CMBS and CRE Briefing                            EDRs Annual Property Due                                     Diligence Su...
Sources of Commercial Real Estate Debt•   CMBS (Securitization)         ─ Recovering•   Life Insurance Companies      ─ Pe...
Obstacles to FinancingSource: National Association of Realtors, 2011 Survey                                               ...
Capital Markets                  4
Real Estate in the Capital Markets• CMBS (Commercial Mortgage Backed Security)    – Securitization of CRE loans, organized...
U.S. CMBS Market Overview• Forecast for 2012 projects new issues up to $50 billion.• Backlog of matured loans continues to...
U.S. CMBS Secondary Market Spreads                      Source: Trepp, LLC   7
Spreads for New Commercial Real Estate Loans                Trepp Real Estate Portfolio Pricing Index (TREPP-i )         I...
Loan Payoff Activity                  9
CMBS 2.0 Primary Market Activity           2010                           2011• $12.7 billion                • $29.9billio...
CMBS 2.0 U.S. Primary Market Activity                     2012*• $7.5 billion    – (11 deals)• $6.5 billion by Freddie Mac...
Selling Non-performing Assets         The What                             The Why• $132,000,000 of certificates   • Lever...
Commercial Real Estate Market Performance                         13
Commercial Real Estate Bear Markets                               14
2011 Year in Review            Annual Sales Volumeoffice, industrial, retail, apartments, hotels and dev sites            ...
2011 Year in Review: Top Markets               Source: Real Capital Analytics
Equity Capital2007     2007 4%                34%                  10%               25%                        20%       ...
U.S. CMBS Retail Performance by Market                           Source: Trepp, LLC                                       ...
U.S. CMBS Collateral Performance                   Source: Trepp, LLC 19
Source: Trepp, LLC 20
U.S. CMBS Delinquency Rates: Significance of Regional Variation                                                           ...
Performance Comparison: CMBS and Commercial Mortgages Held by                                            Commercial Banks ...
Performance Comparison: CMBS and Bank Loans (Income Properties)                                 Delinquency Rate (30+ Days...
Opportunities                24
Growth in Defaults        Source: Trepp, LLC 25
Increased Backlog of Matured Loans                        Source: Trepp, LLC 26
Cumulative Size of Matured Loan Backlog                            Source: Trepp, LLC 27
Additional Opportunities in Maturing CMBS Loans                                  Source: Trepp, LLC 28
Aggregate Commercial and Multifamily Mortgage Maturities                                                             29   ...
Residential Loan Performance                               30                        Sources: FDIC
Residential Loan Performance                             31                      Sources: FDIC
Stress in the Bank MarketForecast Bank Failures and Cost to the DepositInsurance Fund in Four Scenarios(As of 4Q 2011)    ...
Appendix A         RialtoNon-Performing Loan Trust   Transaction Briefing                                    33
Briefing Call -- Agenda 1.     Parties to the transaction 2.     History 3.     Structure of the deal 4.     Collateral sc...
Parties to the Transaction • Seller: Rialto Real Estate Fund • Asset Manager: Rialto Capital Advisors • Sponsor: Rialto Ca...
History • Rialto Capital formed in 2007 to purchase non-   performing and distressed Commercial Real Estate   assets • Pur...
Structure – Transaction Basics       Distressed                        Sell Loans         Sellers                         ...
Structure – Basic Waterfall                           Simplified Cash Flow  Collections  On Assets                        ...
Collateral Scenario • Seasoned Portfolio • Recovery based on property type       – 21 distinct property types       – Lowe...
Economics • Rialto       – Add leverage to private equity fund       – Defers cash flow on investment, but       – Boosts ...
Market Reaction • Rating agencies supportive       – Fitch BBB-(sf)       – Moody’s Baa3(sf) • Investors interested       ...
Future Applications •    Rialto plans more transactions •    Distressed asset buyers plan could increase returns •    Bank...
Appendix BCMBS Background                          43
CMBS – A Brief (Modern) History• Created in Response to Savings & Loan Crisis• First Used to Finance Resolution Trust Corp...
Key Features of CMBS• Debt securities• Collateralized by the principal and interest generated  by a static pool of commerc...
CMBS Sequential Pay Structure            InterestPrincipal                       Investment Grade                       AA...
Parties in a CMBS Deal• Issuer: Owns the loans and owes the bonds• Master Servicer: Collects loan payments and  manages re...
Data Reporting Structure                          Idealized Data FlowBorrowers               Borrowers        Borrowers   ...
49
Introduction to Trepp, LLC• Trepp is the leading provider of analytics, information and technology  to the global CMBS and...
our Clients                                     Rating                                    Agencies                        ...
our Partners               52
about CMBS• Widely recognized as the market standard for information and  analytics to the global CMBS industry• Largest c...
our ProductsTrepp for CMBS             TreppDerivative™   TreppCRE™               Powered by Trepp• Analytics on the Web  ...
for CMBSCMBS Analytics    •       Powerful analytics and reporting capabilities    •       Rating agency default models an...
for CMBSMorning Update*  • Delivered daily via email in Excel format  • Quickly identify collateral events  • Contacts for...
for ValuationsCMBS Pricing Service•   Based on Trepp’s industry standard    library•   Price investment grade securities  ...
for CDS -- TreppDerivative™Contract Creation     •   Single name, bespoke basket and         CMBX reference obligations   ...
our Products – CRE/MortgagesTreppLoan™ – a powerful suite of web-based research and surveillance tools designed for    mon...
powered by TreppData Feed     •   Standard data format for all deals in .csv files     •   Updated daily and delivered nig...
for research -- Foresight Analytics      •   Commercial Real Estate           – Market level research and analysis        ...
for News -- TreppWire™Delivers daily commentary and market observations. TreppWire provides the commercial realestate comm...
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CMBS and CRE Briefing

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2012 EDR Client Summit: Presented by Tom Fink, Trepp

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CMBS and CRE Briefing

  1. 1. CMBS and CRE Briefing EDRs Annual Property Due Diligence Summit May 16, 2012 Copyright 2012, Trepp, LLC
  2. 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. 3. Obstacles to FinancingSource: National Association of Realtors, 2011 Survey 3
  4. 4. Capital Markets 4
  5. 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. 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. 7. U.S. CMBS Secondary Market Spreads Source: Trepp, LLC 7
  8. 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. 9. Loan Payoff Activity 9
  10. 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. 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. 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. 13. Commercial Real Estate Market Performance 13
  14. 14. Commercial Real Estate Bear Markets 14
  15. 15. 2011 Year in Review Annual Sales Volumeoffice, industrial, retail, apartments, hotels and dev sites 2012 Projected Source: Real Capital Analytics
  16. 16. 2011 Year in Review: Top Markets Source: Real Capital Analytics
  17. 17. Equity Capital2007 2007 4% 34% 10% 25% 20% 7% Buyer Composition 2011 By User/Oth er Private Propertyuity Fun d Public Eq Type In stl 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. 18. U.S. CMBS Retail Performance by Market Source: Trepp, LLC 18
  19. 19. U.S. CMBS Collateral Performance Source: Trepp, LLC 19
  20. 20. Source: Trepp, LLC 20
  21. 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. 22. Performance Comparison: CMBS and Commercial Mortgages Held by Commercial Banks 22 Sources: Trepp, FFIEC, Foresight Analytics
  23. 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 $1 Bn 23 Sources: Trepp, FFIEC, Foresight Analytics
  24. 24. Opportunities 24
  25. 25. Growth in Defaults Source: Trepp, LLC 25
  26. 26. Increased Backlog of Matured Loans Source: Trepp, LLC 26
  27. 27. Cumulative Size of Matured Loan Backlog Source: Trepp, LLC 27
  28. 28. Additional Opportunities in Maturing CMBS Loans Source: Trepp, LLC 28
  29. 29. Aggregate Commercial and Multifamily Mortgage Maturities 29 Source: Foresight Analytics
  30. 30. Residential Loan Performance 30 Sources: FDIC
  31. 31. Residential Loan Performance 31 Sources: FDIC
  32. 32. Stress in the Bank MarketForecast Bank Failures and Cost to the DepositInsurance Fund in Four Scenarios(As of 4Q 2011) Cost to Deposit Insurance Fund ($ Billion)Scenario # of Failures* Low HighDeep Recession 514 $71.8 $107.6Moderate Recession 364 $29.3 $44.0Moderate Growth 196 $10.6 $15.9Strong Growth 131 $5.8 $8.8* Critically Undercapitalized Banks in 2-year scenario forecastSource: Trepp Bank Navigator
  33. 33. Appendix A RialtoNon-Performing Loan Trust Transaction Briefing 33
  34. 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 applications4/19/2012 34
  35. 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. 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 assets4/19/2012 36
  37. 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 Investors4/19/2012 37
  38. 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 Notes4/19/2012 38
  39. 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 years4/19/2012 39
  40. 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 risk4/19/2012 40
  41. 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 deal4/19/2012 41
  42. 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 financing4/19/2012 42
  43. 43. Appendix BCMBS Background 43
  44. 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. 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. 46. CMBS Sequential Pay Structure InterestPrincipal Investment Grade AAA (Includes IO) AA CashCollateral Pool A flow BBB Losses Below Investment Grade BB to NR 46 46
  47. 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. 48. Data Reporting Structure Idealized Data FlowBorrowers Borrowers Borrowers Subservicer Master Servicer Trustee Special Servicer Investor Reports Trepp Investors Investors Investors 48
  49. 49. 49
  50. 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. 51. our Clients Rating Agencies Government Broker/Dealers Agencies Opportunity Institutional Funds Investors Trepp Third Parties / InsuranceCompanies Product Software companies Suite 51
  52. 52. our Partners 52
  53. 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. 54. our ProductsTrepp 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. 55. for CMBSCMBS 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. 56. for CMBSMorning 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 56
  57. 57. for ValuationsCMBS 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. 58. for CDS -- TreppDerivative™Contract Creation • Single name, bespoke basket and CMBX reference obligations • Create and send ISDA confirmationsValuation and Analytics • Project contract flows • Valuation using Contingent Claim and Net Present Value alternativesSurveillance and Risk Management •Custom alerts based on contract and reference obligation performance •Remittance report, Annex A, servicer watchlist commentary and prospectus 58
  59. 59. our Products – CRE/MortgagesTreppLoan™ – 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. 60. powered by TreppData 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 PropTrepp 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 environmentStructuring • “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. 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. 62. for News -- TreppWire™Delivers daily commentary and market observations. TreppWire provides the commercial realestate community with tradable market color, market trend analysis and breaking news.TreppWires 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 62
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