Have the small bankers-community and regional bankers–been lagging in their recognition of bad commercial real estate loans? Their modified loans are substantially fewer than the big banks–with about $500 billion in loans coming due this year are we about to see some major write-offs?
This article provides some food for thought–and that is all it really provides. Personally I exited most bankers earlier in the year–waiting for more ‘shoes to drop’ (although they may well never drop). Never hurts to ponder the ‘what ifs’.
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I was sidetracked by Tex’s public service announcement.
Now for a comment on Tim’s post. It does bring up the question about smaller regional banks. You have to decide what your level of risk aversion is. If you have an aversion for a whole sector of the market you could be missing out. For example I am wary of MREIT’s. Partly I have so much on my plate I can’t keep up as things can change quickly in this sector and I don’t understand the leverage they use. Of course leverage also applies to other sectors like BDC’s, CEF’s, and ETF’s and others.
I was holding RWTN and recently sold. Then the same week or after I saw on that other site this post.
J.P. Morgan upgraded Synchrony Financial (NYSE:SYF) to Overweight from Neutral due to upside from higher annual percentage rate and downgraded Redwood Trust (NYSE:RWT) to Neutral from Overweight as higher long-term rates put pressure on its residential loan portfolio.
My concern is the outlook is still uncertain on where long term rates are headed.
As for the banking sector, I still hold a 1/2 dozen preferred and BB but I sold off about 2/3rd of my CUBI PF as I felt I was overweight and it could do damage to the portfolio if it blew up. My concern is their involvement in crypto and if that bubble blows up. I am still holding ASBA I bought it over a year ago when I read they were going to bit the bullet and take a loss on selling a large portion of low yield loans. They still have some commercial paper but they returned 750 million to the feds they borrowed. I had one small regional I sold out of, but I may re-enter its preferred but still watching.
On a side note, We were out cider tasting and talking to the host. He had some interesting information. He had recently lost his mother who had lived in AZ. and he co-owns her house with his step brother. The property is rented for about $3,400.00 a month. I guess he has been watching Zillow as he mentioned the property has lost about 6% in value. His dad also recently died and he is inheriting a 6 acre property with a 1870’s cabin on it about 30 miles from the nearest large sized town. He said that property has lost about 30% in value. His plans are to trade the property for an adjacent 30 acre property and build a vacation home. He expects mortgages to come down to the 4 to 5% range with the new administration in charge. He may be right, I don’t know but if rates fall that low I think it will be a short term window.
If you think mortgages will be 5%, then you must also believe the 10-year will be 2-3%. The economy would have to slow significantly with inflation under 1% to bring the 10-year down that much.
— Was reading through some old banking reports. In February 2024 defaults on office mortgage CMBS were ~7% , By November, office CMBS defaults had risen to ~10.2%. The fastest rise ever.
— It is said that most of the problems are with so-called Class B offices. (Observation: I have never been in a grocery where all the olive oil bottles were not labelled EVOO (Extra Virgin Olive Oil), cold pressed. I have never seen a real estate company whose office buildings were not all Class A. )
— While CRE exposure for regional banks has tripled from 2001 to 4Q23, office CMBS exposure (vs direct CRE loans) is not much of a bank problem. Office CMBS risk has been dispersed into REITs, CLOs, PE, insurers and foreign banks. Office CMBS exposure at banks is minimal. Most bank CMBS exposure (85%) is in multi-family. Default rates there are ~4.5%.
— By contrast to offices, lodging and retail, defaults on industrial-type CMBS (like warehouses and fulfillment centers) are only 0.3%. Maybe long industrial REITs is the play here.
— Mall prices in 2/24 were around 80% of their 2020 levels. Retail CMBS defaults were around 6.9% in November. Mall retail is still weak. This is no surprise. Bloomberg Wall Street Week had a report on recycled malls today. Spoiler: one mall’s assessed value has dropped 90% and the new owner seems happy with it.
https://www.bloomberg.com/news/videos/2024-12-13/the-future-of-shopping-centers-wall-street-week-video
–IMHO, 2025 is an open question for publicly traded banks. Lower rates are a plus for banks on the deposit side, although a slower pace is bad for re-fis of loans by cash-strapped landlords. Deregulation is likely a plus on the cost side and a boon for M&A (Bloomberg at ~24:00), although the recent noise about shrinking or eliminating bank regulators like the FDIC (Reuters, Dec 12) may make some CD holders and corporate payroll accounts nervous. It would not at all surprise me to see another run off of accounts from smaller banks to Chase. Sentiment – Long regional banks but more likely to reduce than add.
Sources: FDIC 2024 Risk report, Wolf Street. JMO. DYODD
Thanks Bear, I look to you as a good source for information on the REIT sector as you follow it. You also follow the MREIT sector so these go hand in hand with the banking sector.
Thank you – you are too kind. I have a general interest in real estate but don’t follow the mortgage REITs as such. If Howard Marks, the legendary value investor, is right that consistent performance is an investing virtue, I am a legendary mREIT investor (if I may modestly say so myself.) I have consistently managed to lose money in mREITs in every financial crisis stretching back to the 1970’s. (GAMI – 48 consecutive months of dividend increases before imploding in the 1970’s) I didn’t learn much from my experiences (other than thinking about shorting myself) except the mREITs usually get overleveraged in good times and are never properly hedged no matter what they tell you.
Getting back to banking, here is a link to an overview of the banking industry. It has some commentary on Chase – one Chase number is larger than the smallest 2500 banks combined. Chase can afford to pay low rates and lose consumer deposits. It more than makes up for lost consumer deposits with cheap corporate deposits from companies who need the implicit TBTF guaranty for their big corporate and payroll accounts.
3Q2024 Asset Report
https://bankregdata.com/articles.asp?aNum=134
JMO. DYODD.
Thanks Bear. Not as serious yet, but consumer credit card stress is up and the report links home equity loans being up as borrowers tap another source presumably to pay bills. New Construction loans are down and non paying construction loans are up. Chase who you like, is the second largest lender in the const. space and the author mentions delinquencies are up. Pie chart shows a little over 1/2% Wonder about Bank of the Ozarks?
Report tells me loans are up since Fed’s started cutting rates but delinquencies and non performing loans (NPL) are up also which is troubling as restructured loans fall again into being NPL
Things are not at alert status but I would re-consider if you have any investments in 1-4 unit construction builders preferred stocks and building supply companies. Keep an eye out as to how the Spring building season is going when it gets here.
As you noted Bear, MREIT’s are a problematic when things slow down.
I was sidetracked by Tex’s public service announcement.
Now for a comment on Tim’s post. It does bring up the question about smaller regional banks. You have to decide what your level of risk aversion is. If you have an aversion for a whole sector of the market you could be missing out. For example I am wary of MREIT’s. Partly I have so much on my plate I can’t keep up as things can change quickly in this sector and I don’t understand the leverage they use. Of course leverage also applies to other sectors like BDC’s, CEF’s, and ETF’s and others.
I was holding RWTN and recently sold. Then the same week or after I saw on that other site this post.
J.P. Morgan upgraded Synchrony Financial (NYSE:SYF) to Overweight from Neutral due to upside from higher annual percentage rate and downgraded Redwood Trust (NYSE:RWT) to Neutral from Overweight as higher long-term rates put pressure on its residential loan portfolio.
My concern is the outlook is still uncertain on where long term rates are headed.
As for the banking sector, I have a 1/2 dozen preferred and BB I sold off about 2/3rd of my CUBI PF as I felt I was overweight and it could do damage to the portfolio if it blew up. My concern is their involvement in crypto and if that bubble blows up. I am still holding ASBA I bought it over a year ago when I read they were going to bit the bullet and take a loss on selling a large portion of low yield loans. They still have some commercial paper but they returned 750 million to the feds they borrowed. I had one small regional I sold out of, but I may re-enter its preferred but still watching.
There is a related Bloomberg story that might be pertinent to some III’ers. Long story short, some retirement homes require large buyins, say $500k to $1.5 million. This is an addition to regular monthly fees. The plan was that your heirs would get most if not all of the buyin back when you/your spouse left the facility. Only problem is that some of these facilities have gone bankrupt, making it unknowable how much if any of your buyin will be refunded.
Related to this is that MANY retirement/senior homes have gone BK. Covid caused a substantial reduction in new residents coming in, plus Covid hit the elderly the hardest reducing their headcount. Even in cases where there was NOT a large buyin, many homes did not survive and defaulted on their debt. I have seen many muni bond defaults in this sector. CAVEAT EMPTOR from an investment perspective.
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(Personally know a family that is out $1+million on one of these homes.)
Americans Risk Losing Life Savings When Retirement Homes Go Bust
Bloomberg
Bob Curtis, 87, and his wife Sandy sold their home in Nassau County three years ago and forked over $840,000 to move into The Harborside, a Long Island retirement home that was supposed to provide care for the rest of their lives.
Then the facility went bankrupt and an effort to sell it to new owners was blocked by New York regulators in October. So now, like nearly 200 others who live there, they could see much of their life savings — and their new home – disappear.
The collapse is emblematic of financial stress coursing through an industry that sprouted up to cater to the Baby Boomers, the demographic bulge that by force of sheer numbers has dominated America’s cultural and economic life for over half a century. At least 16 continuing care retirement communities, or CCRCs, have filed bankruptcy since 2020 as pandemic restrictions, labor shortages, soaring wages and rising supply costs have pushed many to the brink. A recent survey of one type of continuing care retirement community – those that also charge a monthly fee and that offer housing, residential services and unlimited healthcare all at one site — found that 50% were operating in the red last year.
Under contracts with The Harborside, residents or their heirs are supposed to get as much as 90% of the entrance fee refunded if they move or die. But the contracts can be voided in bankruptcy court, which treats residents as unsecured creditors, pushing them toward the back of the repayment line. The Harborside’s residents could be forced to move and stand to lose as much as $130 million unless a new buyer is found who is willing to take over the residents’ refund obligations.
Let me try this again. Hit the wrong key and erased everything.
Tex I like watching BBC detective shows. Recently watched a show about an owner of a retirement tower who was getting wealthy tenants to move in to impress future clients. She was also cheating people out of their money by having added charges to renovate the apt. after they moved out, buying below market themselves and reselling at a higher cost. Course they added to the plot with having tenants murdered so there was a higher turn over. Aside form the murders it’s funny how real life sometimes mirrors fiction.
https://nationalseniors.com.au/news/latest-news/retirement-villages-come-under-scrutiny#:~:text=The%20report%20exposed%20how%20hundreds,after%20leaving%20their%20retirement%20village.
Something similar may be coming to America to your nearby retirement village courtesy of P.E. Best to get a lawyer to review any contracts before turning over your retirement nest egg. As the knight said in Indiana Jones the Last Crusade “chose wisely”
Another article I recently read and commented on, but I can’t remember if I posted here. Independent and large for profit retirement operators tried and failed to stop a new federal law or executive order going into affect I think in 2027 They are hoping the new administration will repeal it. It requires a minimum staffing level at nursing homes. This is a problem for the reasons Tex pointed out. A study included in the article showed that only 21% of the for profit operations and 61%? of non profit operators currently meet the requirements. Again, choose wisely.
As an old guy in the building trades you hear stories. There is one of these new buy in retirement villages going in down the street from me. Heard from a person at the will call counter several workers filed with the union they are being forced to rush work by the builder due to finish deadlines. Open pipes ( probably soil vent pipes) are being left open in the walls and not connected and sheet rocked over. Makes you wonder about the rest of the construction. Impressive new development but who gets stuck with repairs years down the road.
Only offer for the bankrupt (three times) Harborside assisted living facility is for around $80 million. New potential buyer wants to replace residents. Sad for the residents and their bank accounts. Also it was obviously a poor investment originally.
Meanwhile, the KRE regional bank ETF is up 40% in the last six months and some individual names like DCOM have basically doubled in the last year. With that said, KRE has been down 12 of the last 13 trading sessions. Personally I’m not betting one way or another, although I still own a couple bank preferreds.
I think if the big short where it doesn’t matter until it does and that was a long drawn out process.
At current levels im surprised that the large investment banks aren’t shorting these much smaller regionals.