Fitch Ratings Finds Commercial Mortgage REITs Pressured by Weakening Credit Quality

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Credit quality at commercial mortgage real estate investment trusts deteriorated in the first half of 2024 according to Fitch Ratings, New York.

“Problem loans now make up close to 15% of gross loans, for the top 10 largest CMREITs,” Fitch Senior Director Bain Rumohr said. “As such, we expect these firms to be focused on asset resolution efforts in the near-to-medium term, which may include foreclosure.”

Fitch’s Commercial Mortgage REIT Dashboard: 1H24 (subscription required) noted loan originations in the first half of the year remained muted as most CMREITs focused on reducing problem loan levels. Fitch estimated the largest 10 CMREITs collectively funded $5.3 billion in originations or existing commitments, flat from the first half of 2023 and well below 2021 and 2022 levels.

Combined with ongoing loan-write offs, gross loan balances have fallen to around $94 billion for the group, down by 11% from peak levels in 2022, the report said.

Meanwhile, earnings at CMREITs have declined due to smaller balance sheets, compressed net interest margins and higher provisions, Fitch said. Reported pre-tax income for the largest CMREITs fell to around $600 million for the trailing 12 months that ended the second quarter, down from $2 billion the year prior.

“As asset resolutions continue, realized losses should weaken cash earnings coverage of dividends,” the report said. “Fitch expects management teams to cut the dividend in order to preserve on-balance-sheet liquidity and dividend coverage.”