Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor April 2017

Fixed Income Commentary

Legacy CMBS ended April with a delinquency rate of 26.2% and a special servicing rate of 35.5%, as paydowns and liquidations continue to reduce the outstanding universe of legacy loans (denominator effect) and a larger proportion of outstanding 2006-2007 loans are secured by underperforming and/or overleveraged properties (adverse selection).

Legacy loan liquidation volumes totaled $848MM across 37 loans, with over 66% of the liquidation volume from the 2006-2007 vintages. The average loss severity was 52%, excluding non-material losses (less than 2.0%).

In CMBS 2.0, 19 loans ($210MM) became newly delinquent, resulting in a delinquency rate of 0.22%. The largest loan to enter delinquency was $26.1MM Minneapolis Apartment Portfolio (2.2% WFRBS 2014-C20), secured by a South Minneapolis portfolio of 17 multifamily properties (430 units totaling 237,630 square feet) and seven retail spaces in two of the properties (7,641 square feet). Although the portfolio was 97% occupied as of year-end and the loan had carried a debt service coverage ratio of 1.46x, the sponsor missed payments (monetary default), neglected deferred maintenance (covenant default), and incurred a class action lawsuit and license investigation (idiosyncratic risk). Per the servicer, the lender is seeking dual track remedies and legal action to protect its interest in the collateral.

Reviewing special servicing activity, six loans ($62.5MM) were newly transferred during the month, bringing the 2.0 specially serviced balance to $1.5BN, for a rate of 0.44%. One of the largest loans transferred, due to imminent monetary default, was $46.7MM Towne West Square Mall (6.1% MSC 2011-C2), secured by 448,760 square feet of a 945,000 square foot regional mall in Wichita, Kansas. The property was constructed in 1980, reportedly most recently renovated in 1993, and was anchored by Sears until the retailer closed in 2014. As of year-end, net operating income at the property was 21% lower than underwriting, resulting in a debt service coverage ratio of 1.22x.

In new issue conduit, two deals totaling $1.9BN priced (both vertical risk retention), resulting in year-to-date conduit issuance of $10.6BN, annualized to $32BN (well below Street outlook projections of $45-55BN). The LCF AAA’s priced at swaps +92-95bps and the BBB-‘s priced at swaps +340-375bps.

In new issue single asset single borrower (SASB), two deals totaling $1.8BN priced, resulting in $4.7BN year-to-date issuance, annualized to $14BN (near the low-end of Street 2017 outlook projections of $15-$25BN). The first SASB deal (horizontal risk retention) was a two-year initial and five-year max extension floater backed by a cold storage portfolio. The floating-rate AAA’s priced at L+100bps. The second SASB deal was a five year fixed-rate deal with a two year non-call period secured by a mixed use property in Houston, TX. The fixed-rate AAA’s priced at sw+90bps.

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