CMBS Servicer Commentary Could Be Improved- But May Also Be Indicating Large Impending Losses

CRE Finance World, Autumn 2012

CMBS Servicer Commentary Could Be Improved — But May Also Be Indicating Senior Managing Director, Vice President Vice PresidentJoe YuVivek TiwariDarrell Wheeler Large Impending Losses Group LP Group LP Group LPAmherst SecuritiesAmherst SecuritiesHead of CMBS StrategyAmherst Securities A four major special servicers in several loans and highlight Management (CW).loan’s cumulative advances & ASERs (Accumulated SubordinateEntitlement Reduction). We will now review our suggested commentsfrom Exhibit 1 by special servicer starting with CW Capital Assets several CMBS loans age beyond two years of specialservicing we find that many times the servicer’s delinquencyand REO commentary is dated or unhelpful in anticipatingresolutions. In this article, we review commentary from some of the good and the bad, while making suggestions of what 1. CWCapital — Could have more disposition commentary would be helpful to CMBS investors. Special servicers remain The first loan is the Continental Towers, which is a $115 million concerned that their comments could be benefitting the borrowers office loan that has now been specially serviced by CW for 30 that have access to CMBS analytics, but most of our recommendations months. The servicer has been doing a good job of providing reflect better reporting of financials, leasing or disposition plans, leasing updates on the struggling property, which suggests why which we expect would only motivate the borrower or potential they have not tried marketing the asset at this point. Given that investor to resolve the loan sooner for a larger recovery. We also the appraisals work out to $43 psf and the recent leasing has note that the loans that have the most dated information usually been at $12 psf it may be apparent, but it would be helpful for the have large embedded losses, which may be embarrassing for the servicer to mention that they intend to keep leasing space with the servicer to discuss or could single-handedly eliminate multiple bond objective of improving recovery closer to the $123 psf loan balance. classes, thereby potentially redirecting control of the transactions This type of lease up plan commentary with a stated objective and the designation of the special servicer. Given this potential loss would allow investors to anticipate further additional workout time of servicing revenues from resolving some of these larger loans and would not hurt the servicer’s realization efforts. As for any one has to wonder if some of them have been simply placed into concerns over disclosures, we expect that if any potential investor suspended animation in the hope that they will improve and limit was to read such a comment, it would motivate them to approach losses that could or would eliminate controlling bond classes. the special servicer with better and better acquisition offers. Days of Summer = Opportunity To The second loan we highlight is the DHL Perimeter Center Building Review Loan Resolution Progress which is a $44 million loan that had been REO for 8 months and In the summer, our strategy group uses our downtime to go in and had its only two tenants scheduled to expire in June 2012. The revisit our underwriting for the troubled CMBS loan universe (nothing comments appear to be dated from November 2011 and so some like the satisfaction of knowing you’ve fully underwritten a CMBS report on the renewal status of those two tenants would have been deal). However, this year as we started plowing through these helpful to an investor’s assessment of the last accepted appraisal troubled deals we started to notice that the servicer delinquency which was in May 2011. Basically, we would encourage the servicers or REO commentary was frequently out of date or just a repeat to provide leasing information on key leases. of comments that were there last summer. For smaller loans, we would expect to see some of this limited servicer attention as they Given these are our first comments on any of the special servicers have been busy this past year and receive no extra compensation we would stress that investors that review all the deal comments for updating information reports beyond their initial delinquency in the Appendix will see that CW also had comments on loans that comments. The CMBS process does not really reward the special allowed investors to anticipate exactly what would happen to the servicer for providing the latest information to investors. Therefore, loan, so investors should realize that dated or incomplete comments it was not too great a surprise that we found information quality is a common problem for all the servicers. was at times obviously subpar from all servicers. So in this article, we felt we would provide some commentary examples and suggest 2. CIII — Brief and to the point with some dated comments improvements that could be helpful to investors in anticipating Our third and fourth loan examples in Exhibit I come from CIII Asset bond cash flows. In Exhibit 1 (see page 32), we provide a sample Management. On the $33 million 1665 Oak Tree Road loan we of the most common types of short comings we have come across appreciate the servicer’s comments that suggest that the borrower along with our recommendations on how the commentary could is fully engaged and the servicer most recent comment provides be improved. fairly good indication that it is moving to foreclosure as a backup option if a discounted payoff fails. In contrast, there has been no Exhibit 1 provides delinquency and REO commentary on eight loans update for the Hotel Pacific loan which is a $23.5MM loan that from four major special servicers along with our suggestions on how has been specially serviced for 31 months and now REO for 10 that commentary could be improved. In the Appendix, we provide months. On this asset, the last comment mentions the placement a full review of five deals with additional information such as each of the asset manager, which would have been 10 months ago at A publication of Autumn issue 2012 sponsored by CRE Finance World Autumn 2012 31


CRE Finance World, Autumn 2012
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