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CREFW-Fall2014 10.15.14

A publication of Autumn issue 2014 sponsored by CRE Finance World Autumn 2014 55 The pre-2003 vintages displayed robust cash flow growth for repeat loans. They also displayed significant downward interest rate migration, and accompanying moderate downward cap rate migration. This created an environment where property values grew faster than even the robust cash flow growth experienced. Leverage increased even faster than value, which significantly outpaced cash flow growth, making CMBS loans less able to handle a crisis or downturn in performance. The 2003–2008 vintages (bubble vintages), displayed less robust cash flow growth than the pre-2003 vintage (albeit still positive and strong). Like the pre-2003 vintages, they continued to experience significant downward interest rate migration. Unlike the pre-2003 vintages, the downward cap rate migration outpaced the interest rate decline which contributed to value increases that were almost double their cash flow growth. Like the pre-2003 vintages, leverage outpaced value increase. The 2009–2012 vintages (post bubble vintages), displayed suppressed cash flow growth. While downward interest rate migration was still prevalent, it slowed, and downward cap rate migration was less than the previous CMBS vintages (albeit still a downward migration). Value increases outpaced cash flow, but leverage increases for the first time in CMBS history did not outpace value growth. While this trend is somewhat encouraging, the fact that leverage increases still outpaced cash flow growth is a credit negative. The 2013–2014 vintages, were similar to the 2009-2012 vintages, but the magnitude of all the migrations increased. Interest rates trended downwards at a quicker pace, as did cap rates. Value growth still significantly outpaced cash flow growth, but it also outpaced leverage increases. Leverage increases were still higher than cash flow growth. The average life of the loans that contributed to the 2013-2014 repeat loan bucket was 9.52 years. They were from vintages that faced a much higher interest rate environment. As such, upon repeat, their leverage and values were pressured to outpace cash flow growth. Despite the fact that cap rate compression remains persistent in post crisis CMBS, repeat loans have leverage that are a far cry from pre-crisis trends. The chart below displays the magnitude of difference between current CMBS and post crisis CMBS. Figure 6 Repeat Loan Characteristics It is rare in the history of CMBS to find a quarter when cash flow growth of repeat loans outpaced leverage. And yet, it is more common in post crisis CMBS to find quarters when value growth out-paced leverage. This is encouraging but not altogether sustainable. It is also not unexpected given the persistently downward trending interest rates, throughout CMBS history. Still 2013 and 2014 are significantly less aggressive than the 2006-2007 vintages. On top of the sheer magnitude of leverage increase relative to cash flow growth, we can also see this difference reflected in the repeat special serviced loans. The chart below demonstrates the same repeat loan statistics of cash-in vs. cashout relative to repeat loans that were under performing assets4 before being re-issued in CMBS. Under such circumstances we should except that the proportion of cash-in to exceed cash-out instances, a scenario which is mostly true today but not so for the top of the market vintages. In the chart below the number of repeat special serviced loans increases dramatically in 2012, 2013 and 2014; most market participants realize that the large increase is caused by the lagged effect of recession, as these loans become distressed due to recession, transfer to special servicing, and experience workouts before being re-issued in new CMBS transactions. Repeat Loans in CMBS


CREFW-Fall2014 10.15.14
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