A publication of Winter issue 2015 sponsored by CRE Finance World Winter 2015 31 capital expenditures, and 1-3% in legal, administrative, and foreclosure costs, cumulative loan losses would total 1.7-3.5%. Adjusting for debt/equity ratios of 1-2x, this would suggest equity losses of 4.2-7.0%. The high end of these estimates includes an assumption for interest costs to the senior lender in the case of a subordinate interest. A potential loss mitigant is close asset surveillance. Since the above scenario is based on statistical averages, it does not account for concentration risk. For example, while BXMT and STWD disclose average LTVs of 63% and 65%, we estimate approximately 61% and 58% of each portfolio is above 65%, respectively. Assessing Theoretical Loss Rates Exhibit 1 below summarizes 2Q commercial real estate loan portfolios, average loan sizes, LTV ratios, and debt-to-equity ratios for the commercial mortgage REITs. Given an average loan to value ratio of 68% for the commercial mortgage REIT sector and average debt/equity ratios of 2x, we believe the companies can withstand approximately 15-20% of losses at the property level before impacting equity and that loss severities of 25-35% would produce losses to equity of 4-7% depending on asset mix and corporate leverage. Exhibit 1 Commercial Mortgage REIT Portfolio Data - 2Q14 Note: $ in millions. ARI and RAS LTVs based on past securitizations. RSO average loan size and LTV based on CRE portfolio and past securitizations. STAR number of loans based on available data and KBW estimates. Source: Company reports; KBW research. Hypothetically, assuming LTVs of 50-80%, a 25-45% decline in property value, 7-20% in capital expenditures, and 1-3% in legal, administrative, and foreclosure costs, loss severities would total 0.0-59.4% with an average of 23.5%. In the case of a subordinate position in the capital structure with an LTV of 65-85%, loss severities would total 0.0-61.8% with an average of 33.7%. These ranges are similar to historical loss severity data from ACLI, Moody’s, and S&P from 1993 to 2013. However, our estimates have conservatively assumed property price declines of 25-45%, which should hopefully prove severe (see discussion below for historical property price performance). Assuming a 5-9% default rate (approximately 75% of a 7-12% delinquency rate), cumulative loan losses would total 1.7-3.5%. Adjusting for debt/equity ratios of 1-2x , this would suggest equity losses of 4.2-7.0%. The low end of these estimates assumes a whole loan or first mortgage position while the high end of these estimates includes an assumption for interest costs to the senior lender (over 6 to 12 months) in the case of a subordinate lender that forecloses on the borrower. All ranges include an assumption for property expenses and/or capital expenditures incurred prior to property liquidation. One potential loss mitigant is that commercial mortgage REITs make loans on transitional assets, which should result in close asset surveillance with unfunded loan commitments subject to business plan execution. Exhibit 2 KBW CRE Loan Loss Model Note: Interest costs to subordinate lender over a 6-12 month foreclosure timeline. Source: KBW research. Modeling CRE Losses for Commercial Mortgage REITs

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