Eric Sherman
May 20, 2024 6:40 AM
The big mortgage REITs are shrinking their portfolios.
In CRE lending, depository banks are reportedly scaling back lending out of concern that falling real estate values will affect loan amounts, straining banks' assets and creating regulatory risks.
But Trepp says it's not just a bank problem. The loan portfolios of the big mortgage REITs have shrunk by a combined nearly 11% over the past year, with most of them drastically reducing lending and turning to troubled loans. That's because mortgage REITs typically lend at variable rates and relatively short-term loans that are intended to improve or stabilize commercial properties, Trepp explained. “Interest rates have risen sharply, and the commercial real estate market has become unfavorable, so the REITs and, more specifically, borrowers have been hurt.”
While REITs aren't regulated like depository institutions, there appears to be a comparable regulation in the market. Trepp tracked 14 different REITs that make loans. In 2021, the group made $49.83 billion in loans. By 2022, the total had dropped to $30.9 billion. In 2023, the annual total dropped to $4.69 billion.
The seven companies with the largest loan portfolio declines (as this figure captures all stocks with double-digit declines) were TPG Real Estate Finance Trust (-35.83%), Ladder Capital (-18.80%), Blackstone Mortgage Trust (-18.12%), Brightspire Capital (-16.52%), InPoint Commercial Real Estate Income (-13.30%), Granite Point Mortgage Trust (-12.60%), and ACRES Commercial Realty (-11.57%).
The second largest cuts were made by CIM Real Estate Finance Trust (-8.38%), Ares Commercial Real Estate (-7.54%), Franklin BSP Realty Trust (-5.66%), Starwood Property Trust (-5.28%), Apollo Commercial Real Estate Finance (-3.71%) and KKR Real Estate Finance Trust (-1.87%).
The only REIT that saw growth from 2022 to 2023 was FS Credit Real Estate Income Trust, at 9.73%.
“A sharp decline in lending and loan paydowns caused the REIT's mortgage portfolio to shrink to $87.51 billion at the end of last year, down from $98.88 billion in 2022,” they wrote.
In terms of size, the total portfolio at the end of 2023 is practically insignificant within the overall $5.6 trillion commercial mortgage market, nor is it representative. But it is worth noting, and is “a clear indicator of the problems property owners may face in finding financing” and “helps explain the sharp decline in property sales activity.” If investors can't get financing, they won't buy. And with short-term interest rates on Treasuries at around 5.5%, it's a safe bet to make a profit.
If conditions change, REITs will re-enter the market, but for now, they're likely to focus on shedding troubled loans and keeping their cash for opportunistic investments.