SPRING 2012
RESEARCH PUBLICATION
Predicting CMBS
Prepayments and Defaults
The Impact of Distressed Real Estate Loans on CMBS Performance
A research report prepared for the Steven L. Newman Real Estate Institute by Benjamin Polen, Senior Research Associate at the Institute.
I had been getting
something for nothing.
That only delayed the
presentation of the bill.
The bill always came.
~ Ernest Hemingway
The Sun Also Rises
Introduction
C
ommercial
securities
mortgage-backed
(CMBS)
investors
have learned, if nothing else
CMBS is created by splitting the cash flow
issuances, as well as a high profile
from commercial mortgages into different
building, to illustrate risk to CMBS
bonds, known as tranches. Commercial
investors. Special servicer estimates and
real estate investors with an opportunistic
market information are applied to assess
strategy may appreciate how their skills can
potential impacts on CMBS tranches.
be used to identify pricing discrepancies
Ratings
that then impact structured real estate
applied to analyze current net operating
finance. Structured finance investors can
income (NOI) and estimate refinancing
use this article to appreciate the impact that
proceeds. Investors can apply these same
unique attributes of individual real estate
techniques to managing CMBS portfolios
assets have on CMBS investments.
or when underwriting prospective CMBS
Figure 1:
Three Columbus Circle
estate can no longer support the debt
willing to discount the probability of
service due to a weak real estate market,
losses to junior CMBS bonds. In today’s
this generates risk for CMBS lenders.
distressed environment, CMBS investors
CMBS tranches allow investors a choice of
face increased default and prepayment
risk. Senior bonds offer lower yields, but
risk as a result of special servicers selling
are created with credit support, which has
nonperforming loans and real estate
generally succeeded in insulating them
owned (REO) properties. It is imperative
from defaults. The CMBS issuance used
for CMBS investors, or those who wish
as an example in this article, WBCMT
to gain knowledge of the subject,
2006-C23, was created with 30% credit
to understand how to evaluate both
support. Junior bonds have less credit
commercial mortgage credit and CMBS
support but offer the opportunity for
cashflows (or waterfalls) to translate these
higher returns. Junior bonds will be the
vague fears and worries into actionable
first to absorb any losses from defaults.
information.
this analysis, investors are empowered
to make their own determinations on
pricing and risk for CMBS, essential tools
for portfolio management and CMBS
trading decisions (“secondary” CMBS).
Risk
modeled. When cash flows from real
with minimal prepayment risk and were
to analyze CMBS loans. By applying
investments.
structured CMBS to perform as originally
investors modeled senior CMBS bonds
data and ratings agency methodologies
are
investors expect both mortgages and
During the real estate boom,
This white paper uses special servicer
methodologies
In a bullish real estate market, most
than out of necessity, how to split the
check.
agency
Prepayment risk represents an early
Photograph credit: Benjamin Polen
Problematic deals that special servicers
are now tasked with resolving are numerous.
In fact, about 8% of all outstanding CMBS
deals are delinquent as of September 2011,
according to Morningstar.
This article uses actual loans and CMBS
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return of principal, eliminating future
interest cashflows that would otherwise
be made to bondholders. This risk was
thought to be generally mitigated by
lockout periods, defeasance and penalty
fees.
given
Rarely was serious consideration
to
substantial
prepayments
resulting from distressed sales. Investors
PREDICTING CMBS PREPAYMENTS AND DEFAULTS SPRING 2012
in today’s CMBS market need to pay careful
material effect on the bond price and yield. For investors who bought into three to five
attention to default and prepayment risks
year bonds with a perception of an AAA safe and steady yield, receiving a large principal
and their impact influence on total returns.
prepayment could shorten the average life down to one to three years. This reduces both
1
Default risk stems from loan losses,
ultimately correlated with a borrower’s
ability to refinance a loan, the causes
of which are property specific.
Recent
property income information can be used
to re-underwrite a loan from a lender’s
perspective and determine refinancing
proceeds. If expected refinancing proceeds
are less than the loan exposure, CMBS
investors face default risk.
In CMBS, nonperforming mortgages
are sent into “special servicing,” where a
special servicer (predesignated at CMBS
issuance) decides whether to engage in
a workout, sell a nonperforming note or
foreclose (leading to REO). Each of these
decisions will have a different effect on
CMBS investors. Understanding special
servicer decisions and the resulting impact
on CMBS is key for investor underwriting.
For example, a note sale results in an
unexpected cash inflow, but the servicer
is obliged to distribute cash according to
the structured formula. This was the case at
Three Columbus Circle, as detailed in the
yield and total return.
How a NYC Office Loan Impacts CMBS
In New York, the $250 million securitized loan on Three Columbus Circle (aka 1775
Broadway, the former Newsweek building) and its sponsor, Joe Moinian, is familiar to many
real estate professionals. The Three Columbus Circle loan was securitized into WBCMT 2006C23. The building, shown in Figure 1, underwent an extensive renovation and repositioning
process, which resulted in a low occupancy of 68% as tenants left during the disruptions.
The mortgage was sold to the Related Companies by special servicer CW Capital, resulting
in a large $250 million prepayment to senior CMBS investors. (SL Green later partnered
with Moinian in a recapitalization and paid off the Related-owned mortgage.) While junior
CMBS investors were protected from a loss, senior bondholders saw the market price of
their bonds drop as a result of the reduction in interest cashflows. This effect is illustrated in
Figure 2. The repayment and the impact on senior bondholders could have been predicted
through an understanding of structured finance and the CMBS issuance.
The CMBS loan on Three Columbus Circle, originated in 2006, was structured with a
four-year, interest-only period and a scheduled amortization period starting in February
2010. This amortization increased debt service by 20%, from $14.4 million to $17.4 million.
According to press reports, when Moinian was unable to refinance the building, he hoped
to negotiate an extension of the interest-only period. In order to do so under CMBS
structure, it was necessary to deliberately skip loan payments in order to transfer the loan
into special servicing. Unlike bank lending, a CMBS borrower cannot rely on a transactional
Figure 2:
WBCMT-C23 Senior Bond Prices via Bloomberg Data History (BDH)
next section of this paper, when the loan
sale resulted in a prepayment. Another
option for a special servicer is a workout or
modification. One modification technique
that has been used frequently is a loan
extension on the same terms, such as a one,
two or three years. While a loan extension
can help keep a borrower current, it does
so at the continued risk to CMBS investors.
Principal
payments,
including
prepayments resulting from an REO or
loan sale, flow first to a senior bond. Cash
proceeds resulting from a loan or property
sale are distributed to the CMBS tranches
that are first in line to receive principal
payments. In the event of a significant
principal prepayment, this can have a
These risks are formally known as constant default rate
(CDR) and conditional prepayment rate (CPR).
1
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–2–
PREDICTING CMBS PREPAYMENTS AND DEFAULTS SPRING 2012
the bond’s performance activity.”2 At Three
Figure 3:
Columbus Circle, plausible prepayment
scenarios
Cumulative CMBS Losses by Vintage (Bloomberg)
would
certainly
include
the
payment of the full $250 million amount.
What if the special servicer had extended
the loan? CMBS bondholders will have
different viewpoints depending on the
tranche owned. Distressed real estate
loans held inside a CMBS conduit may be
resolved in several ways by the special
servicer, including an outright sale of the
loan or foreclosure and sale of the real
estate asset.
Besides a sale of the loan (or foreclosed
property),
other
resolution
strategies
include a modification of loan terms,
an extension of balloon payment or
receivership. Each will have a different
impact on bondholders. In this case, a loan
extension would have helped the senior
A-PB tranche, which would not have taken
such a large prepayment and subsequent
hit on its market price (Figure 2).
Exploring CMBS Risk
relationship or goodwill in a workout. In this instance, the missed payments triggered a
material default of the loan.
A loan modification is generally employed when there are few other palatable alternatives,
including a lack of interested buyers and the inability to refinance. Given market reports
about the borrower’s various failed attempts to refinance the loan, he may have viewed this
as a sign of the market’s lack of appetite for the collateral. A calculated risk of withholding
loan payments to force a modification may have been rational, but perhaps it was the
borrower’s only choice. From the special servicer’s perspective, tasked with maximizing
proceeds to the trust, selling this loan quickly was an easy choice to make. To date, 2006
vintage CMBS deals have had the second highest losses (Figure 3).
The ability to identify likely loan resolution outcomes is the first step to estimating the
impact on CMBS. For example, an analysis of the distressed loan on Three Columbus Circle
could reasonably determine sufficient demand for the first mortgage loan, based on the
property’s location, size and loan to value (LTV) ratio. With a loan balance of $250 million,
this represented a collateralization of $404 loan/square foot. Even with additional required
redevelopment costs, this opportunity is a compelling deal, given the property’s frontage
on 57th Street and its proximity to Columbus Circle. It is therefore a reasonable possibility
that the special servicer could sell the loan at or near its par value of $250 million.
The next step is in understanding the impact of a $250 million prepayment would have
on the CMBS trust. In The Handbook of Mortgage Backed Securities, Jacob, Manzi,
and Fabozzi wrote, “For large loan pools, CMBS investors should identify the loans that
influence a given bond the most and then develop plausible prepayment scenarios to reveal
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–3–
Real
estate
professionals
can
use
their market knowledge to estimate the
likelihood of prepayments and losses on
CMBS conduits. For example, applying
market cap rates to property income will
derive a property value. A loan amount,
based on 65% loan-to-value ratio, can
then be backed out of the property value.
Alternatively, one could apply a required
debt service coverage ratio and interest
rate to determine the property’s ability to
support a refinancing.
When refinancing proceeds are less than
the loan balance, loss and prepayment
estimates are applied to their corresponding
junior and senior tranches. Near-term
(within 12 months) prepayments and losses
are most likely to immediately occur from
the sale of properties or delinquent loans
Handbook of Mortgage Backed Securities, Chapter
50, “The Impact of Structuring on CMBS Bond Class
Performance” by David P. Jacob, James M. Manzi and
Frank J. Fabozzi.
2
PREDICTING CMBS PREPAYMENTS AND DEFAULTS controlled by the special servicer (as was
the case with Three Columbus Circle).
Fortunately, it is possible for investors
to access the information maintained
SPRING 2012
Figure 4:
WBCMT 2006-C23 REO & Potential Losses based on Special Servicer Estimates as of September
2011 (Special Servicer Report)
by special servicers that describes both
delinquent loans and foreclosed properties,
also known as the previously mentioned
REO.
REO Generates High Prepayment Risk
REO assets are destined to be sold by
the special servicer, most likely in the near
term. While it is true that a special servicer
may hire a management company to lease
a REO property and attempt to increase
the property value, this strategy can take
more than a year to implement. Thus, REO
properties provide the highest likelihood
for prepayment. According to the special
servicer’s reports on WBCMT 2006-C23,
there are eight REO loans with a total
principal balance of $87.7 million and a
total loan exposure of $98.6 million.3
The special servicer estimates REO
sales at 90% of the most recent value,
which would result in a prepayment of
$57.8 million (Figure 4). As a result, there
is a total potential loss risk estimated at
$40.8 million (Table 1), representing the
shortfall between sale proceeds and total
loan exposure. The $57.8 million of cash
flow would go to the senior tranches and
repay servicer advances. Considering the
current balance of the senior A-PB tranche
is $66.4 million, this prepayment would pay
down 87% of that bond’s principal balance
(Figure 6). Senior bond investors would
suffer from high principal repayments and
REO could result in a $57.8 million prepayment to senior tranches, and write down the junior tranches with $40.8 million in losses.
risk an inability to replace those yields in
current markets. The losses of $40.8 million
3 The total exposure balance reflected in
the loss estimates
includes advances made by the special servicer. These
advances include principal and interest, along with
property management and loan sale expenses. Since
proceeds from a loan sale are first used to repay servicer
advances before paying down bond classes, a long, drawn
out and expensive loan battle can hurt recoveries to both
junior and senior investors. In WBCMT 2006-C23,
the REO loans have a total of $10.9 million in servicer
advances.
Table 1:
WBCMT 2006-C23 loss & prepayment risk from delinquent and REO loans as of September 2011
Loan Status
Loss Risk
Prepayment
REO
$40,811,082
$57,775,500
Delinquent
$53,751,743
$112,197,899
Total
$94,562,824
$169,973,399
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Deal Name
–4–
WBCMT 2006-C28
Loss Risk
($72,044,342)
Ranking
1
Deal Name
WBCMT 2006-C28
REO Loa
Balance
$318,034
PREDICTING CMBS PREPAYMENTS AND DEFAULTS SPRING 2012
would write down the balance of the junior
Figure 5:
tranches, wiping out the entire balance of
WBCMT 2006-C23 Potential Losses from Delinquent Loans based on Special Servicer Estimates as of
September 2011. (Special Servicer Report & author’s analysis)
the most junior S tranche (Figure 7).
Applying this analysis to the CMBS
universe, a review of the ten largest REO
loans shows the CMBS deals and their
corresponding risk exposure (Table 2). The
REO with the largest loan balance is a mall
in California, built in 1968. The CMBS trust
has $190 million in loan exposure, but the
special servicer estimates the property
valued at $153 million, a $37 million deficit
to the loan balance. However, a portfolio of
Southeast office buildings has the greatest
loss risk of REO loans, with $68.3 million in
loss exposure on a $180.9 million loan that
is valued at only $112.64 million. Investors
in those CMBS deals should be cognizant
of the prepayment and default risk at hand.
The CMBS deals associated with those loans
have some of the highest REO loan balances
and REO loss risk exposures (Tables 3 and
4). The prepayment risk to specific CMBS
bonds is noted in these tables. The largest
REO loan balance, the California mall,
Loan Status
Loss Risk
would prepay the A2 bond of the WBCMT
Prepayment
REO
$40,811,082
$57,775,500
Delinquent
$53,751,743
$112,197,899
Total
$94,562,824
$169,973,399
Deal Name
Loss Risk
Deal Name
Ranking
2006-C28 issuance.
The REO loan with
the greatest risk loss, the Southeast office
Deal
Name
portfolio,
REO Loan
Balance
Ranking
Loan
wouldForeclosure
prepay JPMCC
2005-CB13
A2FL. The
JPMCC 2005-CB13
Balance
Bloomberg
CMBS tool makes
$167,946,611
it easy to identify prepayment
$127,777,001 risk up the
BACM 2006-5
WBCMT 2006-C28
($72,044,342)
1
WBCMT 2006-C28
$318,034,342
1
JPMCC 2005-CB13
($68,260,000)
2
JPMCC 2004-CBX
$88,000,000
JPMCC 2005-CB13
$180,900,000
2
collateral chain, from loan
to CMBS deal.
GSMS 2006-GG8
($65,405,189)
3
GSMS 2006-GG8
$179,805,189
3
GSMS 2005-GG4
$83,125,000
CWCI 2006-C1
($56,030,399)
4
Delinquent Loans $70,988,785
Are Troublesome,
CWCI 2006-C1
$110,753,000
4
GMACC 2006-C1
GCCFC 2005-GG5
($43,027,073)
5
GCCFC 2005-GG5
$107,753,000
5
Special Servicer Options
GCCFC 2005-GG3
$67,727,758
BACM 2005-3
($38,785,404)
6
6 million in
Delinquent loans could result in a $112 million prepayment to senior BACM
tranches 2005-3
and a write down of the $96,500,000
junior tranches with $53.8
CSMC 2007-C1
$64,000,000
CSFB
2001-CKN5
($37,875,000)
losses.
(Note:
Two loans are not expected
to have losses.) 7
CSFB 2001-CKN5
$89,930,399
7
The next, or even equally risky basket of
LBFRC
2006-LLFA
$57,361,673
CGCMT 2007-C6
($22,703,000)
8
CGCMT 2007-C6
$87,702,073
8
BACM
2006-1
$55,000,000
BACM 2006-4
($22,701,636)
9
BACM 2006-4
$74,127,123
9
BACM
2005-3
$50,923,880
GSMS
2005-GG4
($19,763,991)
10
GSMS 2005-GG4
$71,022,826
10
Table 2:
Rank
1
2
3
4
5
6
7
8
9
10
Loan Name
Montclair Plaza(2)
DRA-CRT Portfolio I
Ariel Preferred Retail Portfolio
Moreno Valley Mall
FRI Portfolio
Highland Mall
Windsor/RECP Hotel Portfolio
55 Park Place
Four Seasons Nevis
Tower Place 200
Deal
WBCMT 2006-C28
JPMCC 2005-CB13
GSMS 2006-GG8
CGCMT 2007-C6
BACM 2005-3
JPMCC 2002-CIB4
GCCFC 2005-GG5
BACM 2006-4
WBCMT 2007-WHL8
GSMS 2006-GG8
NameStreet, New York, NY 10010
Deal
P: Rank
646.660.6950 / 137 Loan
East 22nd
www.baruch.cuny.edu/realestate
1
Trinity Hotel Portfolio
BACM 2006-5
Target Bond
A2
A2FL
A2
A1
A2
A3
A2
A3A
A1
A2
State
CA
Various
Various
CA
Various
TX
CA
GA
Various
GA
Property
Type
Retail
Office
Retail
Retail
Office
Retail
Hotel
Office
Hotel
Office
Target Bond
State
–5–
Property
Type
A2
Various
Hotel
Current Trust
Balance
Recent Value
Value Date
$190,000,000
$180,900,000
$90,009,189
$84,565,377
$70,000,000
$61,104,416
$53,783,787
$51,303,123
$51,000,000
$50,500,000
$153,000,000
$112,640,000
$65,650,000
$42,700,000
$37,825,000
$128,000,000
$50,400,000
$42,000,000
$110,000,000
$27,050,000
2/3/2011
n/a
n/a
10/17/2011
8/19/2011
6/1/2001
12/16/2010
5/20/2011
9/27/2010
6/1/2011
Current Trust
Balance
Recent Value
Value Date
$127,777,001
$113,120,000
1/13/11
Loss Risk
($37,000,000)
($68,260,000)
($24,359,189)
($41,865,377)
($32,175,000)
n/a
($3,383,787)
($9,303,123)
n/a
($23,450,000)
Loss Risk
($14,657,001)
Deal Name
MCC 2005-CB13
ACM 2006-5
MCC 2004-CBX
SMS 2005-GG4
SPRING 2012
$57,775,500
Both REO and delinquent loans also
DealaName
REO Loan
Ranking
present
serious prepayment
risk for
senior
Balance
tranches. If these loans were prepaid within
44
9
25
3
7
Loans
Foreclosure Loan
Balance
Loss Risk is the REO Loan Balance subtracted from Most Recent
Property
Rank Value
Loan Name
$167,946,611
$127,777,001
$88,000,000
$83,125,000
$70,988,785
$67,727,758
$64,000,000
Loss Risk
($37,000,000)
($68,260,000)
($24,359,189)
($41,865,377)
($32,175,000)
n/a
($3,383,787)
($9,303,123)
n/a
($23,450,000)
Loss Risk
WBCMT 2006-C28
$318,034,342
1
the next 12 months, it would completely
JPMCC 2005-CB13
$180,900,000
2
prepay
the A-PB class
and also prepay
a
GSMS
2006-GG8
$179,805,189
3
portion
of the A-4 tranche,
which are4 the
CWCI
2006-C1
$110,753,000
GCCFC
2005-GG5
$107,753,000
5 had
next level of senior bonds. Investors who
BACM 2005-3
$96,500,000
6
recently purchased these bonds expecting
CSFB 2001-CKN5
$89,930,399
7
stable yield
would be disappointed
CGCMT
2007-C6
$87,702,073 with
8 the
quick 2006-4
return of their principal
and a lack
BACM
$74,127,123
9 of
GSMS
2005-GG4
$71,022,826
10
interest income.
$57,361,673
$55,000,000
$50,923,880
Value Date
2/3/2011
n/a
n/a
10/17/2011
8/19/2011
6/1/2001
12/16/2010
5/20/2011
9/27/2010
6/1/2011
Value Date
($14,657,001)
($15,530,785)
($37,700,000)
n/a
($29,000,000)
($9,250,000)
n/a
($16,858,499)
($6,071,159)
($2,200,000)
1
2
3
4
5
6
7
8
9
10
Prepayment
$112,197,899
estimates described
herein.
$169,973,399
$94,562,824
Deal Name
Loan
CMBS deals
with largest REOForeclosure
loss risk
Balance
Deal Name
Loss Risk
Ranking
JPMCC 2005-CB13
$167,946,611
WBCMT 2006-C28
($72,044,342)
1
BACM 2006-5
$127,777,001
JPMCC 2005-CB13
($68,260,000)
2
JPMCC
2004-CBX
$88,000,000
GSMS 2006-GG8
($65,405,189)
3
GSMS
$83,125,000
CWCI 2005-GG4
2006-C1
($56,030,399)
4
GMACC
2006-C1
$70,988,785
GCCFC 2005-GG5
($43,027,073)
5
BACM 2005-3
($38,785,404)
6
GCCFC
2005-GG3
$67,727,758
CSFB 2001-CKN5
($37,875,000)
7
CSMC
2007-C1
$64,000,000
CGCMT 2007-C6
($22,703,000)
8
LBFRC 2006-LLFA
$57,361,673
BACM 2006-4
($22,701,636)
9
BACM 2006-1
$55,000,000
GSMS 2005-GG4
($19,763,991)
10
BACM 2005-3
$50,923,880
MACC 2006-C1
Ranking
$318,034,342
$180,900,000
$179,805,189
$110,753,000
$107,753,000
$96,500,000
$89,930,399
$87,702,073
$74,127,123
$71,022,826
1/13/11
12/14/10
12/20/10
7/1/05
3/24/10
n/a
1/19/11
3/1/11
n/a
4/7/11
WBCMT 2006-C28
JPMCC 2005-CB13
GSMS 2006-GG8
CWCI 2006-C1
GCCFC 2005-GG5
BACM 2005-3
CSFB 2001-CKN5
CGCMT 2007-C6
BACM 2006-4
GSMS 2005-GG4
REO Loan
Balance
4:
CCFC 2005-GG3
Deal Name
Table
Total
SMC 2007-C1
$169,973,399
CMBS deals with largest REO balance
$53,751,743
Recent Value
$112,197,899
$40,811,082
FRC 2006-LLFA
Delinquent
$153,000,000
$112,640,000
$65,650,000
$42,700,000
$37,825,000
$128,000,000
$50,400,000
$42,000,000
$110,000,000
$27,050,000
Table 3:
REO
ACM 2006-1
ACM 2005-3
rent Trust
alance
90,000,000
80,900,000
90,009,189
84,565,377
70,000,000
61,104,416
53,783,787
51,303,123
51,000,000
50,500,000
$57,775,500
Recent Value
ng
Prepayment
$113,120,000
$91,500,000
$50,300,000
$397,650,000
$35,000,000
$46,850,000
$85,100,000
$32,200,000
$39,300,000
$40,000,000
24
rrent Trust
Balance
43
$127,777,001
$107,030,785
$88,000,000
$70,988,785
$64,000,000
$56,100,000
$55,000,000
$49,058,499
$45,371,159
$42,200,000
82
Loan Status
Loss Risk
PREDICTING CMBS PREPAYMENTS AND DEFAULTS
JPM
BA
JPM
GS
GM
GC
CS
LB
BA
BA
$631,134,724
$115,939,623
$746,254,958
Total
$247,049,267
$325,251,138
$78,864,315
$32,947,218
$279,996,485
$404,115,453
.75 to .99
$23,970,097
.50 to .74
$543,958
$27,554,229
Est. Prepayment
$3,584,132
$34,588,791
.25 to .49
Property
Type
0 to .24
State
Est. Loss
Target Bond
$34,864,221
Investor Target
Identification
& Analysis
Deal
Bond State
Property of Curr
Current Trust
Recent Value
Value Date
Loss Risk
Type
Ba
Distressed CMBS Loans
Balance
1
Montclair Plaza(2)
WBCMT 2006-C28
A2
CA
Retail
$19
Table 5: A2
MT 2006-C28
CA
Retail
$190,000,000
2/3/2011
After REO
loans, an $18
2
DRA-CRT$153,000,000
Portfolio I
JPMCC ($37,000,000)
2005-CB13
A2FL and delinquent
Various Office
CC 2005-CB13
A2FL
Various
Office
$180,900,000
$112,640,000
n/a 2006-GG8
($68,260,000) A2
WBCMT 2006-C23 loans with debt service coverage under
as of
September
2011
3 1.0
Ariel
Preferred
Retail
Portfolio GSMS
Various
Retail
investor can identify other problem CMBS $9
S 2006-GG8
A2
Various Retail
$90,009,189
$65,650,000
n/a
($24,359,189)
$8
4
Moreno Valley
Mall
CGCMT
2007-C6
A1
CA
Retail
loans. The next most immediate concern
Loans
ReportedA1DSCR Loan
Est. Prepayment
Est.
Loss
$84,565,377
$42,700,000
10/17/2011
($41,865,377)
MT 2007-C6
CA Balance
Retail
5
FRI Portfolio
BACM 2005-3
A2
Various Office
$7
is from other
troubledTX
loans that
are likely $6
M 2005-3
A2
Various Office
$70,000,000
$37,825,000
8/19/2011
($32,175,000)
6
Highland
Mall
JPMCC
2002-CIB4
A3
Retail
0 to .24
$34,588,791
$34,864,221
7
$543,958
CC 2002-CIB4
A3
TX
Retail
$61,104,416
$128,000,000
6/1/2001
to be n/a
classified
as delinquent
or perhaps $5
7
Windsor/RECP
Hotel Portfolio
GCCFC 2005-GG5
A2
CA
Hotel
FC 2005-GG5
CA $27,554,229
Hotel
$53,783,787
$50,400,000
12/16/2010
($3,383,787)
3
.25 to .49 A2
$23,970,097
$3,584,132
8
55 Park Place
BACM 2006-4
A3A
GA
Office
transferred to the special servicer through $5
M 2006-4
A3A
GA
Office
$51,303,123
$42,000,000
5/20/2011
($9,303,123) A1
WBCMT
Various Hotel
$5
9
Four Seasons
Nevis
.50 to .74
$279,996,485
$247,049,267
$32,947,218
9 2007-WHL8
foreclosure. A quick and helpful way to
MT 2007-WHL8 A1
Various Hotel
$51,000,000
$110,000,000
9/27/2010
10
Tower Place
200
GSMS 2006-GG8 n/a A2
GA
Office
$5
$325,251,1386/1/201125 ($23,450,000)
.75 to .99 A2
$78,864,315 $27,050,000
S 2006-GG8
GA $404,115,453
Office
$50,500,000
determine which loans fall into this category
Deal
Rank
Loan Name
State coverage
Property Cu
isDeal
by looking Target
at the Bond
debt service
$115,939,623
$631,134,724
44
Property Current Trust
Recent Value
Value Date
Loss Risk
Type
ratio
of
the
loan.
For
the
WBCMT
2006Type
Potential losses and prepayments are estimated using Moody’s
methodology Balance
1
Trinity Hotel Portfolio
BACM 2006-5
A2
Various Hotel
$
C23 securitization, there are 44 loans with a
BACM 2006-5
A2
Various Hotel
$127,777,001
1/13/11JPMCC
($14,657,001)
2
The Shore $113,120,000
Club
2005-CB13
A2FL
FL
Hotel
$
JPMCC
2005-CB13
FL2006-C23
Hotelare known
$107,030,785
$91,500,000
12/14/10
($15,530,785)
debt-service
coverage
ratio
of 1.00
loans
in CMBSA2FL
and WBCMT
servicer
3as delinquent
Continentalloans.
Plaza The special
JPMCC
2004-CBX
A5
NJ (DSCR)
Office
JPMCC 2004-CBX
Office
$88,000,000
$50,300,000
($37,700,000)
4
DDR/Macquarie
Mervyn’s
GMACC
or2006-C1
less.5 TheseA3loans have Various
a currentRetail
balance
has discretion A5
to choose aNJ
resolution
of delinquent
loans
and may
choose Portfolio
to 12/20/10
sell a loan
GMACC 2006-C1
A3
Various Retail
$70,988,785
$397,650,000
7/1/05
n/a
5
717 North Harwood Street
CSMC of
2007-C1
A1A
TX
Office
$746.3 million. There are 10 loans with
foreclose
on the property
(leading to REO)
or modify the
loan (by($29,000,000)
$35,000,000
3/24/10
CSMC(resulting
2007-C1 in prepayment),
A1A
TX
Office
$64,000,000
6
Investcorp Porfolio
JPMCC 2005-CB13
A2FL
PA
Industrial
a DSCR under 0.50 and with a cumulative
extending
for example).
A loan modification ($9,250,000)
JPMCC
2005-CB13a balloon
A2FL payment
PA or scheduled
Industrial amortization,
$56,100,000
$46,850,000
7
Fairmont Sonoma
Mission Inn & Span/aBACM
2006-1
A2
CA
Hotel
BACMtypically
2006-1 resultsA2
CA
Hotel
$55,000,000
$85,100,000
n/a
loan
balance
of
5).
in the loan being
transferred
out of
and reducing1/19/11
the near
8 special
Novoservicing
Nordisk
Headquarters
CGCMT
2005-C3
A2$62.1 million
NJ (Table
Office
CGCMT 2005-C3
A2
NJ
Office
$49,058,499
$32,200,000
3/1/11
($16,858,499)
9
Birtcher/Charlesbank Office Portfolio GCCFC 2005-GG3
A2 in foreclosure
CA
Office
CMBS loans
represent
term prepayment risk.
GCCFC 2005-GG3
A2
CA
Office
$45,371,159
n/aGSMS
($6,071,159)
10
Four Falls $39,300,000
2005-GG4
A2
PA
Office
significant prepayment and default risk
The loan onA2Three Columbus
Circle
categorized as
delinquent until
it was ($2,200,000)
GSMS 2005-GG4
PA
Office loan was$42,200,000
$40,000,000
4/7/11
Target Bond
$746,254,958
State
Reported DSCR
Deal
Loan Balance
Total
sold (in defiance of the borrower’s requested workout). WBCMT 2006-C23 currently has
to investors (Tables 6 and 7). The top ten
eleven delinquent loans which represent $166.6 million in loan exposure.4 Unfortunately
largest loans in foreclosure represent $130
for bondholders, the properties are valued at $133.1 million, a deficit to their loan balances
million in loss risk and uncertainty to their
(Figure 5). However, since the balances are allocated on an individual loan basis, two of
CMBS bondholders. If these losses are fully
the properties are valued greater than their loan exposure. Those deals still have equity
realized, it would generate a 19.5% loss on
and a chance of refinancing. The special servicer estimates a sale price at 90% of value.
the $663 million in loan exposure.
A payment of 90% of the approximate value of $133.1 million would first repay servicer
Once risky loans are identified, how does
advances of $7.0 million and then be applied towards principal repayment of $112.2 million.
one evaluate them and assess potential
In total, the delinquent loans could result in a $53.8 million loss, which would write down
losses or prepayments?
the junior tranches. By analyzing the REO and delinquent loans, it is possible to estimate
standards re-underwrite existing CMBS in
a total prepayment risk of nearly $170 million and potential losses to junior tranches of
4
$94.6 million (Table 1, Figure 7). A write down of $94.6 million to junior tranches would
completely wipe out the S, Q, P, O, and N tranches, and 93% of the M tranche. Holders of
those tranches would benefit if these loans were extended or if recoveries exceeded the
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–6–
Moody’s CMBS
The eleven delinquent loans in this deal have a total
principal balance of $159.6 million, but when servicer
advances are included there is an additional $7.0 million
in loan exposure.
5 This excludes the loan on the property at 620 Sixth
Avenue, which has been recapitalized, according to press
reports.
3
Ariel Preferred Retail Portfolio GSMS 2006-GG8
A2
Various Retail
$90,009,189
$84,565,377
4
Moreno Valley Mall
CGCMT 2007-C6
A1
CA
Retail
5
FRI Portfolio
BACM
2005-3
Various Office
$70,000,000
PREDICTING
CMBS PREPAYMENTS
AND
DEFAULTSA2
6
Highland Mall
JPMCC 2002-CIB4
A3
TX
Retail
$61,104,416
7
Windsor/RECP Hotel Portfolio GCCFC 2005-GG5
A2
CA
Hotel
$53,783,787
8
55 Park Place
BACM 2006-4
A3A
GA
Office
$51,303,123
Table
6:
WBCMT 2007-WHL8 A1
Various Hotel
$51,000,000
9
Four Seasons Nevis
10
Tower
Place
200
GSMS
2006-GG8
A2
GA
Office
$50,500,000
Largest loans in foreclosure and loss risk
Rank
Loan Name
1
2
3
4
5
6
7
8
9
10
Trinity Hotel Portfolio
The Shore Club
Continental Plaza
DDR/Macquarie Mervyn’s Portfolio
717 North Harwood Street
Investcorp Porfolio
Fairmont Sonoma Mission Inn & Spa
Novo Nordisk Headquarters
Birtcher/Charlesbank Office Portfolio
Four Falls
Deal
Target Bond
BACM 2006-5
JPMCC 2005-CB13
JPMCC 2004-CBX
GMACC 2006-C1
CSMC 2007-C1
JPMCC 2005-CB13
BACM 2006-1
CGCMT 2005-C3
GCCFC 2005-GG3
GSMS 2005-GG4
Figure 6:
A2
A2FL
A5
A3
A1A
A2FL
A2
A2
A2
A2
State
Property
Type
Various
FL
NJ
Various
TX
PA
CA
NJ
CA
PA
Hotel
Hotel
Office
Retail
Office
Industrial
Hotel
Office
Office
Office
Current Trust
Balance
$127,777,001
$107,030,785
$88,000,000
$70,988,785
$64,000,000
$56,100,000
$55,000,000
$49,058,499
$45,371,159
$42,200,000
n/a
($24,359,189)
10/17/2011
($41,865,377)
8/19/2011
($32,175,000)
SPRING
2012
6/1/2001
n/a
12/16/2010
($3,383,787)
5/20/2011
($9,303,123)
9/27/2010
n/a
6/1/2011
($23,450,000)
Recent Value
Value Date
$113,120,000
$91,500,000
$50,300,000
$397,650,000
$35,000,000
$46,850,000
$85,100,000
$32,200,000
$39,300,000
$40,000,000
1/13/11
12/14/10
12/20/10
7/1/05
3/24/10
n/a
1/19/11
3/1/11
n/a
4/7/11
Loss Risk
($14,657,001)
($15,530,785)
($37,700,000)
n/a
($29,000,000)
($9,250,000)
n/a
($16,858,499)
($6,071,159)
($2,200,000)
an effort to estimate the ability of immediate
Figure 7:
Visualization of WBCMT 2006-C23 tranches
as of September 2011
$65,650,000
$42,700,000
$37,825,000
$128,000,000
$50,400,000
$42,000,000
$110,000,000
$27,050,000
refinancing proceeds to payoff the existing
WBCMT 2006-C23 junior tranches
as of September 2011
loan balances.6 If these estimated loan
proceeds are less than the loan balance,
then a loss to the CMBS trust is expected.
If the loan proceeds are greater than the
loan balance, then there would not be a
loss to trust. Moody’s stated method works
backwards from current NOI and uses the
lesser amount of proceeds resulting from
either a DSCR of 1.25 (1.50 for hotels) or an
LTV of 65% (75% for hotels) test.7 Under this
method, an office property with $5 million
in NOI would qualify for a $43.2 million
refinancing using the LTV approach (with $4
million in debt service).8
Applying Moody’s methodology to the
44 loans in WBCMT 2006-C23 with DSCRs
below 1.0 results in an estimated loss of
$631.1 million. This extreme loss would
wipe out all of the $524 million junior
tranches that provide credit support for
the deal, and the A-J tranche would take
a $107 million loss (Figure 7). In addition,
senior bonds would take in $116 million in
prepayments, further eroding the yield and
value of senior bonds.
While the Moody’s loan analysis seems
to err on conservative side by applying
Published by Moody’s in US CMBS and CRE CDO
Surveillance Review Q2 2010 (August 19, 2010).
7 Moody’s uses an interest-only loan originated at a 9.25%
interest rate, while the LTV approach uses an 8.0% cap
rate. DSCR Proceeds = (NOI/DSCR)/9.25%. LTV
Proceeds = (NOI/8.0%) * LTV.
8 The proceeds of $43,243,243 obtained by the DSCR
method are less than $46,875,00 obtained using a 8.0%
cap rate and 75% LTV.
6
Senior tranches (first pay) are at the bottom, junior tranches
(first loss) are at the top.
Tranches N through S with a total balance of $75 million would be
wiped out if the REO and delinquent loans took the $94.6 million
losses explained herein. Tranche M would lose 93% of its value.
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–7–
Deal Name
Foreclosure Loan
Balance
loans again.” As a result of the aggressive
severely troubled, and they very well may
workouts, “Non-CMBS lenders also carry
be the next crop of bad loans that the
much higher REO balances compared to
special servicer will be forced to workout.
CMBS,” the RCA statement concluded.
To gain a better understanding of possible
Conclusion
outcomes, further analysis of the 44 loans
JPMCC 2005-CB13
$167,946,611
BACM 2006-5
$127,777,001
could include special servicer reports, the
JPMCC 2004-CBX
$88,000,000
opinions of local brokers and local market
GSMS 2005-GG4
$83,125,000
data to assess property conditions. A more
GMACC 2006-C1
$70,988,785
precise outcome could then be estimated
GCCFC 2005-GG3
$67,727,758
and the prepayment expectations could be
CSMC 2007-C1
$64,000,000
LBFRC 2006-LLFA
$57,361,673
entered into pricing models to understand
BACM 2006-1
$55,000,000
BACM 2005-3
$50,923,880
25
44
3
Loans
7
tranches.
9
the impact on junior and senior CMBS
The data shows that special servicers have
of how a distressed commercial mortgage
resulted in a significant prepayment to
senior CMBS investors. It also demonstrates
how to analyze CMBS loan data using both
special servicer reports and ratings agency
methodologies to understand the impact
on CMBS tranches.
The techniques described in this white
$404,115,453
$325,251,138
$631,134,724
$78,864,315
$115,939,623
In addition, current owners of CMBS can
$247,049,267
and profitable ways. Investors can compare
$746,254,958
paper can be applied in numerous insightful
$32,947,218
$23,970,097
This article provides a real market example
$279,996,485
$34,864,221
been
a highTrust
interest
rate,
the derived
Current
Recent
Value
Value Dateloan Loss
Riskless aggressive in addressing distress
Balance
amount is based on an interest-only loan. than non-CMBS lenders. According to Real
for purchases on the secondary market.
$180,900,000
$112,640,000
n/a
($68,260,000)
$3,584,132
increased $7.7 billion through September
rate
would result
in substantially lower
$90,009,189
$65,650,000
n/a
($24,359,189)
2011. In comparison, non-CMBS lenders
funds
available $42,700,000
to borrowers.
However, ($41,865,377)
$84,565,377
10/17/2011
$543,958
different CMBS issuances and tranches
Est. Loss
$190,000,000
$153,000,000
2/3/2011
Capital Analytics (RCA), CMBS distress
An
amortizing loan
with the same
interest ($37,000,000)
Est. Prepayment
$70,000,000 properties
$37,825,000
have reduced their distress balances by
multifamily
able 8/19/2011
to obtain ($32,175,000)
$27,554,229
collateral at 6.5% interest rate and a 25-year
$34,588,791
$61,104,416
$128,000,000
the same amount. “The comparison
terms
competitive
with Fannie6/1/2001
Mae or about n/a
$53,783,787
$50,400,000 12/16/2010
($3,383,787)
also highlights the significant differences
Freddie
Mac financing
can obtain
greater ($9,303,123)
$51,303,123
$42,000,000
5/20/2011
loan
proceeds $110,000,000
than Moody’s 9/27/2010
estimates. between
$51,000,000
n/a CMBS and non-CMBS lenders
$50,500,000
6/1/2011
($23,450,000)
in dealing with roughly the same amount
For
example, on$27,050,000
a loan with multifamily
to determine which offer the best value
perform a thorough credit analysis on
their portfolios to make hold as well as sell
decisions.■
of distressed commercial property,” RCA
Current Trust
Recent Value
Value Date
Loss Risk
amortization
period, loan proceeds would said in a press release. According to RCA,
Balance
“Non-CMBS lenders have been more
be$127,777,001
14% greater $113,120,000
than Moody’s estimates.
1/13/11 ($14,657,001)
$107,030,785 these
$91,500,000
12/14/10do ($15,530,785)
aggressive at working out problem loans
Furthermore,
broad brushstrokes
.75 to .99
Total
.50 to .74
.25 to .49
$88,000,000
$50,300,000
12/20/10 ($37,700,000)
and have relied far less on modifications or
$70,988,785
$397,650,000
7/1/05
n/a
extensions, which risk becoming problem
the$64,000,000
property.
$35,000,000
3/24/10 ($29,000,000)
$56,100,000
$46,850,000
n/a
($9,250,000)
$55,000,000
$85,100,000
1/19/11
n/a
Bibliography
$49,058,499
$32,200,000
3/1/11 ($16,858,499)
“CTSLink,”
CTSLink.
N.p., n.d. Web. http://www.ctslink.com.
$39,300,000
n/a
($6,071,159)
$45,371,159
$42,200,000
$40,000,000
4/7/11
($2,200,000)
“Find a Securitization,” CMBS.com - Providing Standardized Tools for the CMBS Industry.
not provide a nuanced appraisal specific to
0 to .24
al
CMBS deals with largest foreclosure
loan balances
SPRING 2012
The loans with DSCRs under 1.0 are
Loan Balance
rty
Table 7:
Reported DSCR
ng
PREDICTING CMBS PREPAYMENTS AND DEFAULTS N.p., n.d. Web. http://www.cmbs.com/searchresults.aspx?showall=1.
This research report is published by the Steven L.
Newman Real Estate Institute, Baruch College,
CUNY.
The Newman Real Estate Institute gratefully
acknowledges the support of the sponsors who
make possible our efforts to promote critical
thinking on topical issues for the real estate industry.
The views expressed in the research report are those
of the authors and not necessarily those of Baruch
College, City University of New York, or any of its
affiliated organizations, foundations, and sponsors.
Please address inquiries to Jack S. Nyman, Director, at:
Jacob, David P., Manzi, James M. and Fabozzi, Frank J., Handbook of Mortgage Backed
Securities, Chapter 50, “The Impact of Structuring on CMBS Bond Class Performance.”
“Moinian misses payments on 1775 B’way .” Crain’s New York Business, June 2, 2010:
http://www.crainsnewyork.com/article/20100602/REAL_ESTATE/100609962.
“Moinian misses payment on third property .” Crain’s New York Business, November 11,
2009: http://www.crainsnewyork.com/article/20091113/FREE/911139985.
“Securitization,” CMBS.com - Providing Standardized Tools for the CMBS Industry. N.p.,
n.d. Web. http://www.cmbs.com/securitization.aspx?dealsecuritizationid=1399.
“Tussle over 1775 Broadway goes down to wire .” Crain’s New York Business, December 6,
2010: http://www.crainsnewyork.com/article/20101206/REAL_ESTATE/101209910.
“US CMBS and CRE CDO Surveillance Review Q2 2010,” Moody’s, August 19, 2010.
P: 646.660.6950 / 137 East 22nd Street, New York, NY 10010
www.baruch.cuny.edu/realestate
–8–
Baruch College, CUNY
137 East 22nd Street
Box C-0120
New York, NY 10010
Tel: 646.660.6950 • Fax: 646.660.6951
www.baruch.cuny.edu/realestate
Mitchel B. Wallerstein, President, Baruch College
William Newman, Founding Chair
Richard Pergolis, Co-Chair
Jack S. Nyman, Director
Emily Grace, Associate Director of Research