Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor March 2017

Fixed Income Commentary

The legacy CMBS delinquency rate increased to 23.5% in March, as pay downs and liquidations continue to reduce the outstanding universe of legacy loans (denominator effect). As of month-end, the balance of legacy CMBS stood at $78.4BN, representing only 22.5% total conduit CMBS outstanding ($268.6BN CMBS 2.0 for a total of $347.0BN conduit CMBS).

One of the largest legacy liquidations during the March remit period was the Citadel Mall, a $75MM 10yr loan secured by 296,707 square feet (SF) of a 1.12MM SF mall in Charleston, SC (the five anchor boxes at the property are owned by their respective tenants). Occupancy at the property fell to 81% by early 2013 and the debt service coverage ratio fell below 1.0x; by June the loan was in default and by January 2014 the property was Real Estate Owned (REO). The retail space was marketed for sale at the end of 2016 – with a primary trade area population of 291,912, an average household income of $77,365, and (per the special servicer), a submarket retail vacancy rate of only 3.4%. A local private real estate firm ultimately acquired the distressed asset, with liquidation proceeds totaling $16.4MM (82% lower than the 2007 valuation of $94MM). All of the proceeds were used to cover liquidation expenses, resulting in a 100% severity to the trust, which carried a $62.7MM amortized balance. As of January 2017, the mall was 90% occupied, though 23% of the occupancy comes from temporary tenants (67%- occupied excluding non-temporary tenants).

In CMBS 2.0, the delinquency rate ended the month at 0.38% (97 loans with a balance of $1.0BN) while the special servicing rate stood at 0.57% (121 loans with a balance of $1.5BN). Refinancing loans continue to maintain an outsized proportion of the special servicing population, standing at 80%, 4x higher than acquisition loans.

Reviewing 2.0 prepayments, ten loans totaling $308MM prepaid during the month, the largest of which was $136MM 110 William Street (11.6% UBSBB 2012-C2), secured by a 32-story and 874,726 square foot (SF) office property in downtown New York City. The 2012 debt included a 5-year partial interest-only mortgage with at a 4.78% rate and a $20MM mezzanine loan (outside the CMBS trust) at a 9.50% rate. Performance at the property has been stable, with a most recent occupancy of 91% (underwritten at 93%) and a debt service coverage ratio (DSCR) of 1.30x (underwritten at 1.35x).

In new issue conduit, five deals totaling $4.9BN priced, on par with February volumes but 64% lower than March 2016 issuance. Pricing on the LCF AAA’s ranged from swaps +88-98bps, while pricing on the BBB-‘s ranged from swaps +315-365bps. Risk-Retention structures varied across the deals, with two horizontal, two L-shaped, and one vertical. Reviewing year-to-date activity, it’s been a slow start with $8.7BN of conduit issued in the first quarter of 2017, reflecting an annualized pace of $35BN for 2017 (well below projections of $45-55BN). In new issue single asset single borrower (SASB), two deals totaling $1.2BN priced, in line with February issuance but also 64% lower than March 2016 volume. Both March SASB deals were floating rate, with one backed by Central Business District (CBD) office (2yr initial term/ 5yr maximum extension term) and one secured by two hospitality properties (3yr initial term/ 4yr maximum extension term). Each SASB deal employed a horizontal risk-retention structure. The 2yr/5yr CBD AAA’s priced L+80bps while the 3yr/4yr hospitality AAA’s priced at L+95bps. Year-to-Date SASB issuance totals $2.9BN, suggesting an annual pace of $12BN (well below projections of $15-$25BN).

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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW