A roadmap for strategically defaulting has been laid out with Columbia Property Trust’s February default on $1.7 billion of debt tied to seven higher-profile office assets.
A bet by Pacific Investment Management Company on the office market’s return to pre-pandemic form has been stymied by a slower than expected return to work, with a subsequent default that could serve to be a blueprint for resetting the basis for loans in the sector.
In 2021, PIMCO acquired CPT for $3.9 billion as part of the Newport Beach, California-based manager’s strategy to bulk its office exposure in anticipation of a recovery for the sector.
In December 2021, PIMCO opted to take out an estimated $1.7 billion floating-rate debt package backed by seven of Columbia’s office assets, essentially banking on a perpetually low interest rate environment throughout the duration of the loan. The whole loan is comprised of 21 promissory notes, KBRA data shows, and is representative of two commercial mortgage-backed securities structures, CXP Trust 2022-CXP1 and Series 2022-CXP1.
Fast forward to 2023, when a rising interest rate environment and an exponentially higher rate cap replacement cost are affecting all commercial properties. The note in CXP Trust 2022-CXP1 transferred into special servicing on January 24 and was reported as more than 30 days delinquent as of the February 2023 remittance – ultimately constituting a default.
Manus Clancy, senior managing director at Trepp, says the default could be a tactic to get some relief on debt service, particularly because Twitter – a major tenant in 245 and 249 West 17th Street in New York – is in flux. Something bigger, however, could be a decision to part ways with the troubled assets and letting special servicers go through the foreclosure process. KBRA data on investor reporting for CXP Trust 2022-CXP1 shows the loan transferred into special servicing on January 24 and is currently cash managed. The loan was noted as being more than 30 days delinquent as of the February 2023 remittance.
Mike Brotschol, managing director and co-head of KBRA Credit Profile (KCP), says it is hard for the surveillance platform to definitively mark the event as a strategic default. “But we think that’s a very realistic scenario,” he notes. “It affords the sponsor an opportunity to negotiate a restructuring and explore rate cap options.”
Maurice Etienne, an associate director with KCP, says the floating-rate mortgage debt on the portfolio was priced at one-month Term SOFR plus 2.702 percent. The SOFR rate, however, has risen substantially over the past year and as of the time of default was at 4.56 percent. The current rate cap agreement, however, includes a strike price of 2.89 percent, which has provided the borrower protection against increased SOFR rates. “With the maturity coming up in December 2023, it might make sense that they’re trying to work something out in anticipation of having to extend that rate cap,” Etienne says.
A CPT spokesperson says: “We, like most office owners, are addressing the unique and unprecedented challenges currently facing our asset class and customer base. We have engaged with our lenders on a restructuring of our loan on seven properties within our larger national portfolio. We look forward to a collaborative process yielding thoughtful solutions that reflect current market conditions and best serve the interests of all stakeholders.”
CPT did not respond to comment on additional questions about the $1.7 billion default.