Maguire Properties’, a major office REIT focused in Southern California, plan to walk away from seven properties with mortgage debt, including six in CMBS deals, highlights a growing trend in the sector, Barclays Capital analysts said.
“Given the significant drop in property values, we expect many recent vintage borrowers to become ‘more efficient’ at exercising their default option and selectively ‘walking away’ from their non-recourse, CMBS debt,” analysts said. “The broader credit and equity markets do not seem to be penalizing sponsors for selectively walking away from nonrecourse CMBS debt; in some cases, we see the opposite trend emerging in this period of stress.”
According to Maguire's 8-K filing released last Monday, six of the properties are in CMBS pools, and total $787 million notional by A-note balance. The defaults were concentrated in office properties in the Orange County and Los Angeles metro regions.
Major hotel REIT Sunstone Hotel Investors set an early precedent to the trend, having already walked away from two properties: the W Hotel in San Diego and the Renaissance Westchester.
Sunstone said that, in cases where a hotel's value has declined below the principal amount of its mortgage, a giveback of the hotel to pay the debt will eliminate the negative equity. Givebacks are only considered in cases where cash flow falls short of debt service, value falls short of principal and the lender will not agree to loan modification.
“We believe the intrinsic value of the W San Diego is now meaningfully below the principal amount of its debt,” said Sunstone’s CFO, Ken Cruse in a prepared statement. “While the company maintains more than adequate liquidity to support or repay this mortgage, we believe a conveyance of this hotel in settlement of the debt would be in the best interest of our stockholders.”
In terms of market reaction, Sunstone equity is up 1.5% since June 5, the prior closing day before the decision to walk away from the W Hotel was announced, versus a 4.7% rise in the Bloomberg REIT hotel index.
Barclays analysts said that Maguire’s decision was not unexpected given the fact that the REIT is highly leveraged and has been struggling for over a year. However, it does add to the expectation of a significant rise in the pace of new CMBS delinquencies over the remainder of 2009 and into 2010.
“We remain concerned that other sponsors will follow the precedent set by Sunstone and Maguire in this period of stress, and selectively ‘walk away’ from underperforming properties,” analysts said. “Our intent is not to take aim at these sponsors; in fact, their actions are entirely rational from a purely economic perspective. Instead, their actions are more a function of aggressively underwritten, non-recourse debt.”
