial Properties, Inc. (IIPR), which increased 54.1%. The worst performing REIT stock was New York REIT, Inc. (NYRT), which declined 48.7%.