Row 6384

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This page contains data entry 6384 from the Axioma AXP content repository. The structured data below represents the complete record for this entry.

Raw Record

{
  "text": "As most of you all are aware, there is currently a worsening crisis in Commercial Real Estate (CRE). With higher interest rates and work-from-home, there are some serious headwinds facing companies in the sector. That being said, if you're anything like me, you've wasted hours trying to figure out how exposed your portfolio is to this but have found researching the topic endlessly annoying. I want to aggregate and publish a key discovery I have been deep-diving. If even one person finds this useful or has input, that would be awesome. This is not investment advice, just wanted to share and get feedback.\n\n**What is the basic overview?**\n\n1. Commercial Real Estate Collateralized Loan Obligations (CLOs) are in extreme stress and getting worse. A CLO is a securitized collection of usually B-BBB commercial loans that are combined and securitized, much like a CDO in 2008. These loans are combined to reduce risk and usually give double-digit returns dependent on the risk of the underlying loan.\n\n2. Unfortunately, the delinquency rates on these loans are up 500% since August 2023 (10.2% DQ vs 1.7%). These delinquencies are charged-off and counted as a loss if the amount owed is not repaid. I will walk you through the math in a minute. Needless to say, this should be ringing alarm bells.\n\n**What Could Happen?**\n\n1. To understand the extent of the losses, we have to understand how a delinquency becomes a loss. A delinquency is usually counted as such when a borrower has had a payment due, yet chosen not to repay the loan for 30 days or more. Then, the lender tries to collect that debt and receive the payment for another 90-120 days before it is a realized loss on the company's financial statements.\n\n2. This means that the loans that were delinquent in August only were considered a loss 120 days later (December) at the earliest since some institutions try to wait to avoid taking the loss on their books. In short, these institutions are going to have to start taking a roughly 500% increase in losses (assuming 1:1 ratio).\n\n3. Now it's time for some math. Looking on the graph on this site [https://cred-iq.com/blog/2024/02/23/cre-clo-distress-rates-surge-over-440-in-12-months/](https://cred-iq.com/blog/2024/02/23/cre-clo-distress-rates-surge-over-440-in-12-months/), we can find that a benign period of delinquencies for CRE CLOs hovered around 1%, or \\~$800M per year given ($80 B total market size). A 10-fold increase brings this total to \\~$8 billion in distressed loans (assuming no further worsening). This would likely result in billions of dollars in losses on financial instruments that usually lose around a few hundred million a yet at most, likely bringing massive losses for REITs.\n\n4. The rapid deterioration of these loans means that companies will have to talk large losses on their books all at once. At least if the deterioration was gradual, these companies could have seen this coming.\n\n**Which companies are affected?**\n\n1. There are more protections around the lending practices of large banking institutions like J.P Morgan, so they do not deal with originating these instrument Instead, they tend to be REITs.\n\n2. Short-interest is rising on Arbor Realty Trust, a major player in this space and short float is \\~40% as of the time I am writing this. So hedge funds are well-aware of this.\n\n3. Personally, I think Starwood Property Trust has more risk, so that is where I opened my short position. Do your own research before taking any kind of financial investment. DO NOT TRUST ME. I lose money on hedges all of the time.\n\n**How could this become a broader crisis?**\n\n1. The CRE market is valued at $2 trillion, much larger than the $80 billion in CRE CLOs. If this risk and deterioration in the CRE CLO spreads throughout the sector, we can see much larger-dollar losses for the likes of Blackstone and Brookfield who own lower-risk assets.\n\n2. Direct and Indirect counterparty risk to these REITs. \n\n3. It has been brought to my attention that this could be an intentional decision to force renegotiation of more favorable leasing terms. This would likely mean more of these delinquencies become charge-offs and lower fees for the REITs if they choose to renegotiate. Absolute worst case scenario if you are invested in one of these stocks.\n\nSourcing: \n\n1. [https://cred-iq.com/blog/2024/04/12/cred-iqs-cre-clo-distress-rate-surpasses-10-for-the-first-time/](https://cred-iq.com/blog/2024/04/12/cred-iqs-cre-clo-distress-rate-surpasses-10-for-the-first-time/)\n\n2. [https://cred-iq.com/blog/2024/03/01/cred-iqs-cre-clo-top-issuer-rankings/#:\\~:text=Leading%20the%20rankings%20by%20delinquent,12.6%25%20of%20their%20portfolio%20delinquent](https://cred-iq.com/blog/2024/03/01/cred-iqs-cre-clo-top-issuer-rankings/#:~:text=Leading%20the%20rankings%20by%20delinquent,12.6%25%20of%20their%20portfolio%20delinquent)\n\nHuge thank you to Michael Haas, who has done some amazing research. I would highly recommend reading all of his research.\n\nIf you read this far and found it interesting, please let me know what you think!",
  "label": "r/investing",
  "dataType": "post",
  "communityName": "r/investing",
  "datetime": "2024-05-09",
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}

Entry Information

• Entry ID: 6384
• Repository: Axioma AXP
• Dataset: arrmlet/reddit_dataset_36
• Total Entries: 100,000