Issuance ($BB) A Brief History of CMBS 250 Agency and Private-Label CM BS New Issue Volum es 228 Private-Label CMBS Agency CMBS 198 167 150 50-16 2 2 26 7 74 2 57 1 47 5 68 6 51 8 78 6 9 5 7 16 4 9 4 27 12 4 48 60 48 72 Source: Jefferies & Co., Commercial Mortgage Alert * Projected 2
CMBS Spread Projections in 201 CMBS spreads will continue to decline in 201, although at a slower pace than in 2012, due to: Historically low rates Technicals: Reduced securitized products Run off in CMBS Improving CRE fundamentals Relative value vs. competing sectors More readily available leverage Continued tame spread volatility
CMBS Conduit Lender Competitiveness Growing Amount Committed ($B) Wider/volatile CMBS spreads and ineffective loan pipeline hedging tools drove up conduit loan rates during 2H11 Only effective hedge was building in cushion via a higher rate to absorb the spread volatility 250 150 Life Company Vs. CMBS Commercial/ Multifamily Mortgage Commitments and Contract Interest Rates (0-2012) 9.00 8.00 7.00 Reduced volatility and strong demand for high-grade risk assets yielded tighter CMBS spreads and sharply lower mortgage rates in 2012 50-6.00 5.00 4.00 Conduit mortgage rates closing in on portfolio lender rates, but can t touch the GSEs Conduit rates of.90% to 4.50% Life Co. rates of.50% to 4.50% Life Co. Amt. ($B) CMBS Amt. ($B) Life Company Rate (%) CMBS Mortgage Rate (%) Source. ACLI, Jefferies & Co. Note: No CMBS data in late-08 through YE09. *Annualized 2012 4
CMBS Issuance Volumes Show Slow But Consistent Annual Growth Issuance ($B) 7: $228 Billion Total Issuance 64 Fixed-rate Conduit CMBS $192b 2 Single-borrower CMBS $11b 1 Floating-rate CMBS - $20.8b ----------------------------------------------------------------------------------------- 9: $2.74 Billion Total Issuance Single-Borrower CMBS 144(a) 2 Private Freddie K CMBS ----------------------------------------------------------------------------------------- 2010: $11.6 Billion Total Issuance 7 Conduit CMBS 144(a) 4 Single-borrower /Other CMBS 144(a) 5 Private Freddie K CMBS ----------------------------------------------------------------------------------------- 2011: $2.2 Billion Total Issuance 18 Fixed-rate Conduit CMBS Public, 144(a) 8 Single-borrower /CMBS Private 144(a) 11 Private Freddie K CMBS ----------------------------------------------------------------------------------------- YTD 2012: $48.0 Billion Total Issuance 27 Fixed-rate Conduit CMBS Public, 144(a) - $2b 21 Single-borrower /CMBS Private 144(a) - $10.1b 16 Private Freddie K CMBS - $.b Non-Performing CMBS Private 144(a) - $486mm New Issue CMBS by Deal Type 60 Other 50 Floaters Single Borrower Conduit/Fusion 40 0 20 10 0 Source: Jefferies & Co., CM Alert 5
CMBS Volume Projections in 201 CMBS Volume will exceed $70mm in 201, due to: More competitive CMBS spreads relative to bank and life company lenders High levels of debt and equity capital Increasing property transactions Growing pool of refinanceable loans, particularly given outlook for historically low mortgage rates Increasingly aggressive first mortgage underwriting Expanding subordinate debt markets 6
Sales Volume ($B) Rising Debt and Equity Capital for CRE: Transaction Volume Up from the Trough 600 500 CRE Property Transaction Volume 51 400 00 0 79 102122 207 54 08 19 60 180 12 00 Source. RCA *Est. 7
CMBS.0 Increasing Leverage As Per the Rating Agencies 120 Fixed-Rate Conduit/ Fusion CMBS Stressed LTV (%) 80 60 Source: Jefferies & Co. * YTD 2012 Data 1.40 Fixed-Rate Conduit/ Fusion Stressed DSCRs 1.20 1.00 0.80 Source: Jefferies & Co. * YTD 2012 Data 8
CMBS Maturities Level Off in 201 and 2014 Before Heading Into the Wall Loan Count Fixed-Rate Conduit/Fusion Maturity Schedule (Excludes Defeased Loans) 10,000 140 7,500 5,000 2,500 Outstanding Balance ($B) Loan Count 120 80 60 40 20 Loan Curr. Bal. ($B) - 0 Source: Jefferies & Co. Excluding Defeased Loans. *as of 11/12 9
Ability to Refinance Depends on Vintage/Seasoning Majority of loans maturing in 1 originated in 0 and 04 0 loans are structurally more sound, but adverse selection issues weigh on outlook Amortizing Higher loan coupons at origination than today Higher cap rates at origination and thus equity build-up as cap rates lower today $18B of fixed rate 10-year 0 vintage loans to mature in 1 $6.2B of fixed rate 9/10-year 04 vintage loans to mature in 1 Fixed Rate Coupons and Capitalization Rates by Vintage Vintage Avg. Coupon (%) Avg. Cap Rate (%) Avg. Loan Spread (BPs) Avg. Pool LTV (%) Avg. 10 Swap Rate (%) 1998 8.25 8.56 00 69. 5.25 1999 7.99 8.45 24 69.2 5.64 0 9.48 8.64 2 69.4 7.15 1 8.20 8.41 28 68.7 5.82 2 7.19 7.98 202 68.9 5.17 6.14 7.67 17 66.8 4.41 4 6.18 7.25 149 68.9 4.69 5 6.0 6.79 10 68.7 4.7 6 6.67 6.6 15 68.0 5.2 7 8.51 5.74 28 69.1 5.24 8 8.62 5.6 48 66.8 4.24 9 NA 6.72 NA -.44 2010 5.8 6.20 258 57.9.25 2011 6.6 5.82 246 6.9.90 2012 5.77 4.26 272 62.1.05 Sources: Jefferies, Trepp, NCREIF. *Across all property types. 10
CRE Values Remain Depressed Nationally, But Many MSAs in Recovery Mode Commercial Property Prices (as of 10/12) Lower by 22% from 10/07 peak Declines vary by asset type/quality/location By Property (peak thru 10/12) Retail: -5% 175 150 125 75 Commercial Real Estate Values Past the Trough (as of 10/12) National CPPI Office: -25% Industrial: -2% Multifamily: -12% But Recovery Well Underway National all-property composite has regained 4% of its peak-to-trough loss Core MSAs in Full Recovery, Non Major MSAs Lag Non-major markets recovered 27% of peak-to-trough loss Source. Moody's Investors Service, S&P CPPI by Property Type: 8 vs. 2012 10/1/08 10/1/12.00 159.02 164.19 162.27 154.72 160.00 11.8 12.51 120.00 80.00 40.00 0.00 Source: Moody' s/real CPPI 161.24 141.97 Major markets recovered 65% of loss 11
Improving Commercial Real Estate Valuations An Uneven Recovery 225 Moody' s/real CPPI by Major/Non -Major Markets vs. Moody' s/real CPPI by Property Type National 225 Major Mkts. Office Non-Major Mkts. Industrial 175 National 175 Retail Apartment 150 150 125 125 75 75 Source. Moody' s, *as of 10/12. Source. Moody' s, * as of 10/12. Source. Moody's Investors Service 12
Net Completion (SF x 0) CRE Supply Technicals Bode Well for Valuations Rooms (x0) National Net Completion (SF) for Retail, Office and Industrial Properties 00,000 2, RT National Net Completion Data for Multifamily and Hotels 00 HT 250,000 OF IN 2,150 MF,000 150,000 2, 2,050 Units (x0),000 50,000 2,000-1,950 - Source. CB Richard Ellis Source. CB Richard Ellis Retail: Completion taking further dip Office: Completion dip surpassed the previous lows of 1994 and 4 Industrial: Showing similar trend to office with triple dips at 199, and now 2012 Hotels: Showing a great pick-up in completions, at the peak currently Apartments: lowest completions since 1994 1
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