Commercial Mortgage Market Monitor July 2016

Fixed Income Commentary

The 60+ delinquency rate for legacy CMBS increased 0.67% in July, to 12.06%, although the volume of newly delinquent loans declined monthover- month, from $696MM to $572MM, respectively (denominator effect). One of the largest loans to become newly delinquent was $90MM Wells Fargo Place (4.9% CSMC 2007-C1), secured by an 88%-occupied 659,894 SF office building in St. Paul, Minnesota. The interest-only loan was transferred to special servicing in May due to imminent default, in anticipation of its November 2016 balloon maturity date. Although the property can cover term payments (1.22x debt service coverage ratio), meeting the balloon payment is complicated by the fact that the net operating income at the property is 21.3% lower than underwriting and a November 2010 appraisal reduced the property value by 36.78%, resetting the loan-to-value ratio of the maturing debt to 128.5%.

The payoff success rate for legacy loans scheduled to mature in 2016 (excluding defeased) declined to 60.2% in July – resetting the year-todate average 2.4% lower, to 78.6%. The lower payoff rate may be indicative of the term market volatility earlier this year, as well as the increasing adverse selection of the outstanding 2006 collateral. Reviewing the 2006 vintage, 54.2% of loans have paid in full, 17.7% were liquidated with losses, 15.2% remain unpaid, 7.1% are in special servicing, 3.3% prepaid with penalty, and 2.6% are currently defeased.

One of the largest loans that failed to pay off at maturity was $101.5MM Southern Hills Mall (24.0% BACM 2006-3), secured by 575,370 SF of a 795,074 SF shopping mall ($350 PSF sales) in Sioux City, SD. The loan was transferred to special servicing in March when the mall owner decided not to pursue refinancing the debt, citing excessive leverage at the property. The loan is currently in foreclosure and according to the special servicer; the property should be in receivership by August with title transfer occurring early 2017. As of year-end 2015, the loan carried a 1.40x debt service coverage ratio on the loan and 87% occupancy (92% underwriting). The Southern Hills Mall is one of five retail properties that the borrower plans to forfeit to lenders.

Liquidation volume totaled $679MM in July, with an average loss severity of 56.7% (excluding loans with less than 2% loss severity). Between payoffs and liquidations, the legacy universe stands at $153BN ($132BN excluding defeased loans), a 40% decline over the past twelve months.

In CMBS 2.0, 15 loans totaling $104MM became newly delinquent, bringing the aggregate balance of CMBS 2.0 30+ delinquency to $714MM across 81 loans, for a rate of 0.30%. The largest loan to become newly delinquent was $16.1MM Shop City Shopping Center (1.95% WFCM 2015-LC20), secured by a 233,926 SF retail center in Syracuse, NY. The loan was underwritten with a debt service coverage ratio of 1.70x and property occupancy of 90%; there are no financials available for the property aside from the March 2015 underwriting.

Nine loans, totaling $203MM, were newly transferred to special servicing in July, bringing the special servicing balance to $1.2BN across 90 loans for a rate of 0.50%. The largest loan to enter special servicing was the $98.8MM Hammons Hotel Portfolio (10.35% CGCMT 2015- GC33). The full loan is $248MM, split pari passu across four trusts (CGCMT 2015-GC33, GSMS 2015-GC34, GSMS 2015-GS1 and CGCMT 2015-GC35). As of March 2016, the loan carried a 2.08x debt service coverage ratio and the portfolio of seven hotel properties was 76% occupied; the loan was transferred to special because the owner, John Q. Hammons Hotels, filed for Chapter 11 bankruptcy in June. In addition to the Hammons Hotel Portfolio, there is one other 2.0 loan, $44.9MM Chateau on the Lake (4.73% WFCM 2015-C26), that is also owned by the newly bankrupt company.

Prepayment and defeasance activity totaled $706MM (24 loans) during the month, bringing the total CMBS 2.0 paid-off balance to $9.9BN (448 loans). The largest maturity pay off came from the $132MM Times Square Hotel Portfolio (DBUBS 2011-LC3A), secured by the Four Points Sheraton and the Fairfield Inn at Times Square. The loan was listed as newly delinquent last month when it failed to refinance at its June maturity date; however, it successfully refinanced in July, illustrating a trend of loans that ultimately pay off post-maturity. As of March, the Times Square Hotel Portfolio was 96% occupied and the loan had a debt service coverage ratio of 1.55x.

In new issue, July was a busy month with nine private-label CMBS deals pricing ($5.7BN), across five conduit ($4.3BN) and four SASB ($1.4BN) deals. Year-to-date issuance totals $30.9BN (44 deals), projecting annual volume of $53BN, 41% lower than 2015 issuance. Execution improved with benchmark 10yr LCF AAA’s pricing at 108-130bps over swaps and BBB-‘s at 600-760bps over swaps. Two of the new issue SASB deals financed early prepayments of legacy conduit loans, $450MM BAMLL 2016-ISQ (International Square; LBUBS 2007-C1) and $307MM DBJPM 2016-SFC (Westfield San Francisco Emporium; LBUBS 2007-C1).

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