A commercial mortgage-backed securities market report published last week by investment bank Academy Securities highlights an unusual phenomenon: a notable increase in the appraisal value – and performance – of a portfolio of malls that was transferred into special servicing in 2019.
The mall portfolio, which is owned by investment firm Starwood Properties, was securitized in SRPT 2014-STAR, a $681.6 million stand-alone commercial mortgage-backed securities deal, and was transferred into special servicing in November 2019. It is now going through a significant workout process, said Stav Gaon, head of securitized products research at New York-based Academy.
The portfolio recorded an appraisal value of $279.3 million this month, a 35 percent increase from the previous valuation of $207 million in December 2021. Gaon noted the new valuation is still significantly depressed compared to the at-issuance level of $1.1 billion.
“The higher appraisal spotlights are still rare, but [there’s] potentially increasing instances of rising valuations on troubled loans. The interesting angle here is that recovering valuations buck the general malaise out there across commercial real estate sectors,” Gaon said.
Academy is increasingly encountering situations in which cashflows on distressed assets have risen sharply from levels that were close to zero a year or two ago. Gaon cited several additional portfolios in which this is being seen, including the $204 million Shidler/NSSP Hospitality Portfolio, securitized in HMH 2017-NSS, and the $180 million Hilton Minneapolis loan, securitized in JPMCC 2018-MINN.
“We will not be surprised to see more upward appraisal revisions, even drastic ones, popping up in the coming months. This may seem counter-intuitive amid the much-publicized stress across commercial real estate markets. But some troubled properties, especially retail and hotel, have seen notable performance improvements compared to the height of the pandemic,” Gaon added.
While Gaon is expecting to see more situations like this going forward, he expects them to be limited to the a handful of sectors.
“It could be very significant for the impacted loans and bonds,” Gaon added, noting the valuations continue to represent distressed situations. “But it is also important to highlight such nuanced angles in the market that sometimes get lost in the broader conversation.”