KBRA Releases Research – CMBS ARAs: Nearing an Inflection Point?

KBRA releases a report on the current state of appraisal reduction amounts (ARA) in CMBS 2.0 conduits. With the economy continuing to contract, property fundamentals weakening, and prices under pressure, KBRA believes that CMBS ARAs have reached an inflection point. In the coming year, we expect to see more ARAs get triggered due to higher loan defaults as well as increased ARA amounts as property valuations decline. In addition, we also analyze their reliability as an indicator of future potential CMBS loan losses, as well as how deals with high ARA exposures can result in a shift in the controlling class.

Key takeaways from the review are as follows:

• Eighty ARAs totaling $635.2 million have been effectuated year-to-date (YTD) through November 2022.
• When looking at the differences between ARAs and realized losses as a percentage of outstanding loan balances, 46% of the loans were within a plus or minus 10% range and 70% were within 20%. Less than 3% (8 loans) varied by a plus or minus 50% range.
• There are currently $3.6 billion (322 loans) of ARAs outstanding as of November 2022.
• In total, 64.7% of the outstanding ARAs by dollar volume are collateralized by retail, with malls accounting for 68.7% of retail ARAs.
• Of the 90 lodging ARAs, two chains accounted for about 30% (26 loans) of the ARAs. These included both Hilton (13) and Holiday Inn (13).

This publication also provides additional details on our analysis of CMBS 2.0 conduit ARAs by loan size, property type, state and highlights transactions with higher ARA exposures.

Click here to view the report.

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About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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