Commercial Mortgage Market Monitor April 2016

Fixed Income Commentary

The 60+ delinquency rate for legacy conduit increased 0.54% in April to 10.13%, largely the result of the declining balance of legacy paper, which now stands at $235BN, down $107BN (36%) over the past twelve months. Rising delinquencies in the 2006 vintage, from 8.96% in March to 10.00% in April, also contributed to the increase, reflecting growing adverse selection in the remaining balance.

There were a number of large special servicing transfers during the month, resulting in a 1.16% increase in the special servicing rate to 13.61% ($26.47BN across 1,625 loans). The largest legacy loan to enter special servicing was the $292.7MM Warner Building (32.34% JPMCC 2006-CB15), secured by a Class A office building in Washington, DC. At year-end 2015, the property was 79% occupied and the debt service coverage ratio on the loan stood at 0.73x, an increase from a low of 47% occupancy and 0.33x debt service coverage ratio in 2012 (after the anchor tenant occupying 53% of the building vacated), but still short of qualifying for a refinance upon the loan’s May 1st, 2016 maturity.

Legacy conduit liquidations totaled $702MM, an increase from March ($609MM, the lowest level since February 2010) but well below the 2015 average of $1.2BN. Overall loss severities were 24%, below the six-month average of 29%. Excluding low-loss severity loans, the average severity for the month was 49%, marginally lower than the six-month average of 51%. The largest legacy loss was $5.3MM 1 East Main Street, a medical office building in Suffolk County, NY. The property went through foreclosure in October 2014 and the real estate owned asset was sold at a 103.00% loss severity to the trust.

The on-time payoff success rate was 85% for the $5.9BN of legacy loans scheduled to mature in April, raising the total 2016 payoff success rate 2% to 83%. The largest legacy loan to refinance was $182.3MM Burbank Town Center (15.98% JPMCC 2016-LDP8), an anchored retail center in Burbank, CA. The most recent occupancy at the property was 98% and the 6.16% coupon loan carried a debt service coverage ratio of 1.19x. The largest loan to mature without paying off was $52MM 1 Allen Bradley Drive (32.98% LBUBS 2006-C3), a single-tenant triple net lease (NNN) suburban office property outside Cleveland, Ohio. The property is currently 100.00% occupied with a debt service coverage ratio of 1.30x; the single tenant has a termination option November 2017 and a lease maturity November 2020. Legacy defeasance totaled $1.0BN, up from March’s level of $867MM, but still well below the six-month average of $1.4BN. Prepayment with penalties totaled $234MM, marginally higher than March but below the 2015 average of $303MM.

In CMBS 2.0, 13 loans totaling $137.7MM became newly delinquent, resulting in a total 30+ delinquency of $630MM across 62 loans for a rate of 0.28%. The largest loan to become newly delinquent was $23MM Woodlands Corporate Center and 7049 Williams Road Portfolio (2.75% GSMS 2015-GC34), secured by two office properties and an industrial property in Wheatfield and Niagara Falls, NY. Additionally, six loans totaling $37MM moved into special servicing, bringing the aggregate balance to $965MM across 72 loans for a special servicing rate of 0.42%. The largest loan transferred to special servicing was $11.0MM BSG Texas Hotel Portfolio (0.76% WFRBS 2013-C14), secured by two limited service hotels in north and northwest Texas. The debt service coverage ratio on the loan declined from 2.05x in 2014 to 1.15x in 2015 as occupancy fell from 75% to 64%. Only three of the newly specially serviced loans are located in oil-sensitive regions, compared to ten in March.

There were $712MM in payoffs across 33 CMBS 2.0 loans in April, resulting in a payoff success rate of 92%. Additionally, 16 loans ($174.7MM) became newly defeased, bringing the total defeased balance to $5.3BN across 263 loans ($3.2BN across 198 loans remain outstanding). The largest loan to defease was $58MM Hackman Industrial Portfolio (4.77% COMM 2013-CR9), which is scheduled to mature on July 1, 2023. The loan is secured by 19 industrial properties located in Cleveland, Columbus and Cincinnati, with an average occupancy of 91% (up from 82% at issuance in 2013) and a debt service coverage ratio of 2.01x.

In new issue, two conduit deals totaling $1.5BN priced in April, bringing 2016 issuance to $12.9BN, down 26% from 2015 and projecting an annualized rate of $39BN. Spreads tightened during the month, with 10-year last cash flow AAA’s pricing at sw+125bps and sw+134bps (2016 average sw+152bps; 2015 average sw+105bps) and BBB-‘s pricing at sw+660bps and sw+700bps (2016 average sw+732bps; 2015 average sw+423bps). New issue conduit credit was marginally weaker month-over-month, though weighted average 2016 deal metrics remain stronger than 2015. The average cut-off Loan-to-Value ratio for 2016 is 61.6%, down from 64.5% in 2015. Weighted average 2016 debt yields are 11.13%, up from 10.60% in 2015. Lending rates are increasing, with a weighted average coupon of 4.73% in 2016, 0.35% higher than the 2015 average of 4.38%. The higher rates are reflected in lower debt service coverage ratios, which average 1.63x for 2016 deals compared to 1.80x in 2015.

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