Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor May 2017

Fixed Income Commentary

The legacy CMBS delinquency rate and special servicing rate continued to rise in May, ending the month at 30.3% and 38.4%, respectively, as pay downs and liquidations reduce the outstanding universe of legacy loans (denominator effect) and a larger proportion of 2006-2007 loans outstanding are secured by underperforming and/or overleveraged properties (adverse selection). The year-to-date refinance success rate for 2007 maturities ended the month at 63%, while the legacy conduit balance declined to $66.4BN, from $74.1BN in April.

Liquidation volumes totaled $533MM across 25 loans, with nearly 80% of the liquidation activity within the 2006-2007 vintages. The average loss severity excluding non-material losses (defined as less than 2.0% loss) stood at 58%, up from 52% in April. The largest liquidation was $48.6MM 6116 Executive Boulevard (15.2% WBCMT 2005-C21), secured by a 207,055 square foot eight-story Class A suburban office property in Rockville, MD. The property never recovered after the largest tenant, the National Institutes of Health (a General Services Administration or “GSA” tenant), representing 92% of rent at the property, vacated after its 2012 lease expiration. The asset was held in Real Estate Owned (REO) status since February 2015 and the liquidation proceeds in May, totaling $9.7MM, were allocated to liquidation expenses, resulting in a 100% severity to the trust.

In CMBS 2.0, the delinquency rate and special servicing rate increased modestly in May to 0.29% and 0.47%, respectively, with activity highlighting idiosyncratic risk related to 2.0 borrowers. The Top 10 Largest CMBS 2.0 Loans Entering Delinquency (p.9) this month features only hotel and multifamily properties – with the top three largest loans representing pari passu interests in the single Hammons Hotel Portfolio, a $244MM mortgage allocated across four 2015 conduits. The Hammons Hotel Portfolio loan, secured by 1,701 rooms across seven branded hotels, has struggled since the loan guarantor filed for Chapter 11 bankruptcy in June of 2016. Although there is an interim cash collateral order in place that provides for the continuation of regular monthly payments to the CMBS lender through January 2018, the loan continues to move in and out of 30-day delinquency during the bankruptcy proceedings.

Reviewing special servicing activity, one of the largest loans to be newly transferred was $23.5MM Cedar Rapids Office Portfolio (2.3% WFRBS 2013-C18), secured by two office buildings totaling 218,346 square feet in downtown Cedar Rapids, IA. As of year-end 2016, the two properties were 94% occupied and the debt service coverage ratio on the mortgage was 1.23x; however, the borrower triggered multiple Events of Default by failing to set up the required lockbox account triggered by low debt service, incurring additional liens on the property (over $2MM), executing leases without noteholder consent, and not funding required reserves. Reportedly unable to negotiate a cure for the loan defaults, the special servicer plans to pursue foreclosure and appoint a receiver to manage the property.

In new issue, May was a busy month for private-label CMBS with over $8.1BN pricing across six conduit deals, totaling $5.1BN, and six singleasset single-borrower (SASB) deals, totaling $3.0BN. The conduit LCF AAA’s priced swaps +92-108bps while the BBB-‘s priced swaps +380- 500bps. May also brought a mix of risk-retention structures in conduit, including three horizontal, two L-shaped, and one vertical. Including May’s volume, year-to-date conduit issuance totals $15.7BN (for an annualized pace of $38BN).

In new issue SASB, May’s issuance included four fixed-rate and two floating-rate deals. Two of the fixed rate deals were 10-year mortgages secured by New York City office properties, with the AAA’s pricing at swaps +98-100bps. One of the deals used a horizontal risk retention (HRR) structure, with the HRR class pricing around swaps +365bps. Including May’s volume, year to date SASB issuance totals $7.6BN (for an annualized pace of $18BN).

Media Attachments

Legal Disclosures

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