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CONFIDENTIAL This document contains proprietary, strictly confidential information and is subject to the non-disclosure agreement between the client and Property and Portfolio Research. This document, or any of its parts, may not be copied, distributed or cited in any manner without Property and Portfolio Research’s written permission. The Current CRE Lending Environment – 2012 UConn CRE Conference Mark Fitzgerald March 6, 2012 PROPERTY AND PORTFOLIO RESEARCH NORTH AMERICA EUROPE ASIA-PACIFIC
chapter 1 Excess Leverage
BANKS HAVE CUTEXPOSURE TO REAL ESTATE SINCE 2007 REAL ESTATE LOANS AS A PERCENT OF TOTAL ASSETS, FDIC UNIVERSE
REAL ESTATE IMBALANCES REMAIN CHANGE IN OUTSTANDING BALANCE BY LOAN TYPE, U.S. BANKS Source: PPR, FDIC
REMOVING LEVERAGE FROM THE SYSTEM CHANGE IN COMMERCIAL REAL ESTATE DEBT OUTSTANDING BY LENDER CATEGORY Sources: Federal Reserve; Moody’s Analytics; PPR As of 11Q3
CAN LENDERS HANDLE THE TIDAL WAVE OF MATURING LOANS? CRE MATURING LOANS BY YEAR Sources: PPR; Federal Reserve; Trepp; ACLI As of 11Q1
THE CAN BEING KICKED CONTINUES TO GROW FORECAST 2011 CRE MATURITIES, AS OF DECEMBER OF REFERENCED YEAR Sources: PPR; Federal Reserve; Trepp; ACLI As of 11Q1 page 7
CONSTRUCTION LOANS ARE BEING DEALT WITH FIRST BANK CRE PORTFOLIO NONPERFORMING LOANS
REGIONAL & COMMUNITY BANKS FACE MORE DIFFICULTY IN “EARNING THEIR WAY OUT”…. ROE BY BANK ASSET SIZE
BANK FAILURES ARE BEING DRIVEN BY THE CRE PORTFOLIO COMMERCIAL REAL ESTATE AS A PERCENT OF TOTAL ASSETS FOR FAILED BANKS Sources: PPR; FDIC As of 11Q4
chapter 2 Lender Modification & Disposition of Nonperforming Assets
“TRUE” MODIFICATIONS CONTINUE TO RAMP UP…. SPECIAL SERVICER MODIFICATIONS BY QUARTER Sources: PPR; Trepp As of 11Q4 page 12
CMBS LIQUIDATION ACTIVITY IS INCREASING LIQUIDATION ACTIVITY & LOSS SEVERITY ON CMBS LOANS, BY QUARTER Sources: PPR; Trepp As of 11Q4 page 13
BIFURCATION IN LIQUIDATION: LARGE COASTAL METROS GETTING BETTER EXECUTION CMBS LOSS SEVERITY AT LIQUIDATION, BY METRO, ON 2009 & 2010 LIQUIDATIONS Sources: PPR; Trepp page 14
2012 CMBS MATURING LOANS WILL CONTINUE TO STRUGGLE PERCENT OF LOANS ABLE TO SECURE TAKE-OUT PROCEEDS UNDER VARIOUS ECONOMIC SCENARIOS Source: PPR, Trepp As of 12/31/2011 page 15 Note: Underwriting standards at refinance vary based upon economic outlook.
BANKS BEGINNING TO MOVE LEGACY LOANS OFF THE BOOKS BANKS’ NON-PERFORMING LOAN SALES BY QUARTER page 16
WHAT DISTRESSED OPPORTUNITY LOOKS LIKE BANKS’ CRE OREO SALES BY QUARTER Source: PPR, CoStar Group, Inc. As of 11Q4 page 17
chapter 3 Relative Value in Today’s Environment
LENDING ON SMALLER CRE ASSETS REMAINS CONSTRICTED CHANGE IN TOTAL BANK CRE LOANS OUTSTANDING BY LOAN SIZE 80% 60% 40% 20% 0% (20%) (40%) <$100K $100-$250K $250K-$1M >$1M 2003-2008 2008-2011 Sources: PPR; FDIC As of 11Q3 page 19
CRE LENDERS HAVE TURNED THE CORNER CRE LENDING INDEX BY SOURCE OF CAPITAL Sources: ACLI; Moody’s Analytics; Commercial Mortgage Alert; MBA; PPR As of 11Q4
NORTHEAST BANKS ARE LENDING AGAIN 2011 CHANGE IN CRE LOANS OUTSTANDING, BY STATE OF BANK HEADQUARTERS Sources: PPR; FDIC Note: Banks with greater than $50 billion in assets excluded from analysis. As of 11Q4
LENDERS PULLED BACK IN 2H2011 DEBT YIELD BREAKOUT BY DEAL ISSUANCE TIMEFRAME Sources: PPR; Trepp As of 11Q4 page 22
LENDING SPREAD DIFFERENTIALS BETWEEN LARGEST MARKETS AND REST OF U.S. REMAIN WIDE LENDING SPREAD DIFFERENTIAL FOR LARGEST SIX U.S. MARKETS VERSUS REST OF U.S. Sources: PPR; ACLI As of 11Q4
LENDERS CATERING TO SMALLER ASSETS CAN FIND ATTRACTIVE RETURNS COMPARED TO LOANS GREATER THAN $25 MILLION, LENDING SPREADS BY LOAN SIZE Sources: PPR; ACLI As of 11Q4
LENDERS CAN GET PAID FOR INCREMENTAL RISK IN TERTIARY MARKETS ADDITIONAL SPREAD AND SPREAD PER UNIT OF YIELD DEGRADATION, COMPARED TO 65% LTV LOAN IN TIER I MARKET Spread/YD Add'l Spread 20.0 2.50% 18.0 16.0 2.00% 14.0 12.0 1.50% 10.0 8.0 1.00% 6.0 4.0 0.50% 2.0 0.0 0.00% Tier I Tier 2 Tier 3 75% LTV Spread/YD 85% LTV Spread/YD 75% LTV Add'l Spread 85% LTV Add'l Spread Sources: PPR; ACLI Note: This analysis captures office loans and assumes 2012Q1 PPR cap rates for each asset. As of 11Q4 page 25
A GOOD TIME TO BE A LENDER Sources: Snyderman/Esaki; FitchRatings; Giliberto-Levy; PPR; Trepp; NCREIF As of 11Q2 Note: Purple bars combine actual to date & Compass projected defaults