State of the Commercial Real Estate Loan Market Shown through data collected and analyzed by DebtX Karen Johnson & Bruce Hounsell August 25, 2015
Overview of Presentation o Introduction o Liquidity o Risk o Pricing o Conclusion
State of the Commercial Real Estate Loan Market Introduction: Today s Topic DebtX Data measuring Liquidity, Risk and Price helps identify trends in loan pricing & valuation of both Performing and Non-Performing Loans.
Introduction: DebtX Background o Loan Sale Advisory A full service, end-to-end solution for selling loans o Web-Based Deal Management Software-as-a Service platforms for syndication, agency and loan sale professionals o Loan Valuation / Data Services Loan valuation, analysis and research
Liquidity: Non-Performing Loans Historical Liquidity for Non-Performing Loans as measured by Investor Participation 2007 2008 2009 2010 2011 2012 2013 2014 2015 Average per Deal 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 Investors in Superficial Due Diligence Investors in Full Due Diligence Investors in Summary Due Diligence Number of Bids
Liquidity: Mixed-Quality Performing Loans Historical Liquidity for Mixed-Quality Performing Loans as measured by Investor Participation 2007 2008 2009 2010 2011 2012 2013 2014 2015 220 200 180 160 140 120 100 80 60 40 20 0 Investors in Superficial Due Diligence Investors in Full Due Diligence Average per Deal Investors in Summary Due Diligence Number of Bids
o DXScore is a numerical loan rating system for commercial and multifamily loans o Effectively a FICO score for CRE loans o Measures Loans Bundle of Risks (LTV, DSC, Pay History, Tenant Rollover Risk, etc.) o Calibrated based on Relationship of Risk Measures with Events of Default and Losses over Time o DebtX Standard Calibration: 0 (worst loans) to 120 (best loans) o Enables Easy Comparison of Heterogeneous Assets o Consistent, Objective & Unbiased o Transparent, Auditable and Repeatable Methodology Risk: Introduction to DXScore
Risk: Historical Default Rate DXScore v. Default Rate Performing CMBS Loans as of 12/31/11 45.0% 7,000 Default Rate 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 6,000 5,000 4,000 3,000 2,000 1,000 Loan Count 0.0% 0 DXScore Loan Count 1-Year Default Rate 2-Year Default Rate 3-Year Default Rate
Risk: New Origination Loans are Trending Riskier 40.0% DXScore by Percentage of Loan Count 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 105-120 100-104 98-99 96-97 94-95 92-93 90-91 85-89 80-84 75-79 70-74 2011 Originations 2012 Originations 2013 Originations 2014 Originations 2015 Originations Straight Averages Standard Deviation 3-Yr Expected Default Rate* 2011 93.8 4.17 1.72% 2012 93.5 3.61 1.86% 2013 92.9 4.21 2.05% 2014 92.5 5.37 2.10% 2015 91.2 4.37 2.55% *Expected Default Rate asssumed Actual 2011 3-Year Default Figures.
Risk: Seasoned Loans are Showing Improvement 30% Portolio Distribution DXScore By Loan Count 25% 20% 15% 10% 5% 0% 105-120 100-104 98-99 96-97 94-95 92-93 90-91 85-89 80-84 75-79 70-74 60-69 40-59 20-39 0-19 2012 2013 2014
Risk: Select Member/Loan Ranking by Risk Quadrant Select Member DXScore & Loan Count Individual DXScore Sorted High to Low 100 95 100 90 90 85 80 80 70 75 70 Portfolio Size (by loan count, smallest to largest) 60 Individual Loans
Risk: Select Member Ranking by Risk Quadrant Risk Quadrant DXScore and Standard Deviation 92 87 DXScore 82 77 72 2 4 6 8 10 12 14 16 Standard Deviation
Pricing: Secondary Market NPL Historical Non-Performing Loan Prices 80% 70% 60% 50% 40% 30% 20% 10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Non-Performing CRE Loans, Price Level 10 Year Average 0%
Pricing: NPL Pricing Distribution 90.0% Non-Performing Loan Volume by Pricing Cohort 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 5 Year History, Purchase Volume Percent 1 Year History, Purchase Volume Percent Full History, Purchase Volume Percent
Pricing: Secondary Market Mixed Performing Historical Mixed Quality Performing Loan Prices 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Mixed Quality Performing CRE Loans, Price Level 10 Year Average 0%
Pricing: Mixed Performing Pricing Distribution Mixed Quality Performing Loan Volume by Pricing Cohort 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 5 Year, Purchase Volume Percent 1 Year, Purchase Volume Percent Full History, Purchase Volume Percent
Pricing: New Origination Spreads Non-Agency Multifamily Spreads 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 7/11 8/11 9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 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 12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 10/15 11/15 12/15 Non-CMBS (all) Non-CMBS (10-Year) Broker Compilation (10-Year, LTV<60%) Broker Compilation (10-Year, LTV>60%) CMBS (10-Year) 4.5% Commercial Real Estate Spreads (excluding multifamily) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 7/11 8/11 9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 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 12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 1/15 2/15 3/15 4/15 5/15 6/15 7/15 8/15 9/15 10/15 11/15 12/15 Non-CMBS (all) Non-CMBS (10-Year) Broker Compilation (10-Year, LTV<60%) Broker Compilation (10-Year, LTV>60%) CMBS (10-Year)
Pricing: Historical CMBS Spreads
Conclusions: Liquidity, Risk & Price o Liquidity is High Trending Flat (Secondary Market) and Still Increasing (Primary Market) o Risk of New Loans is Increasing; Risk of Seasoned Loans is Decreasing o Pricing seems to have Bottomed after becoming Less Profitable for the past Several Years
Conclusions: Trends o Technology is Easing Entry to Markets o Pressures are Unlikely to Ease Significantly Near Term o Banks Market Share under Threat from Shadow Banks o But, Lending Market is Growing due to Innovative Products o Embrace new Technology to Capture Fees and Market Share o Shadow Banks could see More Regulation o Wild-cards include Rising Interest Rate Environment and Unknown Economic Future
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Pledging Commercial Real Estate (CRE) Loan Collateral presented by Scott Stansberry - Vice President, Credit Risk Director
CRE Selection Criteria Building Partnerships. Serving Communities. Participations 100% Member/ Affiliate Owned Senior Lien Position LTV<100% Employee Loans - Ineligible Eligibility DSCR>1.0X* 30+ DQ or Classified - Ineligible Construction & Raw Land Loans - Ineligible Assignment of Leases & Rents *Exceptions: Temporary Impairment or Escrow NOTE: Highlighted eligibility requirements. The complete selection criteria guidelines available on Member Link. 23
Collateral Procedures & Selection Criteria Building Partnerships. Serving Communities. 24
CRE & Multifamily Over-Collateralization Requirements (OCR) Building Partnerships. Serving Communities. Minimum CRE Over-Collateralization Requirement Specific Listings/Physical Possession 155% OCR 64.5% Advance Rate Blanket Reporting 165% OCR 60.6% Advance Rate Minimum Multifamily Over-Collateralization Requirement Specific Listings/Physical Possession 140% OCR 71.4% Advance Rate Blanket Reporting 155% OCR 64.5% Advance Rate 25
Establishing Over-Collateralization Requirements (OCR) Building Partnerships. Serving Communities. Whole Loan Collateral OCR Holding Periods Market Stress Credit Stress Liquidity Premium Liquidation Costs Market Value Adjustment 26
Valuation: CRE Whole Loan Collateral Building Partnerships. Serving Communities. Delinquency History Property Type Interest Rate & Rate Type DSC Remaining Term LTV Discount Rate Interest Only Discount Rate Loan Cash Flow Model Estimated Market Value 27
CRE Collateral Loan Pricing Sensitivity Analysis Building Partnerships. Serving Communities. Key Loan Characteristics Impact Pricing *Loan collateral market values capped at par 28