CMBS and CRE Briefing
Transcript of CMBS and CRE Briefing
Copyright 2012, Trepp, LLC
EDR's Annual Property Due Diligence Summit
May 16, 2012
CMBS and CRE Briefing
2
Sources of Commercial Real Estate Debt
• CMBS (Securitization)• Life Insurance Companies• Commercial Banks• Credit Unions• Government• Private Equity
─ Recovering─ Peaking─ Recovering─ Emerging─ Over-heated─ Active
Obstacles to Financing
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Source: National Association of Realtors, 2011 Survey
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Capital Markets
5
Real Estate in the Capital Markets
• CMBS (Commercial Mortgage Backed Security)
– Securitization of CRE loans, organized a passive investment pool in a REMIC
• REIT (Real Estate Investment Trust)
– Shares in a company which holds either debt or equity in commercial real estate as actively managed investments
– Shares can be public (exchange traded) or private (non-exchange)• CLO (Collateralized Loan Obligation)
– Securities backed by various types of debt on real estate
– Adopted because “CDO” is a bad word• NPL (Non-Performing Loan)
– Securities used to finance distressed asset pools
– Liquidating trust where all proceeds go to bondholders
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U.S. CMBS Market Overview
• Forecast for 2012 projects new issues up to $50 billion.
• Backlog of matured loans continues to grow
• Secondary trading remains active and has recovered from summer 2011 disruption
• Loans continue to pay off
• Collateral performance is poor with delinquency rates near record levels
• Regional differences in collateral performance remain significant
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U.S. CMBS Secondary Market Spreads
Source: Trepp, LLC
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Spreads for New Commercial Real Estate Loans
Compiled from a survey of institutional lenders. Copyright, 2010, Trepp, LLC, all rights reserved.
Trepp Real Estate Portfolio Pricing Index (TREPP-i™)Indicative Spreads for Commercial Real Estate Loans vs. Treasury
(50-59% Leverage, Amortizing, 10 year, fixed rate)
Source: Trepp, LLC
Loan Payoff Activity
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10
CMBS 2.0 Primary Market Activity
2010• $12.7 billion
– (16 deals)• $6.4 billion in Freddie
Mac– (6 deals)
2011• $29.9billion
– (27 deals)• $13.7 billion by Freddie Mac
– (12 deals)• $395 million by FDIC
– (1 deal)
Source: Trepp, LLC
CMBS 2.0 U.S. Primary Market Activity
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2012* • $7.5 billion
– (11 deals)• $6.5 billion by Freddie Mac
– (5 deals)• $4 billion pricing for May
– (4 deals)
*(as of 4/30/12)
Source: Trepp, LLC
Selling Non-performing Assets
The What• $132,000,000 of certificates
• Sold at 99.75%• Coupon of 4.75%
• Secured by• 320 assets with• $224 MM carrying value• $569 MM unpaid balance
The Why• Leverage• Return boosted from mid 20% to
high 30%
The How• Single class of notes• Fast-pay, 100% cash sweep• Reserves
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Commercial Real EstateMarket Performance
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Commercial Real Estate Bear Markets
Sources: Trepp LLC, Moody’s, NCREIF, Bureau of Economic Analysis
Period Decline DurationTime to Recover
1929 to 1933 -44% 4 years 8 years
1941 to 1943 -42% 2 years 2 years
1989 to 1993 -32% 4 years 10 years
1999 to 2002 -4% 3 years 2 years
2007 to Present
REITs: -35%Direct: -45%
3 years in Top 6
5 + yrs others?
Major Value Decline – Prospect is a Long Recovery
Annual Sales Volume office, industrial, retail, apartments, hotels and dev sites
2012
Pro
ject
ed
2011 Year in Review
Source: Real Capital Analytics
2011 Year in Review: Top Markets
Source: Real Capital Analytics
Buyer Composition
Past Five Years
2011 By Property Type
2011 By Market Size
2007
User/Other Private Public Equity Fund Inst'l Cross-Border
11%
16%
11%
4%
8%
14%
5%
19%
7%
6%
8%
34%
38%
55%
49%
34%
24%
30%
33%
49%
28%
56%
27%
39%
49%
19%
18%
7%
10%
10%
15%
32%
16%
13%
35%
11%
21%
17%
13%
17%
13%
6%
10%
25%
15%
14%
27%
14%
17%
16%
16%
21%
14%
13%
10%
13%
20%
21%
8%
9%
16%
11%
6%
16%
15%
7%
9%
7%
6%
6%
7%
18%
9%
5%
8%
12%
7%
2011
2010
2009
2008
2007
Office
Industrial
Retail
Apartment
Hotel
Dev Site
Major Metro
Secondary
Tertiary
Buyer Composition
Past Five Years
2011 By Property Type
2011 By Market Size
2007
User/Other Private Public Equity Fund Inst'l Cross-Border
11%
16%
11%
4%
8%
14%
5%
19%
7%
6%
8%
34%
38%
55%
49%
34%
24%
30%
33%
49%
28%
56%
27%
39%
49%
19%
18%
7%
10%
10%
15%
32%
16%
13%
35%
11%
21%
17%
13%
17%
13%
6%
10%
25%
15%
14%
27%
14%
17%
16%
16%
21%
14%
13%
10%
13%
20%
21%
8%
9%
16%
11%
6%
16%
15%
7%
9%
7%
6%
6%
7%
18%
9%
5%
8%
12%
7%
2011
2010
2009
2008
2007
Office
Industrial
Retail
Apartment
Hotel
Dev Site
Major Metro
Secondary
Tertiary
Equity Capital
Source: Real Capital Analytics
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U.S. CMBS Retail Performance by Market
Source: Trepp, LLC
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U.S. CMBS Collateral Performance
Source: Trepp, LLC
20Source: Trepp, LLC
U.S. CMBS Collateral Performance
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U.S. CMBS Delinquency Rates: Significance of Regional Variation
10.82%
9.88%
8.46%14.57%
5.81%
10.249%
7.16%
9.29%11.19%
Source: Trepp, LLC
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Performance Comparison: CMBS and Commercial Mortgages Held by Commercial Banks
Sources: Trepp, FFIEC, Foresight Analytics
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Performance Comparison: CMBS and Bank Loans (Income Properties)
Sources: Trepp, FFIEC, Foresight Analytics
Delinquency Rate (30+ Days Past Due)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11p
Quarter
CMBS (Ex Pro-forma Loans) >= $100 Bn $10 Bn to $100 Bn $1 Bn to $10 Bn $100 Mn to $1 Bn
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Opportunities
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Growth in Defaults
Source: Trepp, LLC
26
Increased Backlog of Matured Loans
Source: Trepp, LLC
27
Cumulative Size of Matured Loan Backlog
Source: Trepp, LLC
28
Additional Opportunities in Maturing CMBS Loans
Source: Trepp, LLC
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Aggregate Commercial and Multifamily Mortgage Maturities
Source: Foresight Analytics
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Residential Loan Performance
Sources: FDIC
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Residential Loan Performance
Sources: FDIC
Stress in the Bank Market
Forecast Bank Failures and Cost to the Deposit Insurance Fund in Four Scenarios(As of 4Q 2011)
Cost to Deposit Insurance Fund ($ Billion)
Scenario # of Failures* Low High
Deep Recession 514 $71.8 $107.6Moderate Recession 364 $29.3 $44.0Moderate Growth 196 $10.6 $15.9Strong Growth 131 $5.8 $8.8
* Critically Undercapitalized Banks in 2-year scenario forecast
Source: Trepp Bank Navigator
RialtoNon-Performing Loan Trust
Transaction Briefing
Appendix A
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34
Briefing Call -- Agenda
1. Parties to the transaction2. History3. Structure of the deal4. Collateral scenario5. Economics of the deal6. Market response7. Future applications
4/19/2012
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Parties to the Transaction
• Seller: Rialto Real Estate Fund• Asset Manager: Rialto Capital Advisors• Sponsor: Rialto Capital Management• Underwriters: JP Morgan / Wells Fargo• Trustee: Wells Fargo• Cash Manager: Berkadia Commercial Mortgage• Rialto companies are subsidiaries of Lennar
Corporation (NYSE: LEN)
4/19/2012
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History
• Rialto Capital formed in 2007 to purchase non-performing and distressed Commercial Real Estate assets
• Purchased $5.2 billion of assets from 9 sellers in 2 years
• Rialto Real Estate Fund (“RREF”) closed in November, 2011
• RREF issued the Notes to increase capital and to leverage return on distressed assets
4/19/2012
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Structure – Transaction Basics
RREF ($224 MM Basis)
RREF 2012 LT1, LLC $132,000,000 Notes
Distressed Sellers
Institutional Investors
Sell Loans and REO
Deposits AssetsSells Notes
Buys Notes
4/19/2012
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Structure – Basic Waterfall
Simplified Cash Flow
Collections On Assets
Pay Servicing, Trustee and Asset Management Fees
Pay Interest on Notes
Replenish Reserves
Retire Notes
Working Capital
Reserve
Interest Reserve
4/19/2012
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Collateral Scenario
• Seasoned Portfolio• Recovery based on property type
– 21 distinct property types
– Lowest recovery (% of balance) is 3.4%
– Highest recovery is 100%
– Average recovery is 66.8%• Estimated that recoveries will retire all notes within 2 years
4/19/2012
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Economics
• Rialto– Add leverage to private equity fund
– Defers cash flow on investment, but
– Boosts returns from mid 20% to mid 30%
– Increases capital available for investment• Investors
– Increased return (almost 5%) in a low interest environment
– Rapid pay out
– No lingering credit risk
4/19/2012
41
Market Reaction
• Rating agencies supportive– Fitch BBB-(sf)
– Moody’s Baa3(sf)• Investors interested
– Active interest in analytics
– 9x oversubscribed
– Several orders for entire deal
4/19/2012
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Future Applications
• Rialto plans more transactions• Distressed asset buyers plan could increase returns• Banks could bolster capital with REO financing• Government insurance funds could replenish themselves with
troubled asset financing
4/19/2012
CMBS Background
Appendix B
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44
CMBS – A Brief (Modern) History
• Created in Response to Savings & Loan Crisis• First Used to Finance Resolution Trust Corporation
(“RTC”) Assets• Adapted to Seasoned Pools and Newly Originated
Loans in early 1990’s• Full-fledged, Stand-alone Asset Class by Late 1990’s
45
Key Features of CMBS
• Debt securities • Collateralized by the principal and interest generated
by a static pool of commercial mortgage loans• Tranched (Multiple classes) • Tranches are sequential pay instruments, with the
most senior tranche paid first
46
CMBS Sequential Pay Structure
46
Collateral Pool
Investment GradeAAA (Includes IO)
AAA
BBB
Below InvestmentGrade
BB to NR
Cashflow
Losses
PrincipalInterest
47
Parties in a CMBS Deal
• Issuer: Owns the loans and owes the bonds• Master Servicer: Collects loan payments and
manages reporting• Special Servicer: Deals with troubled assets• Trustee: Represents investors and handles cash for
the bonds • B-Piece Investor: Owns riskiest CMBS bonds and has
consultation rights• Senior Investor: Owns the AAA bonds
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Data Reporting Structure
Idealized Data Flow
Borrowers Borrowers Borrowers
Subservicer
Master ServicerSpecial
Servicer
Trustee
Investor
Reports
Trepp
Investors
Investors
Investors
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Trepp Company Overview
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Introduction to Trepp, LLC
• Trepp is the leading provider of analytics, information and technology to the global CMBS and commercial mortgage finance and banking industries
• Founded in 1979 with a 30 year history in structured finance focusing on CMBS and CRE the past 15 years
• Headquartered in New York City with offices in San Francisco, CA and London, UK
• Acquired Foresight Analytics in March of 2010, and Investcap in 2011 to expand commercial real estate and banking footprints
• Trepp is a wholly-owned subsidiary of DMG Information, which is a part of the Daily Mail Group, a multi-billion pound media company based in Britain
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our Clients
Over 650 Firms worldwide rely on Trepp’s products and services
Trepp Product
Suite
Insurance Companies
Opportunity Funds
Broker/DealersRating AgenciesGovernment AgenciesInstitutional
InvestorsThird Parties /
Software companies
52
our Partners
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about CMBS
• Widely recognized as the market standard for information and analytics to the global CMBS industry
• Largest commercially available database containing more than 100,000 loans which support close to $800 billion in securities
• Deal coverage includes North American, European, and Asian CMBS as well as Commercial Real Estate backed CDOs
• Products and services are used to support trading, research, risk management, surveillance and portfolio management
• Selected by the Federal Reserve Bank of New York as the collateral monitor for TALF Lending Program
• Industry thought leaders and active participant in all major industry associations
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our Products
TreppCRE™
• Research
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• Portfolio
• Morning Update: Loan Edition
• Trepp-i
• TreppMLS™
Trepp for CMBS
• Analytics on the Web
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• TreppWatch
• Morning Update
• Pricing Service
Powered by Trepp
• Structuring
• Trepp Engine
• Data Feed
TreppDerivative™
• CMBX
• Single Name
• Bespoke Basket
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for CMBS
CMBS Analytics• Powerful analytics and reporting capabilities• Rating agency default models and credit analysis
tools• Enhanced grouping capabilities• Scenario sharing• Delivered via the web or Bloomberg
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Package (IRP & EIRP) access
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for CMBS
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• Delivered daily via email in Excel format
• Quickly identify collateral events
• Contacts for servicer, special servicer, and trustee
• Adds structure to the risk management process
• Links to TreppWatch for comprehensive information
* Also available - MorningUpdate: Loan Edition
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TREPP-i (60-65% Leverage, Amortizing, 10 year, fixed rate)
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275
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Week Ending
Sp
read
(b
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po
ints
)
Multi Family
Office
Retail
Industrial/Warehouse
Hotel / Lodging
for Valuations
CMBS Pricing Service• Based on Trepp’s industry standard
library • Price investment grade securities
(BBB- and above)• Daily tier-adjusted valuations• Valuation of most actively traded
CMBS CUSIPs including IOs and Floaters
• Delivery through the Internet or secure FTP site
Trepp-i™• Indicative real-estate levels of spreads on
commercial mortgages
• Calculation methodology employed is similar to approach used for LIBOR™
• Major advancement versus spread data currently available
58
for CDS -- TreppDerivative™
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• Single name, bespoke basket and CMBX reference obligations
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Valuation and Analytics
• Project contract flows
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• Custom alerts based on contract and reference obligation performance
• Remittance report, Annex A, servicer watchlist commentary and prospectus
59
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Lead Finder Portfolio Research
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(bas
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TREPP-i (60-65% Leverage, Amortizing, 10 year, fixed rate)
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Office
Retail
Industrial/Warehouse
Hotel / Lodging
Trepp-i™• Indicative spread/pricing levels for commercial
mortgages
• Compiled through a consortium of almost 20 national lenders and insurance companies
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• Open architecture system offers flexibility in a UNIX, Windows or Linux environment
Structuring
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