Page 53

CREFW-Fall2014 10.15.14

Repeat Loans in CMBS A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 51 BRS identified a sample of approximately 3,700 CMBS properties that were collateral for repeat loans (i.e. loans that have been securitized in multiple CMBS transactions over the past 20 years). The data available from these repeat loans1 can provide representative snapshots in time of the health of the CMBS market and are helpful in assessing the market’s long term sustainability. Specifically, we will use them to create apples-to-apples comparison of leverage and other financial metrics for CMBS loans through time. This commentary explores repeat loan trends throughout the history of CMBS. Broadly speaking, the results show that since the near collapse of the CMBS industry in the late 2000s, repeat loans have signaled some relative stability in the CMBS market — but the industry has yet to achieve a long-term stable footing. Loans representing an original balance $42.0 billion have been re-issued into new CMBS transactions. Through refinancing or other purposes, repeat loans have found their way back into the CMBS universe with a combined balance of $57.0 billion (a 35% increase in leverage). This increased leverage is illustrated by the measure of whether a repeated loan is cash-in vs. cash-out2. During the bubble years3, observances of cash-in loans declined substantially, underscoring the increased risk in legacy CMBS transactions. This trend has been reversing itself since late 2007; but instances of loans that are cash-in still remain less than half of all repeat loans. Cash-outs can be normal and healthy when accompanied by proportional cash flow growth. But when either loan balance growth is greater than value growth (LTV increase), or value growth is greater than cash flow growth (cap rate compression), DBRS recognizes a high likelihood that, all else equal, the repeat loan’s ability to perform and refinance in good standing is reduced relative to its prior term. The observed 35% increased leverage of repeat loans is partially justified by an offsetting 15% cash flow growth, but the balance was created by changes in underwriting standards (i.e. LTV increases) and cap rate compression (i.e. inflating property values). Repeat Loan Examples The experience of repeat loans after and including CMBS 2.0 is so far relatively strong, but there are points of concern as illustrated by three case studies below. Case #1. Serrano Highlands The Serrano Highlands loan is secured by a large multifamily property that has now been securitized three times in CMBS pools: first in 1998, then in 2004 and finally in 2007. D David Nabwangu Senior Vice President, CMBS DBRS Figure 1 Serrano Highlands


CREFW-Fall2014 10.15.14
To see the actual publication please follow the link above