CMBS Lending and the Credit Markets

Game Over?

Greg Saunders
Executive Vice President, Chief Financial Officer & Director
Bridger Commercial Funding

Risk Management Association Luncheon

San Francisco, CA

June 2009
Bridger Commercial Funding
 Today’s Discussion

 CMBS Overview

 Credit Market Freeze & CMBS

 CMBS Market Prognosis

Bridger Commercial Funding

 CMBS Overview

What is CMBS?

 Bonds that are created from the cash

flows of a pool of commercial mortgages
 Loans that are included in the pools are
referred to as “CMBS loans”
 CMBS loans have grown to be a major
source of commercial real estate capital,
with $750 billion outstanding

Bridger Commercial Funding

 CMBS Overview

CMBS Evolution

 Roots in early ’80s—Residential

MBS
 Born out of RTC efforts in early
‘90s
 Standardization of loan attributes &
documentation

Bridger Commercial Funding

 CMBS Overview
CMBS Loans vs. Other CRE Loans
Freddie Mac/
  CMBS LIFE CO. BANK
Fannie Mae
Construction &
Loan Types Permanent Permanent Permanent
Mini-Perms
Partial/Full
Non-Recourse Non-Recourse Non-Recourse
Recourse
Loan Terms
Max LTV Moderate LTV Moderate LTV High LTV

Primary Source of
Funds Bond Market Premiums Deposits Debt & Equity

Typical Property Commercial & Class A

Types
All Multifamily
Multifamily Properties

Developers / Developers / Short Term &

Long Term
Borrower Types Long-Term Short-Term Long Term
Investors
Investors Investors Investors

Bridger Commercial Funding

 CMBS Overview
CMBS Issuance ($ Billions; Domestic)

$250

$200

$150

$100

$50

$-
1991

1995

1998
1999

2002
2003

2005
2006
2007

2009
1990

1992
1993
1994

1996
1997

2000
2001

2004

2008
Source: CMSA

Bridger Commercial Funding

 CMBS Overview

CMBS Market Share

CM BS Share of CRE Mortgage CMBS Share of Outstanding Com m ercial Mortgages

Originations

70% Banks and

Life
S&Ls
Insurance,
60% 50%
GSEs,
50% Other
29%
40%

30%

20%
CMBS
10% 21%

0%
2003 2004 2005 2006 2007 2008

Source: Federal Reserve & CMSA

Bridger Commercial Funding

 CMBS Overview

CMBS Loan Pricing Methodology

10-Year Treasury Yield

+ 10-Year Swap Spread
“Loan Spread”
+ CMBS Credit Spread
+ Originator Profit Margin
= All-In CMBS Loan Coupon

Bridger Commercial Funding

 CMBS Overview
CMBS Loan Pricing Levels: Then and Now
10.00%
8.70% Total
9.00%
0.50% Profit Margin
8.00%
7.00%
5.95% Total
6.00% 0.15% 4.50% CMBS Credit Spread
0.40%
5.00% 0.65%

4.00%
0.20% 10-Year Swap Spread
3.00%
4.75%
2.00% 3.50%
1.00% 10-Year Treasury

0.00%
Spring '07 "Now"

Rate component Spring '07 "Now"

Originator Profit Margin 0.15% 1.20% total 0.50% 6.20% total
CMBS Credit Spread 0.40% spread 4.50% spread
10-Year Swap Spread 0.65% 0.20%
10-Year Treasury 4.75% 3.50% In reality, no new
Total Interest Rate 5.95% 8.70% issuance market, so this
rate is hypothetical

Bridger Commercial Funding

 CMBS Overview

Structuring CMBS

Individual Mortgages Trust CMBS % of Deal

Retail AAA 88%
Whole
Multifamily / MHC Loan Pool AA – A 4%
--- BBB 3%
Office $3 billion BB 2%
Industrial / Self Storage
B 2%
Hospitality Unrated 1%

Bridger Commercial Funding

 CMBS Overview

The Players…
 Originator/aggregator (Bridger)
 Bond underwriter/issuer (I-bank)
 Trustee
 Servicers (3)
 Third party providers
 Rating agencies
 Bond investors

Bridger Commercial Funding

 Credit Freeze and CMBS
The Start of the End…
 Subprime delinquencies
 Rating agencies put investors on notice
 Investment grade investors started pulling back
 Stung by mark-to-market losses
 Lack of leverage reduced their appetite
 Subordinated investors pulled back
 Demanded higher yields
 Lack of debt financing to purchase bonds

Bridger Commercial Funding

 Credit Freeze and CMBS
The Start of the End…
The initial panic…2007 The ultimate demise…2008-9
AAA-Rated CM BS Spreads AAA-Rated CMBS Spreads
(Basis points over 10-Yr Treasury) (Basis points over 10-Yr Treasury)
1800

210 1600

190 1400

170 1200

150 1000

130 800

110 600

90 400

70 200

50 0
1/2/07

7/2/07

8/2/07
2/2/07

3/2/07

4/2/07

5/2/07

6/2/07

9/2/07

10/2/07

11/2/07

3/2/07

7/2/07

11/2/07

5/2/08

9/2/08

11/2/08

1/2/09

3/2/09

7/2/09
1/2/07

5/2/07

9/2/07

1/2/08

3/2/08

7/2/08

5/2/09
Source: Banc of America Securities

Bridger Commercial Funding

 Credit Freeze and CMBS
Nails in the coffin…
Morphing from credit crisis to economic crisis
U.S. Employment Growth
(6 Month Moving Average in 000s)
400
300
200

100
-
(100)
(200)
(300)
(400)
(500)
(600)
(700)
Jun-03

Jun-05

Jun-06

Jun-07

Jun-08
Jun-04

Jun-09
Dec-04

Dec-06

Dec-08
Dec-03

Dec-05

Dec-07

Source: Bureau of Labor Statistics

Bridger Commercial Funding

 Credit Freeze and CMBS
Nails in the coffin…
Property fundamentals are getting hammered

Average Growth in Asking Rents Average Vacancy Rates

6.0% 12.5%
5.0%
12.0%
4.0%
3.0% 11.5%
2.0%
11.0%
1.0%
0.0% 10.5%

-1.0% 10.0%
-2.0%
9.5%
-3.0%
-4.0% 9.0%
2003

2005

2007
2004

2006

2008

2003

2005

2006

2007
2004

2008
Source: Mortgage Bankers Association

Bridger Commercial Funding

 Credit Freeze and CMBS
Nails in the coffin…
Weakening fundamentals = rising delinquencies
CMBS Loan Delinquency Rates
(30+ days)

7.00%

6.00%

5.00%

4.00% Last recession

3.00%

2.00%

1.00%

0.00%

2010-E
2009-E
2000

2002

2005

2007
2001

2003
2004

2006

2008

Source: CMSA, Deutsche Bank

Bridger Commercial Funding

 CMBS Prognosis
Headwinds…
Flood of CMBS maturities coming
CMBS Maturity Calendar
(billions)
$140 $132 $131

$120

$100 $95

$80
$60
$60 $49
$45 $43
$40 $30

$20 $15

$-
2009

2010

2011

2012

2017
2013

2014

2015

2016

Bridger Commercial Funding

 CMBS Prognosis
Headwinds…
Declining property fundamentals + higher rates +
conservative underwriting = equity vacuum
Scenario 1: Current Rates & New Underwriting, But NOI Stays Flat

Legacy Loan
Current Take-Out Underwriting &
Financing Interest Rates Change
Property Net Cash Flow/Yr. $ 465,000 $ 465,000 $ -
1 LTV / NCF DSCR ratio 65% / 1.40x 80% / 1.15x
2 Cap rate 8.55% 6.58% -1.97%
Property Value $ 5,438,000 7,064,000 (1,626,000)
Change in Property Value -23%

10-year Treasury yield 3.50% 4.75% -1.25%

+ Loan Spread 5.20% 1.20% 4.00%
3 All-in Interest Rate 8.70% 5.95% 2.75%

Bridger Commercial Funding

 CMBS Prognosis
Headwinds…
Declining property fundamentals + higher rates + conservative
underwriting + bad economy = bigger equity vacuum

Scenario 2: Current Rates & New Underwriting, But NOI Declines 20%

Legacy Loan
Current Take-Out Underwriting &
Financing Interest Rates Change
1 Property Net Cash Flow/Yr. $ 372,000 $ 465,000 $ 93,000
2 LTV / NCF DSCR ratio 65% / 1.40x 80% / 1.15x
3 Cap rate (solve for this) 8.55% 6.58% -1.97%
Property Value 4,350,000 7,064,000 (2,714,000)
Change in Property Value -38%

10-year Treasury yield 3.50% 4.75% -1.25%

+ Loan Spread 5.20% 1.20% 4.00%
4 All-in Interest Rate 8.70% 5.95% 2.75%

Bridger Commercial Funding

 CMBS Prognosis

Complaints that need to be answered

 Rating agency conflicts
 Underwriting standards
 Issuers having “skin in the game”

Bridger Commercial Funding

 CMBS Prognosis

Market and property fundamentals need to

improve
 Stabilization of housing prices
 Signs of economic stability
 The “toxic loan” issue needs resolution
 CRE fundamentals
 Vacancies: slow down
 Rents: stabilize

Bridger Commercial Funding

 CMBS Prognosis

Can you come out and play?

 Investors wanted
 Investment grade buyers
 Subordinated bond investors (“b-piece” buyers)
 Equity investors to help support refi activity
 Issuers needed
 Life insurance companies
 Investment banks / money center banks
 Warehouse credit facilities

Bridger Commercial Funding

 CMBS Prognosis

Government Assistance May Help

 TALF (Term Asset-Backed Loan Facility)
 Supports origination of new & legacy
CMBS
 Attractive financing / 85% “advance rate”
 Remaining questions & issues:
• TALF loans are only for 3-5 years
• New York Fed can reject specific loans from
the pool
• Applies only to AAA-rated securities

Bridger Commercial Funding

 CMBS Prognosis

Government Assistance Can Help…

 Public Private Investment Programs
 Provides debt and equity capital for
investors to purchase legacy loans and
securities from banks
 Further cleans up balance sheets
 Questions & Issues:
• Large bid/ask spread on performing assets
• Fear of changing government rules

Bridger Commercial Funding

 CMBS Prognosis

The CMBS Market Will Come Back…

 Support property acquisitions & construction
 Important vehicle to support refinancing
 Critical risk management tool for banks
 Great investment: excellent risk-adjusted returns
over time

Bridger Commercial Funding

CMBS Lending and the Credit Markets
Game Over?

Greg Saunders
415-289-3230
gsaunders@bridgerfunding.com

Bridger Commercial Funding