Commercial Mortgage Market Monitor February 2016

Fixed Income Commentary

The legacy CMBS 60+ day delinquency rate increased 11bps in February, to 9.47%, though the increase is largely the product of a shrinking outstanding balance of legacy loans (the denominator effect), as most delinquency buckets (except REO) fell in dollar terms. Over the past 12 months roughly $57BN of conduit loans scheduled to mature between 2016-2018 either prepaid or defeased, reducing the outstanding legacy balance by 24%. The entire legacy universe (all legacy vintages) declined by $108BN, or 34%, during that same period, with only $208BN legacy conduit remaining (compared to $228.8BN conduit 2.0). Prepayments of open loans remained elevated during February, though 2006- vintage CPY declined slightly to 90% from 92% in January (still above the 6-month moving average of 87%). The balance of 2006-vintage loans open to prepayment increased by $1.2BN, to $28.0BN. The refinance success rate also increased, up 4% since January to 77%.

The special servicing rate for legacy loans remained stable this month at 6.3%. Liquidation volumes on delinquent loans slowed to $573MM (44 loans), down from $2.5BN (125 loans) during a very active January. The average loss severity on liquidations was 33%, down from 60.5% in January and well below the six-month average of 50%. Cumulative losses for legacy CMBS remain highest in the 2008, 2007, and 2006 vintages, at 10.47%, 7.00%, and 6.74% respectively. The largest legacy liquidation was the $190.8MM Gulf Coast Town Center Phases I & II (7.01% of CSMC 2007-C5), a 10yr full term interest only loan backed by an anchored retail property in Fort Myers, FL. The property transferred to special servicing in July 2013 due to imminent default. The borrower cited financial hardship as the property cash flows could no longer cover operating expenses after payment of debt service (the most recent net operating income was 28% below underwriting). The loan modification discussions were rejected and the property was liquidated with the loan taking a $44.3MM loss (23% severity).

In CMBS 2.0, 15 loans totaling $103MM became newly delinquent, including eight loans secured by properties in oil-focused regions (majority in Texas and North Dakota). In total, 45 loans with a balance of $470MM were 30+ delinquent at the end of February, resulting in a delinquency rate of 0.21%. During the month, eight loans totaling $104MM moved to special servicing, raising the total to $770MM across 59 loans, for a rate of 0.32%. One of newly transferred loans is $23MM 88 Hamilton Avenue, secured by a mixed use property in Stamford, CT (2.52% of WFCM 2015-NXS2). The loan experienced financial trouble at the end of the year, including two bounced checks, which prompted an investigation into the company’s operations and a forced the resignation of the company’s CEO. The loan was transferred to special servicing when the lender received notice that the borrower’s sole member and manager both filed Ch. 11 bankruptcy protection.

CMBS 2.0 watchlist activity increased in February with the addition of 189 new loans ($3.0BN), up from 133 new loans ($2.3BN) in January. One of the largest loans to be put on watchlist is $71.5MM 333 North Central Avenue, secured by an urban office property in Phoenix, AZ (6.28% of JPMBB 2015-C28). The property is 99% leased to the mining company, Freeport McMoRan Corporation, and the move to watchlist is the result of Moody’s downgrade of the company from Baa3 to B1. In total, 1,057 ($16.8BN) 2.0 loans are on the watchlist, resulting in a rate of 7.37%.

Only one 2.0 loan was modified in February, resulting in total 2.0 modification volume of $392.7MM across 12 loans. The modified loan is $94.2MM Gateway Salt Lake, secured by an anchored lifestyle retail center in Salt Lake City (30.50% of JPMCC 2010-C1). The special servicer marked the loan for potential imminent write-down and modification in November 2015 due to a continued decline in performance after the March 2012 opening of a competitive property, City Creek Center Mall, only 0.6 miles away. The modification report indicated that following the sale of the property, the loan was assumed for $78.5MM with an interest rate of 0.00% in the first year of the extended term and a step-up to 1.00% in the fifth year. In addition to the apparent $15.7MM write-off (a write-down of the entire Class NR and a partial write-down of the Class H), the 0.00% coupon is likely to result in significant interest shortfalls to the trust. It’s worth noting that the most recent loan commentary suggests there may be adjustments the initial terms of the resolution.

The largest 2.0 appraisal reduction during the month was $9.6MM on $18.7MM Strata Estates Suites (1.91% of COMM 2013-CR10), secured by two corporate multifamily properties in the Bakken Shale Oil region of North Dakota. The loan moved to special servicing in February 2014 after Halliburton, a corporate tenant at the property, terminated 55 leases. After several months in default, the special servicer initiated foreclosure and the assets became real estate owned (REO) in October 2015. According to the December 2015 rent rolls, the aggregate occupancy stands at 52.2%, down from 72.0% June 2015 and 100% August 2013 (issuance).

One loan was liquidated in February, bringing the 2.0 liquidation total to $156.9MM across 16 loans. The liquidated loan is $12.4MM Campus Habitat 15 (0.92% of WFRBS 2011-C3), secured by a student housing complex near the University of Wyoming. Campus Habitat 15 represents the first 2.0 loan to be liquidated at a meaningful loss (in terms of absolute dollars and loss severity). The borrower failed to make payment in early 2013 due to a significant decrease in occupancy (69% March 2013, down from 99% June 2011) and filed for Ch. 11 bankruptcy in late 2013. In March 2014, the borrower filed a plan of reorganization, but subsequently filed a June 2014 motion to dismiss the March 2014 reorganization plan in favor of pursuing a workout with creditors. Despite the storied history, the loan was most recently reported as current (albeit still in special servicing) and there was no appraisal reduction on the property, so the February liquidation at a $7.1MM loss (57% severity) surprised the market.

As for new issue, February conduit issuance totaled $5.6BN across six deals, bringing 2016 volume to $8.3BN, down 5% from a year ago. Single asset/single borrower (SASB) issuance totaled $2.0BN across three deals, resulting in $2.2BN total volume, down 70% from a year ago. Across the Street, banks have reduced their 2016 volume projections to reflect the significant headwinds to the new issue market. Current volume projections range from $70-80BN ($40BN conduit and $30BN SASB), down from $100-115+BN at the end of 2015. The biggest impediments to issuance so far have been spread volatility, which creates significant market risk between loan origination and CMBS execution, and spread widening, which makes CMBS a less competitive lender in the market. By the second half of the year, even if spreads have stabilized, originators and issuers will have to deal with the regulatory headwind of risk retention, which goes into effect December 24, 2016.

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