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Next we reviewed the metrics in the 20-30% group, a good proxy for the entire cashout universe, given the average return of equity across the entire universe is 23.8%. The average KLTV for this bucket is 97.3% while the KDSC is 1.71x. The IO index for this bucket is 20.7%, with 37 loans out of 76 loans carrying some IO term. Hotels, retail and office made up 88.3% of the group. This bucket also includes one of the highest leverage points across the universe with a KLTV of 134.9% and a 1.15x DSC. Nevertheless, less than 3% of the loans in this group have pronounced risk layering (KLTV>100%, lower than average KDSC and IO exposure). Peeling Back the Layers To tell the whole story it is necessary to review other characteristics of the loans. In this section, given the degradation of credit metrics, we have concentrated on the qualitative differences in our two subsets in the first half of 2014 starting with property type. We reviewed asset summaries for each of the cashout loans for this section, including the information obtained in our Asset Information Memorandums in our presales. Although cashout loans tend to have higher leverage, the underlying loans are generally backed by well-performing properties that performed through the downturn steered by borrowers that have provided infusions along the way. Multifamily properties are predominately (62.6%) made up of Class-A assets located within a mix of urban and suburban markets. The properties are at least 90% occupied and diversified between assisted living facilities, condominiums, garden, high-rise, townhomes and student housing with multiple amenities. The average sponsor ownership is approximately 7.0 years with more than $10 million in borrower equity invested within the properties. However, several properties were Class-C and had significant tenant concentrations in students or military personnel. Generally, retail loans in this universe were located in urban or KPrime suburban markets. The majority of the properties are anchored retail, with needs-based tenants making up the bulk of the rent rolls. Larger properties also tended to have High Quality Credit-Worthy Tenants (HQCWT) in place. More often than not, the retail properties we examined were more than 90% occupied and were often 100% occupied. That said, there were outliers. Several properties are older and lacked updates and as such received below average KBRA property inspection scores. Others had tenants with above market leases in place, situated in competitive markets. These were the exceptions however and CRE Finance World Autumn 2014 48 most loans that carried such a negative, had strong individual mitigants (only location for certain tenants for many miles, leases that were set to be executed after closing, strong performance despite tertiary location) in place as a counterpoint. Figure 5 Bucket Summary Office properties were overwhelmingly concentrated in primarily urban or suburban markets, with slightly more than half in or within relative distance to the city’s CBD. Nearly all the properties were Class-A or Class-B, with approximately 42% of loans characterized as Class-B. Sponsors have contributed equity to most of the properties although there are many instances where several years have passed since updates. For properties with serious rollover hurdles during the life of the loan, nearly all were structured with ongoing reserves and cash flow sweep language. Behind the Cashout


CREFW-Fall2014 10.15.14
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