Debt on Blackstone buildings 47% more than portfolio’s worth: Moody’s
Ratings agency downgrades debt, citing 11 properties’ “declining performance”
Blackstone’s Stephen Schwarzman with 250 West 19th Street (Getty, Google Maps)
Two months after a $271 million Blackstone loan secured by 11 Manhattan multifamily buildings went to special servicing, Moody’s downgraded the CMBS debt, citing cash flow that wouldn’t cover the debt service.
The loan is still current, but the portfolio’s “declining performance” has driven up the loan-to-value ratio, putting the CMBS bondholders at risk. The debt is now far greater than the apartment buildings are worth.
As of March, the mortgage’s loan-to-value ratio hit 147 percent. Typically, lenders originate debt at a 75 percent or 80 percent ratio.
The Blackstone portfolio should have benefitted from the booming rental market in Manhattan for the past two years. The 637 units in the portfolio, which spans Chelsea, Midtown South and the Upper East Side, are 96 percent market rate.
Though occupancy dipped to 69 percent in December 2020 from 99 percent in 2019, it recovered to 97 percent in 2021, Morningstar data shows.
But it’s possible that rent collection didn’t fare as well.
During the pandemic, the landlord voluntarily extended eviction protections to residents for longer than federal or state moratoriums required.
Blackstone began winding down those protections at the beginning of 2023, a year after New York allowed its moratorium to expire.
Those measures allowed tenants to remain in place despite nonpayment. Growing arrears might have delivered a hit to the portfolio’s value.
As of last month, the properties’ appraised value hovered at $214 million, about 60.5 percent below what it was when their debt was underwritten in 2019, according to Morningstar.
Building valuations are tied to net operating income, which fell for many buildings when rent collection dropped during the pandemic eviction pause.
Net cash flow — operating income minus expenditures such as debt service — was $12 million for the 12 months ending in September 2022, up from $7 million reported in 2021 but down from $15.3 million when the loan was underwritten, according to Moody’s.
The loan’s floating rate exacerbated the problem. The mortgage was underwritten at 3.8 percent in 2019. Interest rates have surged more than 4 percentage points since.
The firm has already extended the loan twice under a modification agreement. When the debt matures in August 2023, Blackstone has one final option to push the due date back a year.
A Blackstone spokesperson attributed the challenges the portfolio has faced to higher capital expenditures than anticipated and the loan’s floating rate debt.
“The transfer to special servicing for this non-recourse loan was an integral part of the process as we work in good faith with our lenders to get the best outcome possible for both the debt and equity investors,” the spokesperson said in a statement.
This article has been updated to include a comment from Blackstone.