2012 EDR Client Summit: Presented by Tom Fink, Trepp

1. CMBS and CRE Briefing
EDR's Annual Property Due
Diligence Summit
May 16, 2012
Copyright 2012, Trepp, LLC

2. Sources of Commercial Real Estate Debt
• CMBS (Securitization) ─ Recovering
• Life Insurance Companies ─ Peaking
• Commercial Banks ─ Recovering
• Credit Unions ─ Emerging
• Government ─ Over-heated
• Private Equity ─ Active
2

3. Obstacles to Financing
Source: National Association of Realtors, 2011 Survey
3

4. Capital Markets
4

5. Real Estate in the Capital Markets
• CMBS (Commercial Mortgage Backed Security)
– Securitization of CRE loans, organized a passive investment pool in a
REMIC
• REIT (Real Estate Investment Trust)
– Shares in a company which holds either debt or equity in commercial
real estate as actively managed investments
– Shares can be public (exchange traded) or private (non-exchange)
• CLO (Collateralized Loan Obligation)
– Securities backed by various types of debt on real estate
– Adopted because “CDO” is a bad word
• NPL (Non-Performing Loan)
– Securities used to finance distressed asset pools
– Liquidating trust where all proceeds go to bondholders
5

6. U.S. CMBS Market Overview
• Forecast for 2012 projects new issues up to $50 billion.
• Backlog of matured loans continues to grow
• Secondary trading remains active and has recovered
from summer 2011 disruption
• Loans continue to pay off
• Collateral performance is poor with delinquency rates
near record levels
• Regional differences in collateral performance remain
significant
6

7. U.S. CMBS Secondary Market Spreads
Source: Trepp, LLC 7

8. Spreads for New Commercial Real Estate Loans
Trepp Real Estate Portfolio Pricing Index (TREPP-i )
Indicative Spreads for Commercial Real Estate Loans vs. Treasury
(50-59% Leverage, Amortizing, 10 year, fixed rate)
Compiled from a survey of institutional lenders. Copyright, 2010, Trepp, LLC, all rights reserved.
Source: Trepp, LLC
8

9. Loan Payoff Activity
9

10. CMBS 2.0 Primary Market Activity
2010 2011
• $12.7 billion • $29.9billion
– (16 deals) – (27 deals)
• $13.7 billion by Freddie Mac
• $6.4 billion in Freddie
Mac – (12 deals)
• $395 million by FDIC
– (6 deals)
– (1 deal)
Source: Trepp, LLC 10

11. CMBS 2.0 U.S. Primary Market Activity
2012*
• $7.5 billion
– (11 deals)
• $6.5 billion by Freddie Mac
– (5 deals)
• $4 billion pricing for May
– (4 deals)
*(as of 4/30/12)
Source: Trepp, LLC 11

12. Selling Non-performing Assets
The What The Why
• $132,000,000 of certificates • Leverage
• Sold at 99.75% • Return boosted from mid 20% to
• Coupon of 4.75% high 30%
• Secured by
• 320 assets with The How
• $224 MM carrying value • Single class of notes
• $569 MM unpaid balance • Fast-pay, 100% cash sweep
• Reserves

13. Commercial Real Estate
Market Performance
13

14. Commercial Real Estate Bear Markets
14

15. 2011 Year in Review
Annual Sales Volume
office, industrial, retail, apartments, hotels and dev sites
2012 Projected
Source: Real Capital Analytics

16. 2011 Year in Review: Top Markets
Source: Real Capital Analytics

17. Equity Capital
2007
2007 4% 34% 10% 25% 20% 7%
Buyer Composition
2011 By
User/Oth er Private Propertyuity Fun d
Public Eq Type In st'l Cro ss-Border
Office 8% 24% Past Five Years
15% 15% 21% 18%
2011 34% 19% 17% 14% 9%
Industrial 14% 30% 32% 14% 8%
2010 11% 38% 18% 13% 13% 7%
Retail 5% 33% 16% 27% 9% 9%
2009 16% 55% 7% 6% 10% 6%
Apartment 49% 13% 14% 16% 5%
2008 11% 49% 10% 10% 13% 6%
Hotel 28% 35% 17% 11% 8%
2007
2007 4% 34% 10% 25% 20% 7%
Dev Site 19% 56% 11% 6%
2011 By Property Type
2011 By Market Size Source: Real Capital Analytics
Office 8% 24% 15% 15% 21% 18%

18. U.S. CMBS Retail Performance by Market
Source: Trepp, LLC
18

19. U.S. CMBS Collateral Performance
Source: Trepp, LLC 19

20. Source: Trepp, LLC 20

21. U.S. CMBS Delinquency Rates: Significance of Regional Variation
5.81%
7.16%
14.57% 8.46%
10.249% 10.82%
9.88% 11.19%
9.29%
Source: Trepp, LLC 21

22. Performance Comparison: CMBS and Commercial Mortgages Held by
Commercial Banks
22
Sources: Trepp, FFIEC, Foresight Analytics

23. Performance Comparison: CMBS and Bank Loans (Income Properties)
Delinquency Rate (30+ Days Past Due)
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11p
Quarter
CMBS (Ex Pro-forma Loans) >= $100 Bn $10 Bn to $100 Bn $1 Bn to $10 Bn $100 Mn to $1 Bn
23
Sources: Trepp, FFIEC, Foresight Analytics

24. Opportunities
24

25. Growth in Defaults
Source: Trepp, LLC 25

26. Increased Backlog of Matured Loans
Source: Trepp, LLC 26

27. Cumulative Size of Matured Loan Backlog
Source: Trepp, LLC 27

28. Additional Opportunities in Maturing CMBS Loans
Source: Trepp, LLC 28

29. Aggregate Commercial and Multifamily Mortgage Maturities
29
Source: Foresight Analytics

30. Residential Loan Performance
30
Sources: FDIC

31. Residential Loan Performance
31
Sources: FDIC

32. Stress in the Bank Market
Forecast Bank Failures and Cost to the Deposit
Insurance Fund in Four Scenarios
(As of 4Q 2011)
Cost to Deposit Insurance Fund
($ Billion)
Scenario # of Failures* Low High
Deep Recession 514 $71.8 $107.6
Moderate Recession 364 $29.3 $44.0
Moderate Growth 196 $10.6 $15.9
Strong Growth 131 $5.8 $8.8
* Critically Undercapitalized Banks in 2-year scenario forecast
Source: Trepp Bank Navigator

33. Appendix A
Rialto
Non-Performing Loan Trust
Transaction Briefing
33

34. Briefing Call -- Agenda
1. Parties to the transaction
2. History
3. Structure of the deal
4. Collateral scenario
5. Economics of the deal
6. Market response
7. Future applications
4/19/2012 34

35. Parties to the Transaction
• Seller: Rialto Real Estate Fund
• Asset Manager: Rialto Capital Advisors
• Sponsor: Rialto Capital Management
• Underwriters: JP Morgan / Wells Fargo
• Trustee: Wells Fargo
• Cash Manager: Berkadia Commercial Mortgage
• Rialto companies are subsidiaries of Lennar
Corporation (NYSE: LEN)
4/19/2012 35

36. History
• Rialto Capital formed in 2007 to purchase non-
performing and distressed Commercial Real Estate
assets
• Purchased $5.2 billion of assets from 9 sellers in 2
years
• Rialto Real Estate Fund (“RREF”) closed in November,
2011
• RREF issued the Notes to increase capital and to
leverage return on distressed assets
4/19/2012 36

37. Structure – Transaction Basics
Distressed Sell Loans
Sellers and REO
RREF
($224 MM Basis)
Sells Notes
Deposits Assets
RREF 2012 LT1, LLC $132,000,000 Notes
Buys Notes
Institutional
Investors
4/19/2012 37

38. Structure – Basic Waterfall
Simplified Cash Flow
Collections
On Assets Working
Capital
Reserve
Pay Servicing, Trustee and
Asset Management Fees
Interest
Reserve
Pay Interest on Notes
Replenish Reserves
Retire Notes
4/19/2012
38

39. Collateral Scenario
• Seasoned Portfolio
• Recovery based on property type
– 21 distinct property types
– Lowest recovery (% of balance) is 3.4%
– Highest recovery is 100%
– Average recovery is 66.8%
• Estimated that recoveries will retire all notes within 2 years
4/19/2012 39

40. Economics
• Rialto
– Add leverage to private equity fund
– Defers cash flow on investment, but
– Boosts returns from mid 20% to mid 30%
– Increases capital available for investment
• Investors
– Increased return (almost 5%) in a low interest environment
– Rapid pay out
– No lingering credit risk
4/19/2012 40

41. Market Reaction
• Rating agencies supportive
– Fitch BBB-(sf)
– Moody’s Baa3(sf)
• Investors interested
– Active interest in analytics
– 9x oversubscribed
– Several orders for entire deal
4/19/2012 41

42. Future Applications
• Rialto plans more transactions
• Distressed asset buyers plan could increase returns
• Banks could bolster capital with REO financing
• Government insurance funds could replenish themselves with
troubled asset financing
4/19/2012 42

43. Appendix B
CMBS Background
43

44. CMBS – A Brief (Modern) History
• Created in Response to Savings & Loan Crisis
• First Used to Finance Resolution Trust Corporation
(“RTC”) Assets
• Adapted to Seasoned Pools and Newly Originated
Loans in early 1990’s
• Full-fledged, Stand-alone Asset Class by Late 1990’s
44

45. Key Features of CMBS
• Debt securities
• Collateralized by the principal and interest generated
by a static pool of commercial mortgage loans
• Tranched (Multiple classes)
• Tranches are sequential pay instruments, with the
most senior tranche paid first
45

46. CMBS Sequential Pay Structure
Interest
Principal
Investment Grade
AAA (Includes IO)
AA Cash
Collateral Pool A flow
BBB Losses
Below Investment
Grade
BB to NR
46
46

47. Parties in a CMBS Deal
• Issuer: Owns the loans and owes the bonds
• Master Servicer: Collects loan payments and
manages reporting
• Special Servicer: Deals with troubled assets
• Trustee: Represents investors and handles cash for
the bonds
• B-Piece Investor: Owns riskiest CMBS bonds and has
consultation rights
• Senior Investor: Owns the AAA bonds
47

48. Data Reporting Structure
Idealized Data Flow
Borrowers Borrowers Borrowers
Subservicer
Master Servicer Trustee
Special Servicer
Investor
Reports
Trepp
Investors Investors Investors
48

49. 49

50. Introduction to Trepp, LLC
• Trepp is the leading provider of analytics, information and technology
to the global CMBS and commercial mortgage finance and banking
industries
• Founded in 1979 with a 30 year history in structured finance focusing
on CMBS and CRE the past 15 years
• Headquartered in New York City with offices in San Francisco, CA
and London, UK
• Acquired Foresight Analytics in March of 2010, and Investcap in
2011 to expand commercial real estate and banking footprints
• Trepp is a wholly-owned subsidiary of DMG Information, which is a
part of the Daily Mail Group, a multi-billion pound media company
based in Britain
50
50

51. our Clients
Rating
Agencies
Government
Broker/Dealers
Agencies
Opportunity Institutional
Funds Investors
Trepp Third Parties /
Insurance
Companies Product Software
companies
Suite
51

52. our Partners
52

53. about CMBS
• Widely recognized as the market standard for information and
analytics to the global CMBS industry
• Largest commercially available database containing more than
100,000 loans which support close to $800 billion in securities
• Deal coverage includes North American, European, and Asian
CMBS as well as Commercial Real Estate backed CDOs
• Products and services are used to support trading, research, risk
management, surveillance and portfolio management
• Selected by the Federal Reserve Bank of New York as the collateral
monitor for TALF Lending Program
• Industry thought leaders and active participant in all major industry
associations
53

54. our Products
Trepp for CMBS TreppDerivative™ TreppCRE™ Powered by Trepp
• Analytics on the Web • CMBX • Research • Structuring
• Analytics on Bloomberg • Single Name • Lead Finder • Trepp Engine
• TreppWatch • Bespoke Basket • LoanADVISOR™ • Data Feed
• Morning Update • CreditDataExpress™
• Pricing Service • Portfolio
• Morning Update:
Loan Edition
• Trepp-i
• TreppMLS™
54

55. for CMBS
CMBS Analytics
• Powerful analytics and reporting capabilities
• Rating agency default models and credit
analysis tools
• Enhanced grouping capabilities
• Scenario sharing
• Delivered via the web or Bloomberg
Professional®
• Seamless integration with TreppWatch™
TreppWatch
• Web based surveillance and research tool
• Portfolio reporting
• Stratification and collateral statistics
• Loan and property detail
• Delinquency and prepay history
• Prospectus, Annex A and Investor Reporting
Package (IRP & EIRP) access
55
55

56. for CMBS
Morning Update*
• Delivered daily via email in Excel format
• Quickly identify collateral events
• Contacts for servicer, special servicer, and
trustee
• Adds structure to the risk management
process
• Links to TreppWatch for comprehensive
information
* Also available - MorningUpdate: Loan Edition
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57. for Valuations
CMBS Pricing Service
• Based on Trepp’s industry standard
library
• Price investment grade securities
(BBB- and above)
• Daily tier-adjusted valuations
• Valuation of most actively traded
CMBS CUSIPs including IOs and
Floaters
• Delivery through the Internet or secure
FTP site TREPP-i
(60-65% Leverage, Amortizing, 10 year, fixed rate)
Trepp-i™ 675
650
625
• Indicative real-estate levels of spreads on 600
575
commercial mortgages 550
Spread (basis points)
525
500 Multi Family
Office
475
• Calculation methodology employed is 450
425
Retail
Industrial/Warehouse
Hotel / Lodging
similar to approach used for LIBOR™ 400
375
350
325
• Major advancement versus spread data 300
275
currently available 250
/2 0 8
/7 8
/5 8
1/ 00 8
23 8
20 8
18 8
15 8
23 9
20 9
20 9
17 9
15 9
14 8
28 8
11 8
25 8
5/ 008
6/ 008
7/ 008
8/ 008
29 8
12 8
26 8
/1 08
/2 08
/1 08
2/ 009
3/ 009
4/ 009
5/ 009
9
11 200
12 200
5/ 20 0
6/ 20 0
7/ 20 0
8/ 20 0
1/ 20 0
2/ 20 0
3/ 20 0
4/ 20 0
5/ 20 0
3/ 2 00
3/ 2 00
4/ 2 00
4/ 2 00
8/ 2 00
9/ 2 00
9/ 2 00
00
10 / 20
10 /2 0
11 /2 0
12 /2 0
2
/2
/2
/2
/2
/2
/2
/2
/2
/2
4/
1/
9/
9/
6/
3/
1/
9/
6/
6/
3/
1/
/
/
/
/
/
/
/
0
29
2/
Week Ending
57

58. for CDS -- TreppDerivative™
Contract Creation
• Single name, bespoke basket and
CMBX reference obligations
• Create and send ISDA confirmations
Valuation and Analytics
• Project contract flows
• Valuation using Contingent Claim
and Net Present Value alternatives
Surveillance and Risk Management
•Custom alerts based on contract and reference obligation performance
•Remittance report, Annex A, servicer watchlist commentary and prospectus
58

59. our Products – CRE/Mortgages
TreppLoan™ – a powerful suite of web-based research and surveillance tools designed for
monitoring both securitized and non-securitized mortgages and properties
Lead Finder Portfolio Research
TREPP-i
(60-65% Leverage, Amortizing, 10 year, fixed rate)
675
650
625
• Indicative spread/pricing levels for commercial 600
575
550
mortgages Spread (basis points)
525
500
475
Multi Family
Office
Retail
450 Industrial/Warehouse
425 Hotel / Lodging
400
• Compiled through a consortium of almost 20
375
350
325
300
national lenders and insurance companies 275
250
Week Ending
59

60. powered by Trepp
Data Feed
• Standard data format for all deals in .csv files
• Updated daily and delivered nightly via FTP Trepp Database
• History available from 1998
• Ideal for research & surveillance Deal Bon Loan Prop
Trepp Engine File d File File
File
• C-function library subroutines which power Trepp
suite of products
• Used by leading buy-side institutions, broker/dealers,
and third party fixed income providers
Client Database
• Easy integration into internal trading, bond
administration, and portfolio management systems
• Designed for a range of vector or logic-based
scenario analysis at the individual loan, group, and
pool levels
• Open architecture system offers flexibility in a UNIX,
Windows or Linux environment
Structuring
• “Best of Breed” CMBS structuring and reverse
engineering tool
• “Battle Tested” by major issuers to hedge their loan
pipeline, analyze deal profitability, and support loan
pricing 60

61. for research -- Foresight Analytics
• Commercial Real Estate
– Market level research and analysis
covering 100 metro areas
– Construction lending activity
– Forecasting and performance
• Banking
– 30 years of historical bank
performance
– Tracking over 12,000 commercial
banks, thrifts, and credit unions
– Proprietary bank scoring and
forecasting
61

62. for News -- TreppWire™
Delivers daily commentary and market observations. TreppWire provides the commercial real
estate community with tradable market color, market trend analysis and breaking news.
TreppWire's suite of products includes:
• Daily Commentary
• Monthly Delinquency
Report
• In the Spotlight
• Foresight Research
– Construction Lending
Activity & Delinquency
Rates
– Bank Loan
– Special Topics Special
reports
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