Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor January 2017

Fixed Income Commentary

The legacy CMBS delinquency rate increased to 20.1% in January, continuing its climb higher as the universe of loans outstanding declines due to paydowns and liquidations. Reviewing liquidation activity, a total of 99 loans with a balance of $1.5BN were liquidated during the month, a 2.5x increase from December’s $595MM. The average loss severity for the liquidations was 61%, with an average severity of 62% when excluding loans with non-material losses (less than 2.0% severity) – in line with December’s 64% severity.

The largest legacy liquidation was $114.4MM Marley Station (28.9% BACM 2005-3), a seven-year full-term interest-only loan backed by 364K square feet (SF) of a 1.1MM SF regional mall located in Glen Burnie, MD. At issuance, the property was 94.8% occupied with four anchor tenants (67.6% SF) all operating subject to ground leases and only one of them (Sears, 17.4% SF) paying base rent (2.8% total rent). The largest shadow anchor at the property closed in 2008 (after declaring Chapter 11 bankruptcy) and the property’s occupancy declined to 64% by 2011. In April 2012, the property net operating income (NOI) was 35% lower than underwriting and the loan was transferred to special servicing due to imminent maturity default (July 2012). The regional mall, originally valued at $178MM ($171 PSF), was ultimately liquidated for $21.65MM ($26 PSF), resulting in a trust loss of $105.2MM (92% severity).

In CMBS 2.0, the delinquency rate remained modest at 0.24%, with $107MM loans newly delinquent, seven of which were previously delinquent over the past 12 months, and six of which were secured by multi-family (MF) properties. Six loans, totaling $81MM, were newly transferred to special servicing, resulting in a special servicing rate of 0.55% ($1.4BN). A total of 179 loans ($2.5BN) were added to watchlist in January (aggregate rate of 6.81%), 58 of which are secured by retail properties, reflecting recently announced store closures (Macy’s and Sears) as well as continued pressure on the sector.

Three CMBS 2.0 loans ($80MM) were liquidated during the month at material losses to the trusts: Oakridge Office Park (MSBAM 2013-C7; 24% severity), Hudson Valley Mall (CFCRE 2011-C1; 86% severity), and Pathmark Staten Island (WFRBS 2012-C7; 26% severity).

Oakridge Office Park (MSBAM 2013-C7) was secured by five Class B/C office buildings in Orlando, FL with AT&T representing 75% of the tenancy. The loan transferred to special servicing in June 2014 after the telecommunications giant reduced its space by 50%, resetting occupancy to 48%. AT&T reduced its space again in 2016, resulting in a 32% occupancy rate. The property was ultimately sold by the receiver for $12.75MM ($40.4 PSF), at a 46% write-down from the original $24MM ($76 PSF) value, resulting in a $3.8MM loss to the trust (23.6% severity).

Hudson Valley Mall (CFCRE 2011-C1), secured by a 765K SF regional mall in Kingston, NY, with (at-origination) sales productivity of $275 per square foot (PSF), saw its JCPenney anchor (10.6% SF) vacate in April 2015 and its Macy’s anchor (15.8% SF) depart in March 2016. The Borrower defaulted in October 2016 and entered a Settlement Agreement with the Lender, whereby the property was transferred to a receiver for sale. The loan was resolved through a discounted payoff (DPO) for $8.1MM, incurring a $42.1MM loss to the trust (86% severity).

Pathmark Staten Island (WFRBS 2012-C7), backed by a 64K SF retail center in Staten Island, NY, was 100% leased (NNN) to Pathmark grocery store. The grocery chain filed for Chapter 11 bankruptcy in July 2015 and the company disaffirmed its lease at the property in January 2016 (December 2021 lease maturity). The loan was transferred to special servicing in February 2016 (due to imminent default) and the resolution was a discounted payoff (DPO) for $10+MM, resulting in a $3.0MM loss to the trust (26% severity).

Reviewing January’s new issue activity, only one conduit ($1.3BN) and one SASB ($365MM) priced – representing the slowest start to the year since January 2012. One driver of the anemic issuance may be the pull-forward of deals in the fourth quarter of 2016, ahead of Risk Retention (December 24th).

The only SASB deal to price was a $365MM hotel-backed floater with a two-year initial term and five one-year extension options. The loan is secured by a portfolio of five full-service hotel properties (owned by Ashford Hospitality Prime, Inc.), with an average occupancy of 80.9% and an Average Daily Rate (ADR) of $222.06, for an average Revenue Per Available Room (RevPAR) of $179.56. The originator retained a 5% notional vertical interest to comply with risk retention (WAC, L+2.58%) and the AAA’s (55.6% credit enhancement) priced at 90 DM.

The only conduit to price in January used an L-shaped risk retention structure, with the bank collateral contributors retaining a 1.9% notional vertical (WAC coupon) and the B-piece buyer retaining a 3.1% market-value (MV) horizontal that included the NR/BB-, NR/B-, and NR/NR classes (0.0%-8.5% slice). The LCF AAA’s on the deal priced at 90/n (124/n 2016 average; 105/n 2015 average) and the BBB-‘s (8.5% CE) priced at 380/n (626/n 2016 average; 423/n 2015 average).

Despite the slow start to the year, Street estimates for full-year 2017 private label issuance remain in line with 2016, around $65BN.

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