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CMBS & Commercial Real Estate Marielle Jan de Beur, Senior Analyst
marielle.jandebeur@wachovia.com
212-214-8047
Chris van Heerden, CFA, Analyst
chris.vanheerden@wachovia.com
704-715-8321
Lad Duncan, Analyst
lad.duncan@wachovia.com
704-715-7423
Landon Frerich, Associate Analyst
landon.frerich@wachovia.com
704-715-8376
CMBS Weekly
Reviewing Principal Write-Downs
The Moody’s CPPI index decreased 4.0% in June for its Contents
first monthly decline since March. Property prices are now Market Commentary 2
down 6.3% in the past year and 41.4% from the peak in Reviewing Principal Write-downs 3
October 2007, having recovered 4.2% since the low in Relative Value Matrix 5
October 2009. Apartment pricing is the only product type Weekly Charts 7
to have increased on a quarterly basis as well as a yearly
basis. Recent Research
CMBS Weekly: Investment Property Sales Volume
Recently, there have been a growing number of losses Improving, August 13, 2010
resulting from modifications that allow part of the current
unpaid balance of a loan to be written-down. Once the CMBS Weekly: ReREMIC A-Pieces in Context of CMBS Up-
principal balance is reduced, a loss is passed through to the in-Credit Trades, August 6, 2010
trust, and the loan returns to the master servicer. Principal
CMBS Performance Monitor-July Summary, July 30, 2010
write-downs have flown under the radar due to the
historically small number and because they are difficult to CMBS Weekly: Southern California Property Markets, July
identify. 23, 2010
Market Commentary
Moodys CPPI Update
The Moody’s CPPI index decreased 4.0% in June for its first monthly decline since March.
Property prices are now down 6.3% in the past year and 41.4% from the peak in October 2007,
having recovered 4.2% since the low in October 2009. The number of repeat-sales transactions
used to calculate the index increased in June, with 153 repeat sales for a larger volume of nearly
$2.1 billion compared to 107 sales totaling $1.5 billion in May. We anticipate the index may
experience an additional 1%–3% decline before ultimately reaching bottom.
2001-7
2002-1
2002-7
2003-1
2003-7
2004-1
2004-7
2005-1
2005-7
2006-1
2006-7
2007-1
2007-7
2008-1
2008-7
2009-1
2009-7
2010-1
So urce: M IT Center fo r Real Estate, Real Capital A nalytics, M o o dy's Investo r Service, Wells Fargo Securities, LLC.
In quarterly data based on property type, the apartment and office sectors showed an increase in
pricing, while the industrial and retail sectors decreased. Apartment pricing is the only product
type to have increased on a quarterly basis as well as a yearly basis. The office sector showed an
increase from the prior quarter, but is down from a year earlier.
Mezzanine debt holders, Pershing Square Capital Management and Winthrop Realty Services
(PSW), would not be allowed to foreclose on the Stuyvesant Town and Peter Cooper Village equity
pending a hearing on the matter on Sept. 2. The hearing has been scheduled in the New York
State Supreme Court after special servicer CWCapital filed a complaint asking for the terms of the
intercreditor agreement to be enforced. CWCapital has also agreed to stay its separate foreclosure
auction pending the hearing.
2
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
Under the terms of the intercreditor agreement, the mezzanine lenders must cure all defaults
under the senior loan as a condition to acquiring the equity. In its complaint, CWCapital requests
1) a declaratory judgment that PSW or any purchaser of the equity must cure the default on the
mortgage before acquiring the equity as per the terms of the intercreditor agreement; 2) an
injunction against PSW from buying the equity at foreclosure without paying the total mortgage
balance outstanding; and 3) an injunction preventing PSW from drawing the property-owning
entities into bankruptcy.
Clearly, the best outcome for the CMBS market would be a decision that enforces the terms of the
intercreditor agreement and preserves the first-priority claim of the mortgage. Anything short of
this may introduce a new element of uncertainty.
3
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
Using trustee reports and Trepp, we identified 43 occurrences that have resulted in $170 million
in principal forgiveness. We found four occurrences of principal write-downs in 2008. In 2009,
the number of write-downs jumped to 14 ($50.9 million), and in 2010 there have been 25 ($103.3
million). Based on what we have seen, principal write-downs fall into one of two categories. In
half of the cases, the original borrower remained in place and injected new equity into the
property in return for some forgiveness of principal. In the other instances, a principal reduction
occurred as a result of a loan assumption as the property was sold at a price below the unpaid
balance of the loan.
In many cases, when a principal reduction occurred other modifications were also made to the
loan such as extending the maturity date, switching the payments from amortizing to IO, and
reducing the note rate. One example is the Sagebrook Apartments loan in JPMCC 2007-LDPX,
which was modified in March 2010. In addition to a principal write-down of $4.35 million, the
maturity date was extended 30 months. The loan was originally set to mature in March 2012 and
now matures in September 2014. The IO period was also extended to the new maturity date. In
the case of the Sagebrook Apartments loan, the borrower provided written documentation that
the property was struggling due to the current economic environment and also contributed
$750,000 of new equity into the property.
Looking at write-downs as a percentage of the original loan balance, we find that the average
severity is 31% across all of the loans since 2008. The severity rate has risen, though, as the loans
that were modified in 2009 had an average of 25% compared to 34% for loans modified in 2010.
The severity rates are higher when the loans are assumed (36% on average) versus when the
original borrower remains in place (25% on average).
Most of the principal write-downs have happened to loans within the 2005 – 2007 vintages, with
only four occurring to pre-2005 vintage loans. Loans backed by multifamily properties have
experienced the largest number of principal reductions with 23, followed by retail with nine. The
number of multifamily loans is not surprising given the sharp decline in the performance of the
multifamily sector recently. Loans receiving principal write-downs have typically been smaller
balance loans as there have only been three loans with original balances above $20 million. Most
of the special servicers have granted principal reductions. JE Roberts has been the most active
with 17 loans.
Conclusion
While principal write-downs have historically been a less frequent cause of losses in CMBS than
liquidations, we expect the number of occurrences to increase given that in many workout
situations it is a better alternative.
4
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
5
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
6
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
Weekly Charts
Historical CMBS Rating Actions by Year for Fixed-Rate Conduit Transactions
7,000 6,651
6,000
5,000
Numcer of Rating Actions
4,000
2,000
1,587
1,556
902 1,017
1,000 703
499
270 257 208 217 206 175
10021 127 145 94 87
26
-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Upgrades Downgrades
*2010 actions are as of August 18, 2010. Ratings are for fixed-rate conduit deals.
Source: Wells Fargo Securities, LLC , Moody's, Fitch, DBRS, and S&P.
7
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
% Delinquent
5.50%
$ Millions
6,000 5.00%
4.50%
5,000 4.00%
3.50%
4,000
3.00%
3,000 2.50%
2.00%
2,000 1.50%
1.00%
1,000
0.50%
0 0.00%
Apr-00
Jul-00
Apr-01
Jul-01
Apr-02
Jul-02
Apr-03
Jul-03
Apr-04
Jul-04
Apr-05
Jul-05
Apr-06
Jul-06
Apr-07
Jul-07
Apr-08
Jul-08
Apr-09
Jul-09
Apr-10
Jul-10
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Oct-00
Oct-01
Oct-02
Oct-03
Oct-04
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Source: Wells Fargo Securities, LLC, and Intex Solutions, Inc.
8
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
9
Reviewing Principal Write-Downs WELLS FARGO SECURITIES, LLC
August 20, 2010 CMBS & COMMERCIAL REAL ESTATE
10
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Diane Schumaker-Krieg, Managing Director, Global Head of Research & Economics diane.schumaker@wachovia.com (704) 715-8437
(212) 214-5070
Credit Research
Lee D. Brading, CFA, Managing Director Head of Credit Research lee.brading@wachovia.com (704) 383-6491
HY Homebuilding, Building Products, Industrials
Gail Golightly, Managing Director Associate Director of High Grade Research gail.golightly@wachovia.com (704) 383-4836
HG Insurance
Matthew H. Burnell, Managing Director HG U.S. Financial Institutions matt.burnell@wachovia.com (704) 374-7148
James P. Dunn, Jr., CFA, Managing Director HG Basic Industries, Building Products, Diversified
Manufacturing, Aerospace & Defense, Railroads jim.dunn1@wachovia.com (704) 715-8377
Dennis M. Farrell, Jr., Managing Director HY Gaming, Lodging and Leisure dennis.farrell@wachovia.com (704) 383-5037
Frank D. Henson, Jr., Managing Director HG Retail, Food & Beverage frank.henson@wachovia.com (704) 715-8466
Bryan C. Hunt, CFA, Managing Director HY Food & Beverage, Food Retailing, Restaurants bryan.hunt@wachovia.com (704) 383-0728
Grant Jordan, Managing Director HY Consumer Products, Retail, Technology grant.jordan@wachovia.com (704) 715-7022
S. Ross Payne, CFA, Managing Director HG Energy, Pipelines ross.payne@wachovia.com (704) 383-3619
Thierry Perrein, Managing Director HG Real Estate Investment Trusts thierry.perrein@wachovia.com (704) 715-8455
Nicole Black, Director HG Telecommunications, Media, Technology nicole.black@wachovia.com (704) 715-7382
Duncan Brown, Director HY Healthcare duncan.brown@wachovia.com (704) 715-8332
Bishop Cheen, Director HY Media/Entertainment/Telecom bishop.cheen@wachovia.com (704) 383-0473
Dan Forth, Director HG Credit Index Specialist daniel.forth@wachovia.com (704) 383-4097
Robert Hauff, Director HG Managed Care, Life Insurance rob.hauff1@wachovia.com (704) 374-4176
Kamal Patel, Director HG Utility & Power kamal.patel@wachovia.com (704) 715-8195
James Spicer, Director HY Energy james.spicer@wachovia.com (704) 715-8389
Kelly Burton, Vice President HY Homebuilding, Building Products, Industrials kelly.burton2@wachovia.com (704) 383-5599
Donovan Chaney, Vice President HY Aerospace & Defense,
Paper, Packaging & Forest Products donovan.chaney@wachovia.com (704) 383-4030
Jason Jones, Vice President HG Healthcare Real Estate Investment Trusts jason.jones2@wachovia.com (704) 715-7932
James Strecker, CFA, Vice President HG U.S. Specialty Finance james.strecker@wachovia.com (704) 715-0592
Erin K. Avery, CIMA, Associate HG Telecommunications, Media, Technology erin.avery@wachovia.com (704) 715-0590
Winifred Cisar, Associate HY Healthcare winifred.cisar@wachovia.com (704) 383-1967
Mike Ciulis, Associate HY Consumer Products, Retail, Technology michael.ciulis@wachovia.com (704) 715-8489
David Deterding, Associate HY Energy david.deterding@wachovia.com (704) 715-8418
Erica Gates, Associate HG Retail, Food & Beverage erica.gates@wachovia.com (704) 374-7026
Davis Hebert, CFA, Associate HY Media/Entertainment/Telecom davis.hebert@wachovia.com (704) 715-0594
Jerod Lenderman, CFA, Associate HG Utility & Power, Energy, Pipelines jerod.lenderman@wachovia.com (704) 715-1147
Kevin McClure, CPA, Associate HY Food & Beverage, Food Retailing, Restaurants kevin.mcclure1@wachovia.com (704) 715-7887
Alex Schneider, CFA, Associate HY Gaming, Lodging and Leisure alex.schneider@wachovia.com (704) 383-6384
Jeff Stewart, Associate HG Basic Industries, Building Products, Diversified
Manufacturing, Aerospace & Defense, Railroads jeffrey.stewart@wachovia.com (704) 715-4130