Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor May 2016

Fixed Income Commentary

The 60+ delinquency rate for legacy conduit increased 0.63% in May to 10.76%. All delinquency buckets except 90-day increased in dollar terms, though the non-performing matured bucket increased the most, by $268MM (to a total rate of 1.22%). The rise in the legacy delinquency rate is also due to an increasingly pronounced denominator effect, as the outstanding balance declined by $7.5BN (3.9%) during the month, reducing the remaining legacy universe to $186BN (compared to $237BN 2.0 outstanding).

Liquidation activity increased by $263MM during the month, to $965MM; however, this represents the fourth straight month of under $1BN in liquidation volume, compared to a 2015 rate of $1.2BN. The largest loan to liquidate was $62.8MM Gale Office Pool (55% WBCMT 2004- C15), secured by a portfolio of four office buildings in Parsippany and Roseland, NJ. The portfolio was appraised at $57.2MM December 2015, a decline of more than 36% from the appraised value at issuance. Liquidation proceeds totaled $55.4MM and expenses totaled $3.3MM, including $2.2MM of servicer advances, for a loss severity of 17.2% to the trust. Overall loss severities averaged 26% in May, slightly above April’s level but below the six-month average of 28%. Excluding low-loss severity loans, the average loss severity in May was 53%, up 4.0% month-over-month and 1.0% higher than the six-month average.

Defeasance activity decreased during the month to $877MN, about 30% lower than the six-month average of $1.3BN, while the amount of loans that prepaid with penalties also declined, to a total of $177MM, down 25% month-over-month and almost 42% year-over-year. The payoff success rate for legacy conduit loans scheduled to mature in 2016 decreased 1.0% to 82.2%. Looking at the payoff rate by vintage, pre- 2006 vintages have a 70.3% payoff rate, 2006 vintages have a 83.0% payoff rate, and 2007 vintages have a 70.1% payoff rate. The largest loan to refinance was $319MM Duke Realty Industrial Pool (12.80% WBCMT 2006-C29), secured by 27 industrial buildings in Indiana and Georgia totaling 8.3MM square feet (SF). As of year-end 2015, the portfolio was 95% occupied with a 1.45x debt service coverage ratio.

In CMBS 2.0, four loans totaling $31.5MM became newly delinquent, bringing the total balance of 30+ delinquency to $618MM across 61 loans (0.26% rate). The largest loan to become newly delinquent was $12.2MM Pathmark-Baldwin (0.85% COMM 2013-LC6), secured by a single-tenant grocer in North Baldwin, NY. The parent company of the single-tenant filed for chapter 11 bankruptcy in July 2015. Additionally, seven loans totaling $101MM transferred to special servicing, bringing the aggregate balance to $1.06BN across 83 loans (0.45% rate). The largest loan newly transferred to special servicing was $28.2MM Studio Green Apartments (2.40% WFRBS 2013-C12), secured by a 665-unit student housing in Newark, DE, located one mile from the University of Delaware Campus. The debt service coverage ratio on the loan fell from 1.73x year-end 2014 to 0.68x third-quarter 2015, as occupancy fell from 93% to 73%.

37 loans totaling $691MM paid off in May, bringing the total CMBS 2.0 paid-off balance to $8.7BN across 395 loans, resulting in a payoff success rate of 94%. Additionally, six loans totaling $132MM were defeased, bringing the total 2.0 defeased balance to $5.4BN (of which $3.2BN across 195 loans remain outstanding). The largest loan to defease was $59MM 1460 North Halsted (4.37% COMM 2013-CR8), secured by a 224,204 square foot (SF) mixed use property in Chicago, IL. The debt yield on the property was 11.90% as of third-quarter 2015, 2.0% higher than the 2013 underwriting.

Nine loans totaling $76MM realized Appraisal Reduction Amounts (ARAs) during the month, resulting in a 2.0 ARA total of $271MM across 25 loans. The loan with the largest new ARA was $18.1MM Strata Estate Suites (1.84% COMM 2013-CR10), secured by two multifamily properties in Williston, ND and Watford, ND. Both properties are in Real Estate Owned (REO) status though neither asset is listed for sale; the ARA was $9.8MM.

In new issue, seven private-label transactions totaling $5.6BN priced. All of the new issue deals were conduit, representing a 2.7x increase month-over-month (April 2016) and an 8% increase year-over-year (May 2015). Execution on the 10yr LCF AAA’s ranged from sw+110bps to sw+130bps while the BBB-‘s ranged from sw+565bps to sw+720bps. Despite the monthly increase in issuance, year-to-date conduit volume stands at $18.5BN, 18% lower than year-to-date 2015. In Single Asset Single Borrower (SASB), year-to-date issuance totals $6.2BN, down 66% from year-to-date 2015. It’s tough to anticipate a meaningful increase in private-label issuance volume in the second half of this year with risk retention going into effect December 24th.

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