Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor February 2017

Fixed Income Commentary

The legacy CMBS delinquency rate increased to 21.7% in February, continuing its climb higher as the outstanding universe of loans factors down due to paydowns and liquidations. Reviewing monthly liquidation activity, a total of 47 loans with a balance of $1.1BN were liquidated, a slowdown from January’s $1.5BN. The average loss severity for all February liquidations was 42%, with an average severity of 50% when excluding loans with non-material losses (excluding less than 2.0% severity losses), down from 62% in January.

Reviewing maturity repayments, approximately $2.4BN (62.4%) of outstanding loans with a February maturity date paid in full during the month, bringing the 6-month successful-repayment average to 74.4%, down from 89.9% in January, and the first time the average has been in the 70’s since February 2015. Street forecasts project a full-year 2017 refinance rate of 60-65%. February’s activity also included a large increase in loan transfers to Special Servicing ahead of maturity, with $1.8BN (89 loans) newly transferred, up from $675MM (39 loans) in January, and the majority (92.4%) representing April maturities. Reviewing aggregate 2017 maturities, a total of $47.4BN loans remain outstanding as of February month-end, down from $52.9BN at the end of January.

In CMBS 2.0, the delinquency rate remains modest at 0.22%, though two loans were liquidated at losses during the month. One of the loans, $20.8MM Independence Place – Fort Campbell (MSC 2012-C4), was a refinance of a 2009-construction 228-unit garden multifamily property located in Clarksville, TN. At issuance, the multifamily property was 82.4% occupied, down from 88.4% the prior year (2011). By June 2013 the property could no longer cover debt service, by October 2013 the loan was transferred to special servicing, and by June 2014 the property was in Real Estate Owned (REO) status. The property was ultimately liquidated at a 46% loss severity.

In new issue conduit, three deals totaling $2.5BN priced, an increase of 1.9x over January’s volume, but 56% lower than February 2016 issuance. All three deals utilized vertical-risk retention, with pricing on the LCF AAA’s ranging from swaps +88-95bps, with the BBB-‘s ranging from swaps +350-450bps. Reviewing year-to-date 2017 credit metrics, the 2017 vintage has marginally lower leverage than the 2016 vintage, with a 58.5% average loan-to-value (LTV) ratio, compared to a 59.8% LTV for 2016. The debt service coverage ratios (DSCRs) for both vintages are in-line, with year-to-date 2017 deals averaging 1.99x DSCR compared to the 2016 vintage average of 2.01x DSCR, despite the weighted average coupon (WAC) of the 2017 vintage (4.74% WAC) being +27bps higher than the 2016 vintage (4.47% WAC). The percentage of fullterm interest-only loans remains elevated, with the 2017 vintage averaging 52.5% so far, marginally higher than the 2016 average of 49.9%.

In new issue single asset single borrower (SASB), two deals totaling $1.3BN priced, an increase of 3.6x from January, but 33% lower than February 2016 volume. Both deals were fixed-rate and secured by Central Business District (CBD) offices, one in in NYC and one in San Francisco, and both employed horizontal risk-retention. The NYC office SASB (96.5% occupied) was a 10-year interest-only loan with a 45.5% loan-to-value ratio (LTV); the AAA’s priced at swaps +100bps. The San Francisco office SASB (97.2% occupied) was a 7-year interest-only loan with a 55.2% loan-to-value ratio; the AAA’s priced at swaps +90bps.

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