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December 5, 2013

Structured Products Research

CMBS & Commercial Real Estate

o m m e r c i a l R e a l E s t

Marielle Jan de Beur, Senior Analyst

marielle.jandebeur@wellsfargo.com

212-214-8047

Chris van Heerden, CFA, Analyst

chris.vanheerden@wellsfargo.com

704-410-3079

Lad Duncan, Analyst

lad.duncan@wellsfargo.com

704-410-3082

Landon Frerich, Analyst

landon.frerich@wellsfargo.com

704-410-3083

2014 CMBS Outlook

The CMBS market moves into 2014 on firm footing. First, property market fundamentals are maintaining an upward trajectory. For 2014, we expect moderate but positive GDP growth and employment gains to support the ongoing recovery. Second, CMBS collateral performance continues to improve as evidenced by a 130-bp decline in the 30+ day delinquency rate to 7.91% for the fixed-rate conduit universe in 2013. Third, demand for CMBS continues to impress as a roughly 90% increase in issuance, and the transfer of more than $30 billion of multifamily CMBS out of GSEs has been readily absorbed by investors to date in 2013. Fourth, CMBS remains conservatively structured by historical standards. Credit enhancement at the Baa3 level for 2013 deals stands at 2.4x the average cumulative loss rate for the 1995–2003 vintages. The certificate LTV ratio for conduit Baa3 tranches issued in 2013 averages 59%. Fifth, term funding sources outside of conduit CMBS are increasing. Transitional properties and non-traditional collateral types are finding financing outside of conduit deals.

Table of Contents

2013 Forecast Recap

2

Relative Value in 2014

3

Issuance Forecast

6

CMBS Buyer Base

7

Public Markets Funding Real Estate

8

Real Estate Credit Cycle

9

CMBS Collateral Performance

11

New Issue Collateral Trends

17

Single-Borrower CMBS Issuance

19

Property Market Fundamentals

21

Property Sales and Pricing

22

New Supply Concerns in Apartment

25

Large Retailers in CMBS

27

Property Market Score Summaries

29

Please see the disclosure appendix of this publication for certification and disclosure information. All estimates/forecasts are as of 12/5/13 unless otherwise stated.

This report is available on wellsfargoresearch.com and on Bloomberg WFRE

are as of 12/5/13 unless otherwise stated. This report is available on wellsfargoresearch.com and on Bloomberg

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

2013 Forecast Recap: Issuance Surprised to the Upside

As we review our calls from 2013, the biggest surprise came from non-agency issuance, which is on track to beat our forecast by 70%. AAA spreads failed to tighten year over year, in line with our expectation, although the spread rally in the spring provided upside for investors that decided to lighten up on exposure.

Exhibit 1: A Recap of Our 2013 Recommendations

 

Timing of

Trade Recommendations

Recommendation

Result

2013 w ill be tough for returns on new issue AAAs; Pair new issue AAAs w ith IO strips. Buy legacy AM tranch es for credit and shorter average life exposure. Strong credit legacy LCF are fair value buy w eaker credit legacy LCF. We like AA and single-A CMBS over comparable corporates.

Dec-12

Year to date new issue super-senior 30% tranches are trading about 10 bps w ide of w here they w ere in December of last year. IO tranches are about 30 bps tighter than a year ago. Weaker credit 2007 LCF rallied into the spring tightening about 20 bps. CMBS rated AA is a trade w e liked all year but spreads are currently flat versus December of last year.

CMBS new issue credit curve has flattened. We see more value in AA and single-A rated CMBS versus BBB new issue. New issue CMBS AAs w ere trading at sw aps +135, single-As w ere sw aps +180 bps and BBBs w ere sw aps +300 bps.

Feb-13

We w ere off in this call as all credit spreads are now w ider than in February. Currently spreads are about 30 bps w ider for AAs, 70 bps

w

ider for single-As and 70 bps w ider for BBBs compared to February

 

levels.

Buy new issue AAA AS tranches for rising enhancement and credit proxy play. We anticipate spreads to tighten 10 bps to sw aps +90 bps.

Feb-13

Spreads tightened to sw aps +95 but w idened through the summer. Currently, AS spreads are at sw aps +117 bps.

Reiterate buy on new issue AAA AS tranches, trading at sw aps +110 bps. Buy w ider trading legacy LCF off of 2006-2007 transactions.

 

Spreads on AS tranches are about 7 bps w ider than they w ere in June

Jun-13

w

hen w e reiterated our call. Legacy LCF paper is about 20 bps w ider

than June levels.

Buy legacy AM tranches versus new issue AS tranches based on recent w idening. We anticipate legacy AM tranches to tighten 40 bps by year end. AM tranches w ere trading at sw aps +225 bps.

Aug-13

Legacy AM tranches have tightened about 3 bps tighter on average since mid August. Spreads on AS tranches are 5-10 bps tighter now than mid-August.

Buy agency CMBS based on positive technicals for low er supply in 2014 and inclusion in the Aggregate Fixed Income Index in mid-2014. Legacy A1A tranches also look attractive as a proxy for Agency CMBS.

Nov-13

Spreads are flat since w e made this call. We anticipate this w ill be more

of

a 2014 trade.

Market Predictions/Forecasts

Timing of Forecast

Result

Non-agency issuance w ill be $50 billion, Agency issuance should total $65 billion.

Dec-12

We raised our non-agency issuance forecast to $75 billion mid-year; w e underestimated the strength of the new issue machine. Non-agency issuance w ill end the year at $85 billion. Agency issuance ended the year on top of our original forecast at $65 billion.

In aggregate delinquencies should decline to close to 9%.

Dec-12

As of November total delinquencies for all non-agency CMBS w as 7.91%, all pre-2010 deals had 9.8% delinquencies.

Liquidations of problem loans should be prevalent in 2013 as fundamentals improve. Maturity defaults should decline. Dec-12

Liquidations of problem loans w ere not as prevalent as expected. How ever, there is currently a large portfolio in the liquidation process. Maturity defaults declined 50% year over year.

We anticipate modifications to moderate and extensions to decline substantially over 2012.

Dec-12

Modifications are dow n about 20% year over year. Ex tensions declined also 25% year over year.

We forecast continued improvement across all property sectors w ith apartments positioned to outperform.

Dec-12

All property types posted positive effective revenue grow th; how ever, hotels w ere the outperforming sector instead of apartments.

Hotel occupancy gains w ill slow in 2013.

Dec-12

Hotel occupancies are 67% versus 66% a year ago, in line w ith our forecast.

Property prices in aggregate w ill increase 3% on average.

Dec-12

Property prices have appreciated significantly more than w e forecast. According to the Moody's CPPI data, valuations are up 12-23% depending on the property type.

Source: Wells Fargo Securities, LLC.

the Moody's CPPI data, valuations are up 12-23% depending on the property type. Source: Wells Fargo

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Relative Value in 2014

As in 2013, we expect retail investors to respond to a potential scale back of Fed bond purchases by selling fixed-income mutual fund holdings. Based on the significant money manager participation in three-year and five-year CMBS tranches, we believe spreads on these bonds may widen when retail investors move for the exit.

Heading into 2014 we don’t see significant upside in the near term for new issue senior 10-year CMBS. Our view is based on flat trading levels in 2013 and the lack of a catalyst for longer dated bonds near term until more clarity or actual action comes from the Fed on QE.

Legacy multifamily directed classes may be the net beneficiary of the addition of multifamily to fixed-income benchmark indices after the rally in spreads on Fannie Mae and Freddie Mae structured deals in November. The approximately four-year difference in duration favors the shorter A1A bonds in a curve steepening environment.

We expect new issue Aa3 spreads to tighten further, moving closer toward Baa2 REIT debt. Because these tranches rely more on insurance company sponsorship, getting the deal credit right matters.

Retail Investors Put New Issue Three-Year and Five-Year Bond Spreads at Risk

One of the changes to the CMBS market since 2008 is the increased ownership share of money managers in new issue product, which comes at the expense of buy-and-hold investors such as banks and insurers. To date in 2013, money managers have purchased 44.5% of the conduit CMBS bonds issued by Wells Fargo. Although this is down from 55.2% in 2012 and 53.5% in 2011, the current money manager share still represents a significant increase over the 26% owned by this part of the buyer base in 2004-2007.

The money manager label is admittedly broad, including not only mutual funds, but also third- party managers of institutional funds and hedge funds. So while the increase in this category of buyers does not correspond directly with an increase in retail investors, at the very least it gives insight into market segments where other buy-and-hold investors are less involved.

Understanding where in the capital structure retail investors “rent” helps understand CMBS spread action in May and June. After Fed Chairman Bernanke suggested that tapering may be at hand in his May 22 testimony to Congress, retail investors rushed for the exit. Taxable bond funds experienced outflows of $43.3 billion in June—a sharp reversal from the trend of inflows averaging $16.2 billion a month in the first part of the year.

Retail investors buying has been focused on short-duration bonds with yield, making three-year and five-year CMBS a natural fit. So when mutual fund redemptions ramped up in June, three- and five-year CMBS bond spreads gapped wider even though short-duration bonds would normally be a safe haven when the yield curve steepens. New issue three-year bonds sold off 32 bps in June, swinging wider to a spread of 60 bps to swaps. Similarly, new issue five-year tranches widened 24 bps to a spread of 70 bps to swaps (Exhibit 2).

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 2: Short-Duration Classes Suffered in the June Selloff

Year-End 2012 bps to swaps

Dec. 2, 2013 bps to swaps

YTD

May–June

Change

Selloff (bps)

New Issue 3-Yr. AAA New Issue 5-Yr. AAA New Issue 7-Yr. AAA New Issue 30% 10-Yr. AAA New Issue 20% 10-Yr. AAA New Issue Aa2 New Issue A2 New Issue Baa3

24

57

33

32

44

80

36

24

65

92

27

41

70

92

22

48

113

120

7

53

150

170

20

80

205

220

15

92

380

380

0

170

Source: Wells Fargo Securities, LLC.

Conduit three-year and five-year classes are largely sold to money managers at new issue. For conduit deals issued by Wells Fargo in 2013, 59% of the three-year (A1) bonds sold to money managers, and 63% of five-year (A2) tranches traded to this buyer base (Exhibit 3).

Exhibit 3: Conduit Buyer Type by AAA Tranche—2013 Wells Fargo Deals

 

A1

A2

A3

A3FL

A4FL

A5

AAB/ASB

AS

Money Manager

58.6%

63.0%

30.1%

11.3%

0.0%

44.6%

40.7%

30.3%

Bank

17.4%

13.3%

11.2%

58.5%

100.0%

17.9%

21.7%

4.2%

Insurance

10.7%

17.6%

54.4%

30.2%

0.0%

19.2%

30.8%

47.1%

Pension Fund

3.2%

3.0%

1.3%

0.0%

0.0%

8.6%

0.0%

8.4%

Opp. Fund

0.2%

1.8%

2.3%

0.0%

0.0%

9.5%

1.3%

8.5%

State Gov

9.8%

1.3%

0.6%

0.0%

0.0%

0.2%

5.5%

1.6%

Source: Wells Fargo Securities, LLC.

As in 2013, we expect retail investors to respond to a potential scale back of Fed bond purchases by selling fixed-income mutual fund holdings. Based on the significant money manager participation in three-year and five-year CMBS tranches, we see spreads on these bonds as exposed to such a move for the exit.

On the other hand, new issue conduit seven-year (A3) tranches and A-S tranches (AAA-rated bonds with 20% credit support) have relied less on sponsorship from money managers, a factor that we expect to stabilize spreads in these bonds in 2014. Along the same lines, the floating-rate classes are largely sold to banks (Exhibit 3), and have limited exposure to retail investor behavior.

Multifamily CMBS

Multifamily CMBS moves into 2014 with sound long-term property fundamentals in place, the prospect of reduced issuance and a likely boost to demand as the product type is added to the fixed-income benchmark indices.

This outlook has not been lost on spreads. The news of the addition of these products to the Barclays Indices drove spreads in significantly in mid-November. The five-year tranches of 10- year K Certificate deals tightened in 7 bps to a spread of swaps plus 49 bps, and 10-year tranches rallied in 5 bps to swaps plus 53 bps. Similarly, spreads on the five-year tranches of Fannie Mae 10-year GEMS deals tightened 5 bps to swaps

Multifamily directed classes from legacy deals were little changed, however, holding steady at an average 88 bps to swaps (albeit with significant variation in spread depending on the collateral credit quality). Over the course of 2014, these classes may benefit the most from the addition of multifamily bonds to the indices because (1) wider spreads make these classes a more attractive way for indexed investors to add multifamily exposure, (2) GSE sales of the bonds should subside

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

as Fannie Mae has cleared out the bulk of its multifamily CMBS holdings, and (3) the duration difference of four years makes the shorter A1A tranches more attractive in a steepening yield- curve scenario.

New Issue Aa3 Spreads—Playing Catch Up to REITs

New issue Aa3 bonds are still recovering ground from the mid-year selloff. The bonds now stand 33 bps wide of Baa2 REIT debt, after entering the year at 28 bps inside of REITs (Exhibit 4). These bonds rely significantly on insurance company buyers and, therefore, getting the deal right matters (Exhibit 5). Bonds from deals that raise credit concerns for insurers are likely to struggle for lack of sponsorship. We expect Aa3 classes to tighten against its REIT counterpart.

Exhibit 4: CMBS New Issue Aa3 Well Wide of REITs

250 200 150 100 50 0 -50 CMBS Aa3 to REIT Spread New Issue Aa3
250
200
150
100
50
0
-50
CMBS Aa3 to REIT Spread
New Issue Aa3 CMBS
Bloomberg 10 Yr. BBB REIT Index
basis points to swaps
11/12
12/12
1/13
2/13
3/13
4/13
5/13
6/13
7/13
8/13
9/13
10/13
11/13

170

137

33

Source: Bloomberg, LP, and Wells Fargo Securities, LLC.

Exhibit 5: Conduit Buyers by Investment-Grade Tranche—2013 Wells Fargo Deals

 

Aa3

A3

Baa3

Money Manager

41.6%

44.3%

55.9%

Bank

1.4%

1.2%

3.3%

Insurance

45.5%

48.6%

4.0%

Pension Fund

3.0%

0.0%

3.7%

Opp. Fund

8.5%

6.0%

33.0%

State Gov

0.0%

0.0%

0.0%

Source: Wells Fargo Securities, LLC.

Within the CMBS capital stack, investors are getting paid 50 bps to move to the Aa3 tranche from A-S class, which translates to around 8 bps of spread pick-up per 1% of credit enhancement give- up (Exhibit 6). Put in context, in January 2013, investors were being compensated with around 6 bps of incremental spread for every 1% of credit enhancement conceded to migrate to the Aa3 class from the A-S class, and that number dipped to a low of 3 bps in April.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 6: Moving Down the Stack—Spread Pickup per 1% of Credit Support

 

Credit

Spread

bps Spread Pickup per 1% of CE

 
 

Credit

Enhancement

Pickup

Suport

Spread

Concession

(bps)

Effect of Moving Down a Class

AAA—Duper

30%

92

0%

0

0.0

AAA—A-S

22%

120

8%

28

3.4

Give 8% CE, gain 3 bps per 1% of CE Give 6% CE, gain 8 bps per 1% of CE Give 4% CE, gain 13 bps per 1% of CE Give 4% CE, gain 36 bps per 1% of CE

Aa3

15%

170

6%

50

7.8

A3

11%

220

4%

50

13.0

Baa3

7%

380

4%

160

36.3

Source: Wells Fargo Securities, LLC.

Issuance Forecast

CMBS issuance handily exceeded our expectations for the year, mainly due to a significant increase in non-agency issuance. Year-to-date agency CMBS issuance stands at about $64.8 billion, in line with our original forecast. Through November, investors have purchased $78.2 billion of non-agency transactions and another $6.1 billion is scheduled to market by year-end. We expect total 2013 non-agency issuance to reach $85 billion.

The higher 2013 issuance number than our original forecast begs the question: Why has non- agency CMBS issuance been so strong this year in spite of fairly high AAA CMBS spread volatility and lack luster AAA (in some cases negative) returns relative to the past several years? In our opinion, the robust 2013 originations are attributable to the following factors:

Fed bond purchases is suppressing interest rates and pushing private capital into spread products.

Commercial real estate prices are improving, allowing more debt in aggregate to fund property transactions.

The CMBS investor base has broadened, particularly in Asia.

Investors with seasoned portfolios (mainly insurance companies) experienced significant CMBS runoff, providing capital for reinvestment into new issue CMBS.

The REIT equity market is providing significant capital to fund private-to-public real estate transactions, which gives comfort to CMBS investors who invested in some of the same transactions but from the debt side.

Our 2014 forecast calls for continued growth in the non-agency CMBS market. We anticipate non- agency CMBS issuance will total about $95 billion. Our estimate is based on activity in our lending pipeline, 2014 CMBS maturities, combined with our interest-rate and property valuation forecast.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 7: Non-Agency CMBS Issuance

250 230.2 225 203.7 200 169.0 175 150 125 93.9 95.0 100 85.0 77.8 74.3
250
230.2
225
203.7
200
169.0
175
150
125
93.9
95.0
100
85.0
77.8
74.3
67.7
75
57.4
51.6
47.5
44.5
50
26.6 37.1
30.5
25
17.1 15.8 16.2
12.1 2.6 12.7
0
Issuance ($Billions)
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
E
E

Note:Includes floating-rate and single asset/single borrower transactions and excludes agency deals and resecuritizations. Totals for 2013 and 2014 are forecasts . Source: CMA, Intex Solutions, Inc. and Wells Fargo Securities, LLC.

We expect GSEs will continue to be active in the securitization market in 2014. For 2013, Fannie Mae and Freddie Mac were required to reduce multifamily business 10%. We believe a similar mandate for 2014 is likely; therefore, we expect $56 billion of agency CMBS issuance in 2014.

Exhibit 8: Agency CMBS Issuance

70 64.8 62.4 60 56.0 52.6 50 40 33.9 30 22.1 20 9.2 8.3 6.9
70
64.8
62.4
60
56.0
52.6
50
40
33.9
30
22.1
20
9.2
8.3
6.9
10
4.7
-
Issuance ($Billions)
2005
2006
2007
2008
2009
2010
2011
2012
2013 YTD
2014 E

Note: 2013 data is through November. 2014 is a forecast. Source: Fannie Mae, Intex Solutions, Inc. and Wells Fargo Securities, LLC.

The CMBS Buyer Base is Shifting Away from Money Managers

Based on Wells Fargo sponsored transactions, money managers continue to dominate the buyer base for agency and non-agency CMBS. In 2013, however, the money manager market share has decreased for agency and non-agency CMBS transactions.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Non-agency Buyers

Money managers accounted for 44% of the buyers of our non-agency deals, down from about 55% in 2012. Insurance companies were more active in the non-agency market this year accounting for 30% of the buyers, compared to 20% in 2012. Banks, state governments and pension funds were also more active in the non-agency CMBS market this year. In our opinion, this shift in buyers toward life companies, banks and pension funds and away from money managers may contribute to more stable AAA spreads in the long term because life insurance companies and banks tend to be more buy-and-hold oriented investors.

Exhibit 9: Investor Base for Non-Agency CMBS (Wells Fargo Transactions Only)

2012

Pension

Sta te

Opportunity Govts., Banks, Funds, Funds, 0.1% 14.4% 2.8% 7.0% Insurance Companies, Money 20.5%
Opportunity
Govts.,
Banks,
Funds,
Funds,
0.1%
14.4%
2.8%
7.0%
Insurance
Companies,
Money
20.5%

Managers,

55.2%

Sourc e: Wells Fargo Securities, LLC.

Agency Buyers

2013

Sta te

Pension Banks, Govts., Opportunity Funds, 11.8% 2.2% Funds, 4.6% 6.9% Money Insurance Managers, Companies,
Pension
Banks,
Govts.,
Opportunity
Funds,
11.8%
2.2%
Funds,
4.6%
6.9%
Money
Insurance
Managers,
Companies,
44.5%
30.0%

Within agency CMBS we also see a shift away from money manager buyers. In 2013, money managers have accounted for 42% of the buyers of our agency CMBS transactions, versus 46% in 2012. Insurance companies were less active in the agency CMBS market, purchasing about 11% of deals versus 14% in 2012. The GSEs and opportunity funds have been more active buyers.

Exhibit 10: Investor Base for Agency CMBS (Wells Fargo Transactions Only)

Pension

2012

O the r, Funds, GSEs, 5% 0.5% 1.1% Opportunity Banks, Funds, 30.1% 2.5% Money Managers,
O the r,
Funds,
GSEs, 5%
0.5%
1.1%
Opportunity
Banks,
Funds,
30.1%
2.5%
Money
Managers,
Insurance
46.8%
Com panies,

14.3%

Sourc e: Wells Fargo Securities, LLC.

2013

Pension O ther, Funds, GSEs, 8.4% 2.2% Banks, 1.2% 28.2% Opportunity Funds, 5.8% Insurance Money
Pension
O ther,
Funds,
GSEs, 8.4%
2.2%
Banks,
1.2%
28.2%
Opportunity
Funds,
5.8%
Insurance
Money
Companies,
Managers,
11.5%

42.7%

Public Markets Funding Real Estate

In 2013, the equity market has provided consistent and significant capital to commercial real estate through the IPO market. In aggregate, we estimate about $13 billion was raised in the equity markets for IPOs tied to commercial or residential real estate. This funding from the public equity markets encouraged CMBS investors to provide capital through the securitization market.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

In addition to the new capital from the equity markets, we estimate the debt markets provided about $100 billion of capital to commercial real estate above scheduled maturities in 2013. In 2014, we estimate that banks, insurance companies and CMBS will provide about $435 billion of capital to the markets, which is about $80 billion more than is maturing from those same sources. Although the pace of releveraging is measured, we watch these aggregate numbers of capital to the commercial real estate markets for signs that leverage may creep up and valuations may become inflated against a lackluster macro-economic back drop.

Exhibit 11: Estimated Commercial Mortgage Maturities

($billion)

2014E

2015E

2016E

Banks Insurance Companies CMBS Total

274.0

301.4

331.6

28.1

33.4

37.6

45.5

90.2

128.1

TOTAL

351.7

424.8

498.7

Source: AC LI, Federal Reserve and Wells Fargo Securities, LLC's estimates.

Exhibit 12: Source of CRE Mortgage Capital for 2014

Sources

Banks Insurance Companies CMBS Private Label CMBS GSE Transactions

Banks Insurance Companies CMBS Private Label CMBS GSE Transactions
Banks Insurance Companies CMBS Private Label CMBS GSE Transactions
Banks Insurance Companies CMBS Private Label CMBS GSE Transactions

($billion)

220-240

40-50

95

56

Source: Wells Fargo Securities, LLC's estimates.

The Credit Cycle: Leverage on the Rise While NOI Growth Rate Gains

In a competitive market, lenders win mandates with incremental concessions on pricing or underwriting terms—credit deterioration is inevitable. Taking stock of the CMBS market, we see the market as somewhere between the consolidation and deterioration phases of the credit cycle, borrowing from the framework of our Credit Strategist colleague George Bory. Although leverage is on the rise, our overall assessment is that the pace of releveraging is measured and supported by improving fundamentals.

The multifamily sector is likely further along in the cycle than the other major property groups. Multifamily rent growth is slowing, and the outlook for new construction is beginning to pick up.

On the other hand, we expect office and retail effective revenue growth to accelerate.

On average 13% of 2013 conduit deal collateral had additional subordinate debt, up from 11% in 2012. Another measure of leverage, rating agency LTV ratios continues to drift higher.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 13: Leverage Is Rising While Property Income Is Growing

Exhibit 13: Leverage Is Rising While Property Income Is Growing CMBS Market Source: Wells Fargo Securities,
CMBS Market
CMBS
Market

Source: Wells Fargo Securities, LLC.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

CMBS Collateral Performance

Overall, it has been an encouraging year for collateral performance in CMBS. Delinquency trends have steadily improved and we expect a similar experience in 2014 given the limited pipeline of maturing loans and the further decline in term defaults, as property fundamentals improve. Heavy issuance in 2014 should also drive down the delinquency rate. The 30+ day delinquency rate for multiborrower transactions is currently at 7.91%, about 130 bps lower than where it was at the beginning of 2013. The percentage of loans in special servicing has fallen to 9.50% from 11.49% at the beginning of 2013. Currently, about $48.1 billion of loans from multiborrower transactions remain in special servicing.

A substantial amount of issuance in 2013 has helped push the delinquency rate lower as has the continued liquidation and modification activity. Net issuance has remained negative in 2013, with paydowns outpacing new issuance, but the gap is narrowing. The decline in the delinquency rate can also be largely attributed to the subsiding amount of newly delinquent loans. In 2013, the amount of loans becoming newly delinquent per month has fallen to $2.0 billion on average, down from $3.3 billion on average in 2012.

Exhibit 14: CMBS Delinquency Trends

16.0 10% 14.0 12.0 8% 10.0 6% 8.0 6.0 4% 4.0 2% 2.0 0% 0.0
16.0
10%
14.0
12.0
8%
10.0
6%
8.0
6.0
4%
4.0
2%
2.0
0%
0.0
-2.0
-2%
-4.0
-4%
-6.0
-8.0
-6%
Newly Delinquent ($)
30+ Delinquency (%)
Newly Current ($)
60+ Delinquency (%)
Change in CMBS Bal ($)
$Billions
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
% Delinquent

Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

Maturity defaults and term defaults have experienced significant declines in 2013. Maturity defaults have declined more than 50% compared to 2012, averaging around $530 million per month in 2013. Of the maturing loans in 2013, 86% have been able to pay off on time, which is up from a payoff rate of 59% for the loans that matured in 2012. The payoff rate has improved in 2013 because the bulk of the maturing loans (almost 70%) have been from the 2003 vintage, which had fairly conservative underwriting. In addition, there have been far fewer loans from the 2005-2008 vintages maturing this year. We expect the payoff rate in 2014 to be slightly lower than 2013, given the mix of loans that are maturing. The 2004 vintage will account for the largest share (about 60%) of the maturing loans in 2014 and should perform well. What may bring the payoff rate down in 2014 is the higher concentration of maturing loans from the 2005 and 2007 vintages.

Term defaults have dropped about 28% percent in 2013 compared to 2012. This is in line with the previous two years, which experienced declines of about 30%. Term defaults totaled $1.7 billion in November, the highest one-month total since May, but we do not expect this to be the beginning of an increasing trend. With property fundamentals continuing to improve, we anticipate a further decline in term defaults in 2014.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 15: Term Defaults and Maturity Defaults

500 450 400 350 300 250 200 150 100 50 0 Term Default Maturity Default
500
450
400
350
300
250
200
150
100
50
0
Term Default
Maturity Default
Loan Count
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13

Note: Maturity defaults include loans that defaulted up to six months prior to the maturity date. Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

Among the 2004-2008 vintages, the delinquency rates are currently all lower than at the beginning of 2013. Although the 2004 and 2008 vintages are currently only slightly lower after experiencing increases the past few months. The delinquency rate for the 2007 vintage remains the highest at 13.10%, but is 64 bps lower than at the beginning of 2013. The delinquency rate for the 2006 vintage has declined 206 bps since the beginning of 2013 to 8.76%. The 2005 vintage continues to perform well, falling 81 bps since the beginning of 2013. Looking to 2014, we do not expect term defaults to increase for any of the vintages, but we may see a slight rise in maturity defaults for the 2005 and 2007 vintages.

Exhibit 16: 30+ Day Delinquency Rates by Vintage

Date

2004

2005

2006

2007

2008

2010

2011

2012

2013

Nov-13

4.36%

6.18%

8.76%

13.10%

9.56%

0.00%

0.06%

0.12%

0.03%

Oct-13

4.26%

5.99%

9.17%

13.42%

9.15%

0.00%

0.06%

0.11%

0.03%

Sep-13

3.78%

5.86%

9.53%

13.54%

8.98%

0.00%

0.12%

0.03%

0.01%

Aug-13

3.97%

5.98%

9.62%

13.70%

8.83%

0.00%

0.13%

0.03%

0.02%

Jul-13

3.87%

6.09%

9.47%

13.69%

10.90%

0.00%

0.12%

0.03%

0.00%

Jun-13

4.03%

6.32%

9.38%

13.91%

10.57%

0.00%

0.12%

0.07%

0.00%

May-13

4.16%

6.74%

9.71%

14.59%

11.04%

0.00%

0.05%

0.01%

0.00%

Apr-13

4.32%

6.57%

9.87%

13.77%

11.23%

0.00%

0.02%

0.01%

0.13%

Mar-13

4.19%

6.81%

10.92%

14.03%

11.20%

0.00%

0.21%

0.01%

0.00%

Feb-13

4.58%

6.81%

10.92%

13.65%

10.41%

0.00%

0.07%

0.09%

0.00%

Jan-13

4.56%

6.99%

10.82%

13.74%

9.63%

0.00%

0.04%

0.00%

Sources: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

To date, there have been few serious credit issues among the loans in the 2.0 and 3.0 transactions. A considerable number of loans have been placed on servicer watch lists and a few loans have become delinquent. Currently, six loans with a total balance of $64.2 million are delinquent from the 2010 to 2013 vintages. There are currently 183 loans totaling $3.3 billion on the servicer watch lists, up from 76 loans totaling $2.1 billion at the beginning of the year.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 17: Total Loan Balance on Servicer Watch Lists (2010-2013 Transactions)

3.5 3.3 3.0 2.7 2.7 2.5 2.6 2.4 2.5 2.5 2.2 2.1 2.1 1.9 2.0
3.5
3.3
3.0
2.7
2.7
2.5
2.6
2.4
2.5
2.5
2.2
2.1
2.1
1.9
2.0
1.5
1.0
0.5
0.0
$Billions
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13

Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

All of the major property types have experienced declining delinquency rates in 2013. The delinquency rate for multifamily-backed loans is 205 bps lower than at the beginning of 2013 and the delinquency rate for hotel-backed loans is 202 bps lower. The delinquency rate for office- backed loans has improved 102 bps since the beginning of the year, with most of the decline occurring in the second half of the year. Retail-backed loans continue to have the lowest delinquency rate among the major property types at 6.45%. Based on our revenue forecasts for 2014, we expect the delinquency rates to continue to improve across all of the property types.

Exhibit 18: 30+ Day Delinquency Rates by Property Type

Date

Multifamily

Retail

Office

Industrial

Hotel

Self-Storage

Nov-13

10.61%

6.45%

8.74%

10.39%

8.08%

1.76%

Oct-13

10.48%

6.49%

9.16%

11.08%

8.40%

1.84%

Sep-13

10.55%

6.57%

9.28%

11.25%

8.63%

1.93%

Aug-13

10.64%

6.68%

9.47%

11.06%

8.83%

2.13%

Jul-13

10.67%

6.80%

9.50%

11.17%

9.06%

2.27%

Jun-13

11.02%

6.94%

9.58%

11.53%

9.22%

2.20%

May-13

11.06%

7.23%

10.34%

11.87%

9.49%

2.25%

Apr-13

11.01%

7.27%

9.92%

11.10%

9.26%

2.30%

Mar-13

11.93%

7.53%

10.42%

11.38%

9.64%

2.36%

Feb-13

12.58%

7.40%

10.06%

11.08%

9.69%

2.43%

Jan-13

12.66%

7.42%

9.86%

11.14%

10.10%

2.42%

Sources: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

Liquidation and Modification Activity

The amount of loans in special servicing has steadily declined in 2013. There is currently around $48.1 billion of loans from multiborrower transactions in special servicing down from $60.7 billion at the beginning of the year. The number of liquidations has been lower in 2013, but the total amount of losses has been on pace with 2012. Losses have remained on pace with 2012 because the loans being liquidated have been larger and severity rates have been higher. Through

November remittances, 1,048 loans from multiborrower transactions had been liquidated with losses totaling $5.9 billion. Losses should total about $7.0 billion by year-end. We do not expect to see a slowdown in liquidations in 2014 given the $48.1 billion of loans that remain in special servicing. Also similar to 2013, we should continue to see special servicers using bulk loan sales in

2014.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Modification activity in 2013 has declined considerably compared to 2012. Through November, 195 loans with a total balance of $7.1 billion had been modified. Over the same time period in 2012, modifications totaled more than $9.0 billion. We expect modification activity to continue to decline in 2014. Of the modifications in 2013, the 2007 vintage has accounted for about 50% and the 2006 vintage has accounted for about 30%. The average size of the loans modified in 2013 has been $36 million, which is similar to 2012. For the loans that have received maturity extensions in 2013, the average extension period was 18 months, down from 20 months on average in 2012.

Exhibit 19: Liquidations and Severity Trends by Month

1,200.0 70% 60% 1,000.0 50% 800.0 40% 600.0 30% 400.0 20% 200.0 10% 0.0 0%
1,200.0
70%
60%
1,000.0
50%
800.0
40%
600.0
30%
400.0
20%
200.0
10%
0.0
0%
Losses ($)
Severity - 6 Mo. Avg (All)
Severity - 6 Mo. Avg (>2%)*
Total Losses ($Millions)
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
CMBS Severity %

* This only includes loans that suffered loss severities greater than 2%. Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

The average loss severity rate for liquidated loans in 2013 has been 41.6%, up from 38.0% in 2012. Severity rates have been on the decline recently. In Q3, the average severity rate was 39%, down from 45% in Q2. Improving market conditions should lead to an improvement in severity rates, but the pipeline of stale loans, those that have been with the special servicers longer than 24 months, will continue to place upward pressure on severities. Bulk loan sales have proven to be an efficient means for liquidating CMBS loans. Orix Capital Markets offered a $1.5 billion portfolio of loans in May. At around 40%, the average severity rate on those loans was in line with typical liquidations.

Exhibit 20: Severity Trends by Property Type (Based on Year of Liquidation)

70% 60% 56.0% 49.9% 50.0% 50% 46.9% 46.1% 46.7% 45.8% 43.1% 39.9% 39.8% 38.1% 40%
70%
60%
56.0%
49.9%
50.0%
50%
46.9%
46.1%
46.7%
45.8%
43.1%
39.9%
39.8%
38.1%
40%
38.0%
37.4%
34.3%
33.3%
36.9%
32.4%
35.6%
30%
31.5%
31.0%
20%
10%
0%
Retail
Office
Multifamily
Hotel
Industrial
2010
2011
2012
2013 YTD
Weighted Average Loss Severity %

Note: 2013 data is as of November. Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

In 2013, we have seen the first transactions from the 2004-2008 vintages to realize losses at the originally rated AAA level. To date, two transactions (CSFB 2005-C2 and LBUBS 2007-C2) have had losses reach the originally rated AAA level (AJ tranche). We expect more losses to reach the AJ tranches in 2014. The cumulative loss rate for the 2007 vintage has climbed 79 bps since the beginning of the year to 3.90%. Currently, 55% of the 2007 vintage transactions have had losses hit the originally rated Baa3 tranches. The cumulative loss rate for the 2006 vintage is now at 4.49%, up 107 bps on the year. Nearly 70% of the 2006 vintage transactions have had losses reach the Baa3 tranches. For the year, the cumulative loss rates for the 2004 and 2005 vintages have climbed 59 bps and 65 bps, respectively.

Exhibit 21: Cumulative Loss Rates by Vintage 6.00% 2008 5.50% 5.00% 2006 2000 4.50% 4.00%
Exhibit 21: Cumulative Loss Rates by Vintage
6.00%
2008
5.50%
5.00%
2006
2000
4.50%
4.00%
2007
2001
2005
3.50%
1999
3.00%
2002
2.50%
2004
2003 1998
2.00%
1.50%
1.00%
0.50%
0.00%
1
16
31
46
61
76
91
106
121
136
151
166
181

Months Since Issuance

Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

Prepayment Activity

In 2013, the number of prepayments during the yield maintenance and penalty point periods has been on pace with 2012. To date, 305 loans have prepaid compared to 340 loans for all of 2012. On average, the loans that have prepaid in 2013 have been larger than those in 2012. Prepayments have totaled nearly $1.9 billion in 2013, up from $1.5 billion for all of 2012. Based on loan balance, the 2006 vintage has accounted for the largest share of prepayments in 2013 at

24%.

Seven loans totaling $114 million from 2.0/3.0 transactions have prepaid in 2013. All seven of the loans were from the 2011 vintage. We expect to see a pickup in prepay activity among the more recent vintages in 2014, as property investors look to take advantage of price appreciation.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 22: Prepayments during Yield Maintenance or Penalty Points (Loan Count)

1,400 Penalty Points 136 81 1,200 Yield Maintenance 1,000 64 800 95 600 1,120 1,086
1,400
Penalty Points
136
81
1,200
Yield Maintenance
1,000
64
800
95
600
1,120
1,086
120
894
400
140
103
61
598
47
102
200
53
28
49
315
10
216
233
200
202
126
128
103
99
86
-
Loan Count
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Note: 2013 data is as of November. Source: Trepp, LLC and Wells Fargo Securities, LLC.

Defeasance activity has spiked in 2013, with 798 loans having already defeased, up from 457 loans during 2012. The 2004 and 2005 vintages have accounted for the bulk of the defeasance activity in 2013, representing more than 60%. There has been some activity among the more recent transactions, as five loans from the 2010 vintage have defeased and two loans from the 2011 vintage have defeased. With market conditions continuing to improve, we expect defeasance activity to increase in 2014.

Exhibit 23: Defeasance Activity (Loan Count)

3,500 3,067 3,000 2,531 2,500 1,880 2,000 1,500 944 1,000 798 601 457 500 351
3,500
3,067
3,000
2,531
2,500
1,880
2,000
1,500
944
1,000
798
601
457
500
351
188
206
208
110
58
17
0
Loan Count
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Note: 2013 data is as of November. Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Rating Action Trends

Downgrades outnumbered upgrades again in 2013, but the ratio is steadily declining. Through November, the rating agencies downgraded 1,603 tranches and upgraded 612 tranches from multiborrower transactions, a ratio of less than 3:1. When we last looked at the downgrade to upgrade ratio in May of this year, it was at 5:1 and for all of 2012 it was 7:1. Tranches previously rated investment grade have accounted for about 20% of the downgrades in 2013. There have been 51 tranches downgraded in the 2013 that were previously rated AAA. Among the rating agencies, Fitch has the highest downgrade-to-upgrade ratio in 2013 at 14:1 compared to S&P and Moody’s, which are both at around 2:1. With collateral performance expected to improve in 2014, the downgrade-to-upgrade ratio should move closer to 1:1.

Exhibit 24: 2013 Rating Actions Matrix (Multiborrower Transactions)

 

AAA AA+ AA AA- A+

A

A-

BBB+ BBB BBB- BB+ BB

BB-

B+

B

B-

CCC+ CCC CCC- CC

C

D

Total

AAA

0

1

22

3

1

21

0

0

1

2

0

0

0

0

0

0

0

0

0

0

0

0

51

AA+

32

0

1

1

1

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

35

AA

26

14

0

1

5

10

0

1

1

0

0

1

0

0

0

0

0

0

0

0

0

0

59

AA-

13

12

4

0

3

6

5

0

3

0

0

0

0

0

0

0

0

0

0

0

0

0

46

A+

15

2

13

6

0

6

3

3

4

8

1

0

0

0

0

0

0

0

1

0

0

0

62

A

14

4

10

10

9

0

2

2

17

3

1

9

0

0

0

0

0

1

0

0

0

0

82

A-

6

4

3

7

10

12

0

2

6

5

2

0

0

0

0

0

0

0

0

1

0

0

58

BBB+

9

3

3

5

14

7

11

0

2

9

7

2

1

0

0

0

0

0

0

1

0

0

74

BBB

7

1

1

5

4

8

8

6

0

9

9

12

5

3

8

2

0

0

1

1

0

1

91

BBB-

2

0

0

0

4

9

7

10

6

0

11

28

3

1

8

2

0

3

1

0

0

1

96

BB+

6

1

6

2

0

1

3

5

8

7

0

3

13

11

7

5

0

1

1

2

0

0

82

BB

5

1

0

2

0

3

1

3

5

8

7

0

1

6

31

11

4

22

1

2

1

0

114

BB-

2

1

0

2

2

0

0

4

3

4

7

2

0

18

18

17

12

11

13

1

0

1

118

B+

2

1

0

2

0

3

1

7

0

4

6

4

5

0

6

18

7

9

10

1

1

1

88

B

1

0

0

0

1

1

2

0

0

3

7

2

2

7

0

19

10

48

7

3

0

5

118

B-

1

0

0

1

0

0

0

3

0

1

6

1

1

9

3

0

16

43

15

4

3

6

113

CCC+

0

0

0

0

0

0

0

0

0

0

0

0

1

9

7

4

0

30

23

1

8

14

97

CCC

0

0

0

0

0

2

0

0

0

0

0

2

0

4

6

3

3

0

53

109

36

28

246

CCC-

0

0

0

0

0

0

0

0

0

0

2

0

0

1

2

9

2

5

0

9

55

130

215

CC

0

0

0

1

0

0

0

0

0

1

0

0

0

0

1

2

1

2

1

0

162

4

175

C

0

0

0

0

0

1

0

0

0

0

0

0

0

0

0

0

1

1

2

1

0

189

195

Total

141

45

63

48

54

90

43

46

56

64

66

66

32

69

97

92

56

176

129

136 266 380

2215

Rating actions are as of November 30, 2013. Source: Bloomberg, LP., DBRS, Fitch, Moody's and S&P.

New Issue Collateral Trends

The issuer underwriting metrics for the 2013 transactions still remain fairly conservative when compared to the transactions issued prior to 2009. However, there has been some decline in underwriting quality particularly when examined on a quarterly basis. With issuance expected to climb in 2014, the increased competition to originate those loans should result in further deterioration in underwriting. In addition, the growing number of b-piece buyers may lead to fewer undesirable loans being removed from transactions before they are issued.

Looking at underwriting metrics on a quarterly basis reveals that DSCRs have been declining in 2013. For the loans in the transactions issued in Q1 2013, the average DSCR was 2.04. As rates have increased, the average DSCR has fallen to a low of 1.60 for the loans in the Q4 transactions issued to date. Issuer LTVs remain low on a historical basis, but the Q4 2013 average of 64.3% ties the highest quarterly average since 2010. The average debt yield in 2013 at 11.4% has changed little compared to 2012 at 11.5%. However, the percentage of loans with debt yields below 10% has risen considerably. In 2013, almost 37% of the loans have had debt yields below 10%, up from 26% in 2012 and 19% in 2011. The amount of full and partial interest-only loans has also increased in 2013 compared to 2012. So far for 2013, 17% of the loans have been full-term IO compared to 12% in 2012. Meanwhile, 32% of the loans have been partial-term IO, up from 22% in 2012.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

10/12

4/12

11/13

5/13

2/11

9/11

Exhibit 25: Underwriting Metrics on a Quarterly Basis (Multiborrower Transactions)

Quarter

Deal Bal

Deal

Loan

Avg Loan

Orig

Orig NCF

Orig NOI

Avg

Full

Part

No

($Bil)

Count

Count

Size ($Mil)

LTV

DSCR

Debt Yield

Coupon %

IO %

IO %

IO %

2011Q1

7.9

5

237

33.4

62.5

1.60

12.0%

5.60

2.6%

21.7%

75.7%

2011Q2

6.9

5

272

25.3

63.8

1.59

11.5%

5.53

11.0%

10.0%

79.0%

2011Q3

3.9

3

163

24.0

60.7

1.74

12.3%

5.47

17.1%

18.7%

64.2%

2011Q4

5.8

5

295

19.6

62.7

1.62

11.7%

5.53

8.6%

14.5%

77.0%

2012Q1

3.2

3

161

19.8

60.8

1.66

12.4%

5.69

4.4%

14.2%

81.4%

2012Q2

8.3

7

454

18.4

64.3

1.58

11.4%

5.46

7.8%

22.4%

69.8%

2012Q3

8.6

7

473

18.2

63.7

1.70

11.2%

4.90

13.2%

21.4%

65.4%

2012Q4

12.0

10

631

19.1

63.5

1.78

11.3%

4.64

15.6%

24.1%

60.3%

2013Q1

11.8

9

609

19.4

61.2

2.04

11.4%

4.26

21.9%

26.6%

51.4%

2013Q2

12.3

10

696

17.7

63.9

1.88

10.9%

4.24

14.1%

35.9%

49.9%

2013Q3

15.1

13

903

16.7

63.7

1.86

11.5%

4.55

16.2%

29.5%

54.3%

2013Q4

10.7

10

657

16.2

64.3

1.60

11.5%

5.07

15.7%

37.7%

46.6%

Note: 2013Q4 data is through November. Source: Intex Solutions, Inc . and Wells Fargo Securities, LLC.

Further highlighting the trend in underwriting is the rising trend in Moody’s LTV ratios. Of the multiborrower transactions Moody’s has rated in 2013, 63% have had an average Moody’s LTV ratio above 100% compared to 32% in 2012. No transactions from the 2010 and 2011 vintages had average Moody’s LTV ratios above 100%.

Exhibit 26: Average Moody’s LTV by Transaction

110%

105%

100%

95%

90%

MSBAM 2013-C10 JPMCC 2013-C16 MSBAM 2013-C13 WFRBS 2013-C16 COMM 2013-CCRE11 WFRBS 2013-UBS1
MSBAM 2013-C10
JPMCC 2013-C16
MSBAM 2013-C13
WFRBS 2013-C16
COMM 2013-CCRE11
WFRBS 2013-UBS1

Source: Wells Fargo Securities, LLC.

The property type mix in multiborrower transactions has continued to shift around in 2013. The percentage of retail-backed loans is still on the decline. Retail-backed loans have accounted for 32% of the 2013 transactions issued to date, down from 36% in 2012 and 45% in 2011. Office- backed loans have been on the decline as well falling to 22% so far in 2013 from 26% in 2012. In a handful of 2013 transactions, the exposure to the office sector has been less than 10%. The property types with an increasing share of the market in 2013 have been multifamily, manufactured housing, hotel, mixed use and self-storage. Multifamily exposure has grown to more than 10% in 2013 from less than 7% of the market in 2012. In several recent transactions, multifamily exposure has been around 20%. Hotel properties have represented about 15% of the

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

collateral in 2013 transactions, up from 13% in 2012. Manufactured housing-backed loans have accounted for nearly 6% of the market in 2013 compared to 3% in 2012.

In our view, the current mix of property types in CMBS is not ideal. The percentage of retail has now hit an optimal level at around 30%, but we would like see more exposure to the office sector. While we are currently positive on the hotel sector, it can be a volatile asset class and it is somewhat concerning that it has accounted for a higher percentage of the 2013 vintage than any other vintage historically.

Exhibit 27: Property Type Percentage of Vintage (Multiborrower Transactions)

60.0% 55.0% 50.0% 2010 2011 2012 2013 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0%
60.0%
55.0%
50.0%
2010
2011
2012
2013
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Retail
Office
Hotel
Multifamily Mixed Use
Manuf.
Industrial
Self
Housing
Storage
% of Vintage

Note: 2013 data is through November. Source: Intex Solutions, Inc. and Wells Fargo Securities, LLC.

Single-Borrower Issuance

More than $22.0 billion of single-borrower transactions have priced in 2013. Issuance was most active through late May when tighter spreads allowed CMBS lenders to compete with life insurance companies on large assets. In early June, spreads widened in tandem with a sell-off in Treasuries. The re-pricing in loan coupons made CMBS less competitive to fund large transactions. Recent activity demonstrates continued investor appetite for large loans.

CMBS Weekly December 5, 2013

WELLS FARGO SECURITIES, LLC STRUCTURED PRODUCTS RESEARCH

Exhibit 28: 2013 Single-Borrower Deal Summary

 

Closing

Orig Deal

Top

Top

Top Prop

Top

WAC

WAM

WA LTV

WA DSCR

WA DY

Deal Name

Date

Balance ($)

State

%

Type

%

Secur

Secur

Secur

Secur

Secur

CGWF 2013-RKWH

12/20/2013

295,000,000

FL

58.3

Hotel

100.0

3.50

23

52.6

4.09

13.4

SCGT 2013-SRP1

12/20/2013

760,000,000

CA

45.5

Retail

100.0

2.60

35

63.6

4.19

11.1

VNDO 2013-PENN

12/18/2013

450,000,000

NY

100.0

Office

100.0

3.95

84

53.9

2.24

9.3

HILT 2013-HLT

12/12/2013 3,500,000,000

HI

19.4

Hotel

100.0

4.05

50

51.2

2.91

12.5

BAMLL 2013-DSNY

11/21/2013

345,000,000

FL

100.0

Hotel

100.0

2.84

24

54.1

3.87

11.9

MAD 2013-650M

10/21/2013

675,000,000

NY

100.0

Mixed Use

100.0

4.04

84

50.0

2.01

8.2

JPMCC 2013-INN

10/22/2013

575,000,000

CA

31.7

Hotel

100.0

3.18

23

45.5

4.74

15.6

BHP 2013-BOCA

9/26/2013

425,000,000

FL

50.0

Hotel

100.0

3.28

23

39.2

4.24

14.2

BBCMS 2013-TYSN

8/29/2013

325,000,000

VA

100.0

Retail

100.0