Net Operating Incomes Rebound to Pre-Recession Levels for CMBS 

Randolph J. Taylor MBA, CCIM, Broker
Coldwell Banker Commercial Naperville, IL

NOI Growth Was Strong in 2012, Rising 4.5% on Average

Surprisingly, net operating incomes on almost all yearly vintages of CMBS loans are now near or above underwritten financial levels, according to recent CMBS research.

With the April CMBS bondholder remittance reports came the first big wave of full-year, year-end 2012 property financial data, bringing the percentage of loans reporting to around 30% of the fixed-rate conduit universe, according to Marielle Jan de Beur, managing director and head of Structured Products Research CMBS and Real Estate Research for Wells Fargo Securities.

Based on the loans that have reported year-end 2012 financials, NOI growth was strong in 2012 rising 4.5% on average. For the 2010 and 2011 vintages about 30% of the loans reporting year-end 2012 financials are showing lower NOI than was underwritten. The 2012 vintage is showing a higher percentage, with around 40% of the loans having lower NOI compared to the underwritten amount.

While they plan to revisit the topic again in a few months once the majority of the loans have reported, based on the early look at NOI (net operating income) trends among loans that have reported year-end 2012 financials, Jan de Beur said NOI growth was strong in 2012, rising 4.5% on average.

“While preliminary, the 2012 NOI growth rate is noticeably higher than the 3% increase in NOI experienced in 2011 on average,” she reported.

Of the loans that have reported, 63% had positive NOI growth in 2012, with the bulk of the loans (25.7%) showing growth in the 0 to 5% range. Jan de Beur also noted a significant percentage of loans (14.6%) had NOI growth of more than 15% in 2012, while a smaller percentage of loans, around 7%, had NOI declining more than 15% in 2012, compared to previous years.

Hotel and multifamily-backed loans, showed significant improvement, with NOI growing at a rate of 11.5% and 6.6% on average, respectively.

To this point, retail-backed loans and office-backed loans have shown NOI growth of around 3% on average for 2012. Retail-backed loans had an NOI growth rate of 1.3% in 2011, while the growth rate for office-backed loans was only 0.04% on average in 2011.

Among the 2004 to 2007 vintages, the 2005 vintage loans have shown the largest increase in NOI for 2012 at 5.3% on average. The rest of the vintages are all showing NOI growth rates of 3.5%- 4.5%. All of the vintages are currently reporting higher growth rates compared to 2011, Jan de Beur reported.

Nearing Peak Year NOIs

CoStar Group analyzed data reported by CMBS trustees on a random sample of more than 300 property loans financed in 2007 and that have reported full-year 2012 net operating incomes. In that group, full-year NOIs have almost returned to their 2007 levels.

For 304 loans examined, 2012 NOIs totaled $601.8 million just $21 million shy of their total NOIs at contribution in 2007. By comparison, NOIs were shy by more than twice that amount in 2011.

The number of the loans examined reported decreased or increased NOIs were statistically even; about half went up; the other half went down. Only one of the 304 loans showed negative net operating results.

Of the total count, 109 were loans on retail properties. NOIs were up a total of $18.35 million in 2012 vs. 2007. Fifty-six of the loans showed increases; 52 showed decreases; one was identical.

One property accounted for most of the bump. The best performing property in our group was the 1.88 million-square-foot Sawgrass Mills shopping center in Sunrise, FL, that showed 2012 NOI of $74.8 million, an increase of $15.33 million from its 2007 total of $59.47 million.

Of the total count, 78 were loans backed by multifamily properties. NOIs were down $15.94 million in 2012 vs. 2007. Thirty-nine of the loans showed increases; 39 also showed decreases.

One property accounted for most of the decrease. The worst reported result in our group was for the 706-unit Cypress Creek apartments in Hyattsville, MD, that showed 2012 NOI of $5.67 million, a decrease of $15.47 million from its 2007 total of $21.15 million.

Of the total count, 48 were loans on office properties. NOIs were down a total of $2.29 million in 2012 vs. 2007. Twenty-six of the loans showed decreases; 22 showed increases.

Of the total count, 33 were loans on industrial properties. NOIs were up a total of $180,500 in 2012 vs. 2007. Eighteen of the loans showed increases; 15 showed decreases.

Are the 2010-2012 Vintage Loans Hitting the Mark?

To date, about 35% of the loans from the 2010-2012 vintages have reported year-end 2012 financials, according to Wells Fargo Securities.

Wells Fargo compared the year-end 2012 NOI figures with the underwritten levels to determine if this more recent batch of loans is hitting the mark set at origination.

“For the 2010 and 2011 vintages about 30% of the loans reporting year-end 2012 financials are showing lower NOI than was underwritten. The 2012 vintage is showing an even higher percentage, with about 40% of the loans having lower NOI compared to the underwritten amount,” Jan de Beur said.

Hotel-backed loans have had strong results, with almost 80% of the loans reporting year-end 2012 NOI above the underwritten NOI. In addition, more than 30% of the hotel-backed loans have shown greater than 20% improvement from the underwritten levels, she reported.

On the other hand, only 53% of office-backed loans have shown year-end 2012 financials that were above the underwritten figures, she said.

CoStar, Mark Heschmeyer April 24, 2013
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