CMBS Presentation to San Francisco RMA

Bridger Commercial Funding

June 2009

CMBS Lending and the Credit Markets

Game Over?

Greg Saunders Executive Vice President, Chief Financial Officer & Director


Risk Management Association LuncheonSan Francisco, CA


Today’s Discussion

CMBS Overview

Credit Market Freeze & CMBS

CMBS Market Prognosis


CMBS Overview

What is CMBS?

Bonds that are created from the cash flows of a pool of commercial mortgages

Loans that are included in the pools are referred to as “CMBS loans”

CMBS loans have grown to be a major source of commercial real estate capital, with $750 billion outstanding


CMBS Overview

CMBS Evolution

Roots in early ’80s—Residential MBS

Born out of RTC efforts in early ‘90s

Standardization of loan attributes & documentation


CMBS Overview

CMBSCMBS LIFE CO. BANKFreddie Mac/

Fannie Mae

Loan Types Permanent PermanentConstruction &

PermanentMini-Perms

Loan Terms

Non-Recourse Non-RecoursePartial/Full

RecourseNon-Recourse

Max LTV Moderate LTV Moderate LTV High LTV

Primary Source of Funds Bond Market Premiums Deposits Debt & Equity

Typical Property Types

Commercial & Multifamily

Class A Properties

All Multifamily

Borrower TypesLong Term

Investors

Developers / Long-Term Investors

Developers / Short-Term Investors

Short Term & Long Term Investors

CMBS Loans vs. Other CRE Loans


CMBS Overview

CMBS Issuance ($ Billions; Domestic)

Source: CMSA

$-

$50

$100

$150

$200

$250

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09


CMBS Overview

CMBS Market Share

CMBS Share of CRE Mortgage Originations

0%

10%

20%

30%

40%

50%

60%

70%

2003 2004 2005 2006 2007 2008

CMBS Share of Outstanding Commercial Mortgages

Banks and S&Ls50%

Life Insurance,

GSEs, Other29%

CMBS21%

Source: Federal Reserve & CMSA


CMBS Overview

CMBS Loan Pricing Methodology

10-Year Treasury Yield

+ 10-Year Swap Spread

+ CMBS Credit Spread

+ Originator Profit Margin

= All-In CMBS Loan Coupon

“Loan Spread”


CMBS Overview

CMBS Loan Pricing Levels: Then and Now

In reality, no new issuance market, so this rate is hypothetical

Rate component Spring '07 "Now"Originator Profit Margin 0.15% 0.50%CMBS Credit Spread 0.40% 4.50%10-Year Swap Spread 0.65% 0.20%10-Year Treasury 4.75% 3.50%

Total Interest Rate 5.95% 8.70%

4.75%

3.50%

0.65%0.40%

4.50%

0.50%

0.20%

0.15%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Spring '07 "Now"

Profit Margin

CMBS Credit Spread

10-Year Swap Spread

10-Year Treasury

5.95% Total

8.70% Total

1.20% total spread

6.20% total spread


CMBS Overview

Structuring CMBS

Hospitality

Industrial / Self Storage

Office

Multifamily / MHC

Retail

Individual Mortgages

Whole Loan Pool

---$3 billion

Trust

Unrated

B

BB

BBB

AA – A

AAA

CMBS

1%

2%

2%

3%

4%

88%

% of Deal


CMBS Overview

Originator/aggregator (Bridger) Bond underwriter/issuer (I-bank) Trustee Servicers (3) Third party providers Rating agencies Bond investors

The Players…


Credit Freeze and CMBS

The Start of the End… Subprime delinquencies Rating agencies put investors on notice Investment grade investors started pulling back

Stung by mark-to-market losses Lack of leverage reduced their appetite

Subordinated investors pulled back Demanded higher yields Lack of debt financing to purchase bonds


AAA-Rated CMBS Spreads(Basis points over 10-Yr Treasury)

0

200

400

600

800

1000

1200

1400

1600

1800

1/2/

07

3/2/

07

5/2/

07

7/2/

07

9/2/

07

11/2

/07

1/2/

08

3/2/

08

5/2/

08

7/2/

08

9/2/

08

11/2

/08

1/2/

09

3/2/

09

5/2/

09

7/2/

09


The Start of the End…

AAA-Rated CMBS Spreads(Basis points over 10-Yr Treasury)

50

70

90

110

130

150

170

190

210

1/2/

07

2/2/

07

3/2/

07

4/2/

07

5/2/

07

6/2/

07

7/2/

07

8/2/

07

9/2/

07

10/2

/07

11/2

/07

The initial panic…2007 The ultimate demise…2008-9

Source: Banc of America Securities



Nails in the coffin…

Morphing from credit crisis to economic crisis

Source: Bureau of Labor Statistics

U.S. Employment Growth(6 Month Moving Average in 000s)

(700)

(600)

(500)

(400)

(300)

(200)

(100)

-

100

200

300

400Ju

n-0

3

De

c-0

3

Jun

-04

De

c-0

4

Jun

-05

De

c-0

5

Jun

-06

De

c-0

6

Jun

-07

De

c-0

7

Jun

-08

De

c-0

8

Jun

-09



Nails in the coffin…Property fundamentals are getting hammered

Average Growth in Asking Rents

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2003

2004

2005

2006

2007

2008

Average Vacancy Rates

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

2003

2004

2005

2006

2007

2008

Source: Mortgage Bankers Association


CMBS Loan Delinquency Rates(30+ days)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

-E

20

10

-E


Nails in the coffin…Weakening fundamentals = rising delinquencies

Source: CMSA, Deutsche Bank

Last recession


CMBS Prognosis

Headwinds…

Flood of CMBS maturities comingCMBS Maturity Calendar

(billions)

$15

$30

$45

$60

$43$49

$95

$132 $131

$-

$20

$40

$60

$80

$100

$120

$1402

00

9

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17


CMBS Prognosis

Headwinds…

Declining property fundamentals + higher rates + conservative underwriting = equity vacuum

Scenario 1: Current Rates & New Underwriting, But NOI Stays Flat

Current Take-Out Financing

Legacy Loan Underwriting & Interest Rates Change

Property Net Cash Flow/Yr. 465,000$ 465,000$ -$ 1 LTV / NCF DSCR ratio 65% / 1.40x 80% / 1.15x2 Cap rate 8.55% 6.58% -1.97%

Property Value $ 5,438,000 7,064,000 (1,626,000) Change in Property Value -23%

10-year Treasury yield 3.50% 4.75% -1.25% + Loan Spread 5.20% 1.20% 4.00%

3 All-in Interest Rate 8.70% 5.95% 2.75%


CMBS Prognosis

Headwinds…Declining property fundamentals + higher rates +

conservative underwriting + bad economy = bigger equity vacuum

Scenario 2: Current Rates & New Underwriting, But NOI Declines 20%

Current Take-Out Financing

Legacy Loan Underwriting & Interest Rates Change

1 Property Net Cash Flow/Yr. 372,000$ 465,000$ 93,000$ 2 LTV / NCF DSCR ratio 65% / 1.40x 80% / 1.15x3 Cap rate (solve for this) 8.55% 6.58% -1.97%

Property Value 4,350,000 7,064,000 (2,714,000) Change in Property Value -38%

10-year Treasury yield 3.50% 4.75% -1.25% + Loan Spread 5.20% 1.20% 4.00%

4 All-in Interest Rate 8.70% 5.95% 2.75%


CMBS Prognosis

Complaints that need to be answered

Rating agency conflicts Underwriting standards Issuers having “skin in the game”


CMBS Prognosis

Market and property fundamentals need to improve

Stabilization of housing prices Signs of economic stability The “toxic loan” issue needs resolution CRE fundamentals

Vacancies: slow down Rents: stabilize


CMBS Prognosis

Can you come out and play?

Investors wanted Investment grade buyers Subordinated bond investors (“b-piece”

buyers) Equity investors to help support refi activity

Issuers needed Life insurance companies Investment banks / money center banks Warehouse credit facilities


CMBS Prognosis

Government Assistance May Help

TALF (Term Asset-Backed Loan Facility)

Supports origination of new & legacy CMBS

Attractive financing / 85% “advance rate” Remaining questions & issues:

• TALF loans are only for 3-5 years• New York Fed can reject specific loans from

the pool• Applies only to AAA-rated securities


CMBS Prognosis

Government Assistance Can Help…

Public Private Investment Programs Provides debt and equity capital for

investors to purchase legacy loans and securities from banks

Further cleans up balance sheets Questions & Issues:

• Large bid/ask spread on performing assets• Fear of changing government rules


CMBS Prognosis

The CMBS Market Will Come Back…

Support property acquisitions & construction Important vehicle to support refinancing Critical risk management tool for banks Great investment: excellent risk-adjusted returns

over time


CMBS Lending and the Credit Markets

Game Over?

Greg Saunders415-289-3230

[email protected]

CMBS Presentation to San Francisco RMA

Documents

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