Commercial Mortgage-Backed Securities Market Monitor

Commercial Mortgage Market Monitor August 2016

Fixed Income Commentary

The legacy CMBS 30+ delinquency rate increased +90bps in August, to 12.8%, driven by the denominator effect (declining outstanding legacy balance). One of the largest loans to become newly delinquent was $65MM Hercules Plaza (33.6% of WBCMT 2006-C25), secured by a leasehold interest in a 518K square foot, 12-story, single-tenant office property in downtown Wilmington, DE. The loan was modified in 2014 (including a two-year maturity extension and a 50% appraisal reduction) after the single-tenant was acquired and vacated a significant amount of its space. The property is currently 73% occupied (underwritten at 100%) with a debt service coverage ratio of 1.12x (underwritten at 1.83x).

The percentage of legacy CMBS in special servicing increased to 15.7% in August, up from 14.8% in July. One of the largest loans to transfer to special servicing was $92MM Rockvale Square (3.6% of WBCMT 2007-C32), secured by an 86% occupied 540K square foot outlet mall in Lancaster, PA. Although the interest-only loan is current, refinancing by its May 2017 maturity may be complicated by the high leverage on the debt; applying the underwritten cap rate (6.7%; 2007) to the most recent net operating income (full-year 2015; -20% below underwriting) equates to a 100% loan-to-value ratio.

The legacy payoff success rate was 73% for August (up from 60% on-time and 64% post-maturity for July), bringing the year-to-date average to 78.9%. One of the largest loans to mature without paying off was $130MM The Alhambra (13.7% of GSMS 2006-GG8), secured by an 845K square foot urban office complex in Alhambra, CA. The loan transferred to special servicing in May 2016 when the borrower requested a 12- month maturity date extension. As of year-end 2015, the property was 66% occupied (underwritten at 90%) with a debt service coverage ratio of 0.92x (underwritten at 1.39x). The largest legacy loan to successfully payoff at maturity was $400MM Tishman Speyer DC Portfolio II (25% of LBUBS 2007-C2). The refinanced debt was secured by a portfolio of eight class A office buildings, totaling 2MM square feet, in the Washington, DC and northern VA. As of March 2016, the portfolio was 83% occupied (underwritten at 90%) and the loan carried a debt service coverage ratio of 1.61x (underwritten at 1.68x).

In CMBS 2.0, eight loans totaling $79.9MM became newly delinquent, bringing the 30+ delinquency balance to $711MM for a rate of 0.22%. The largest 2.0 loan to become newly delinquent was $26.4MM Minneapolis Apartment Portfolio (2.2% of WFRBS 2014-C20), after the last two borrower payment checks were returned. The loan is secured by a portfolio of 17 multifamily properties (totaling 430 units) and seven retail spaces (located at two of the multi-family properties) in South Minneapolis, MN. As of March 2016, the property was 98% occupied (underwritten at 95%) and the loan carried a 1.87x debt service coverage ratio (underwritten at 1.38x).

The special servicing rate for 2.0 increased +9bps in August, to 0.36% ($1.15BN aggregate balance). The largest loan newly transferred to special servicing was $71.5MM Hammons Hotel Portfolio (8.5% of GSMS 2015-GC34). The entire $247.6MM Hammons Hotel Portfolio loan is split pari passu across four conduit deals, though only two of the loan components have been transferred to special servicing since the owner, John Q. Hammons Hotels, filed for Chapter 11 bankruptcy in June. Per the most recent financials, the portfolio is 76% occupied (underwritten at 75%) and the loan carries a debt service coverage ratio of 2.08x (underwritten at 1.68x).

Prepayment and defeasance activity for the month totaled $567MM (29 loans), resulting in a total CMBS 2.0 paid-off balance of $10.4BN (478 loans). The largest loan to defease was $93.1MM Apache Mall (9.12% of UBSBB 2012-C3), secured by 591K square feet of a 754K square foot, enclosed, single-level regional mall in Rochester, Minnesota. As of year-end 2015, the property was 99% occupied (underwritten at 96%) and the loan had a 1.74x debt service coverage ratio (underwritten at 1.74x).

In new issue, seven private-label deals, totaling $4.2BN, priced during the month - including the first conduit deal that was structured with the intent of being risk-retention compliant (vertical interest; CMBS risk retention goes into effect December 24th). Spreads on conduit 10yr LCF AAA’s ranged from sw+94bps to sw+106bps (an average of -20bps tighter month-over-month and -33bps tighter than the sw+132bps year-todate average) while BBB-‘s ranged from sw+425bps to sw+515bps (an average of -175bps tighter month-over-month on published prices and - 189bps tighter than the sw+667bps year-to-date average).

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