The Gloves are Off (Seagram Building Pt. 2)

Reuters drops some nuggets of gold in this article but for the sake of brevity, and my 9am deadline, I'm going to paste the relevant pieces.  This is in regards to last week's post on CGCMT 2013-375P.

The Pricing

1. While this type of rating agency sniping has been going on over the past two years...it has never been timed in this way, according to industry participants.
2. "The underwriters clearly emptied the old bag of tricks on this one, as far as crisis-era underwriting goes, and the agencies [fell for] them," said the head of CMBS investing at one of the biggest asset managers in the country.
1.  Those tricks included re-measuring the building, lowering management fees in order to minimize projected expenses, and creating an 'optimizing' structure that pushes as much away from the mezzanine debt into the securitization at the Triple B minus level.
3. ...the Triple A portion of the US$572.9m transaction was increased at pricing on Thursday from US$75m to US$209m. Spreads on the most subordinate pieces widened considerably, however. The deal was originally US$439.75m. 

The Structure

1. The underwriters securitized the entirety of the so-called subordinate, or junior, portion of a US$782.75m commercial mortgage on the Seagram building.
1. However, they only securitized part of the senior portion, known as the A loan, leaving the flexibility to increase the Triple A piece in the bond transaction.  
2. he remaining unsecuritized portion of the A loan will be put into an upcoming multi-borrower CMBS conduit.

But let's get real people, this isn't the first pro-forma deal within the CMBS 3.0 space and it's not like Kroll and Moody's took the underwriter's assumptions at face value:

The Assumptions

1. ...they generally thought that the issuer's initial projected numbers regarding net operating income, occupancy, expenses, structure, and other metrics on the top-notch building were way too aggressive.
1. Therefore, each agency assumed a steep haircut on the building's net cashflow and valuation in order to arrive at its Triple A enhancement levels.
1. Kroll assumed 17.9% less than the issuer's net cashflow and 46.7% below the appraiser's valuation...
2.   Moody's undercut by 10.7% the underwritten cashflow.

The Other Elephants in the Room

1. In January, Fitch rated a CMBS titled GSMS 2013-KYO, linked to six hotels in Honolulu, which was said to have used pro forma underwriting; 
1. In response, the head of CMBS at Fitch, Huxley Somerville, said that Fitch used a highly stressed cashflow assumption on the deal backed by the Kyo-Ya hotel portfolio
2. The underwriter, Goldman Sachs, used pro forma assumptions to calculate so-called Revenue Per Available Room (RevPAR), presenting a projected cashflow of US$174.4m. 
2. ..last November Fitch gave Triple A grades to a deal linked to an office building, 1290 Ave of the Americas, with pro forma projections.
1.  Similarly, on the deal backed by a loan on 1290 Ave. of the Americas in Manhattan, Somerville said there was a US$10m leasing reserve to cover future leasing costs
2. the underwriter's cashflow was US$94.4m, while Fitch assumed US$89.9m.

  I'm still on the fence on this one.  If these kind of deals markedly increase over the next 6 months and CMBS teams at the dealers start making frequent weeknight appearances at Milk and Honey;
then I'll start to get worried. 


~Jingle Male
 

Stuy Town Rent Increases

Checked in on Stuy Town this morning, there were tenant protesting notes they all received under their doors last night stating rents were being increased 21% in two weeks. Sounds like everyone got them. Payup or move out was the message...

Nerd Fight!

Fitch does not seem to agree with Kroll's rating of a $782.75M, interest-only mortgage that was stuffed into the recent CGCMT 2013-375P deal.  For the uninitiated, Fitch seems to believe that the underwriting assumptions used to finance RFR Realty's acquisition of the Seagram Building is a bit aspirational, to say the least.

Basically:

"--2010: $53,560,729 (average occupancy of 96.9%);
--2011: $56,745,150 (average occupancy of 96.6%);
--2012: $54,078,388 (average occupancy of 94.4%).

This compares to the issuer's NOI of approximately $74 million and average occupancy assumption of 96.7%."

Citi and Deutsche  underwrote this one with about $20M in pro-forma income.  That is, the banks assumed that the property's earnings would increase ~37% via the following:

"--$10.2 million from the mark to market of rents assuming $135 psf for floors 2-12, $145 psf for floors 13-38 and $125 psf for the retail space;
--$7.8 million from the lease up of vacant space from 90.2% to 96.7%; and
--$2.2 million from a recent re-measurement of the building increasing the total sf to 858,000 sf."

I'm in the middle on this one.  On one hand I'd like to believe that Fitch has a point and is acting prudently but on the other hand, it seems as if they're still trying to make amends for missing some of the market tops that occurred in 2006 and 2007.  Not sure if Fitch is being proactive or reactive.

And then there was this (emphasis added):
Fitch provided preliminary feedback of $510 million at investment grade and was not asked to rate the transaction. 

But despite any butt-hurtness on the part of Fitch, I take a look at KBRA's assumptions and also the mezz jammed into this deal and it does make a Jingle Male wonder:

Right-click and select "View Image"

 So yes, let's see how this one plays out. 



~Jingle Male

Another >100% Loss Severity

East Ridge Mall ($44.5mm - WBCMT 2005-C22) was liquidated last month after GGP tossed the keys back to the servicer. The sales price came in at $7mm (was appraised at $13.7mm in August!), which Barclays expects to result in 100% loss in principal, partial payback of outstanding ASERs, TI&LCs and transaction costs.

This follows several other recent 100% (or close to it) loss severities in recent months:

• Oviedo Marketplace ($55mm MSC 2005-HQ6) - 108% severity
• Lakeview Square Mall ($43mm - COMM 2006-C7) - 100% severity
• Prestige Place I & II ($15.2mm  - GSMS 2006-GG8) - 92% severity
• Parmatown Shopping Center ($61.6mm - GMACC 2004-C2) - 91% severity
• AnchorBay ($41.2mm - MLMT 2003-KEY1) - 100%
• Carefree Eastern ($11.3mm - WBCMT 2006-C28) - 96% 
• Metro I Building ($40mm - COMM 2004-LB4A) - 100%
• Pentagon Park ($18.5mm - MLCFC 2006-4) - 94%
• Hilton Tapatio ($55.25mm - BSCMS 2006-T24) - 90%
• Livonia Industrial Properties ($16.3mm - LBUBS 2005-C1) - 96%
• Empire Towers ($14.6mm - MSC 2007-T27) - 108%
• Lightstone Portfolio ($62.5mm JPMCC 2006-CB15) - 90.7% severity
• City View Portfolio ($69mm JPMCC 2006-CB16) -  101% severity

I'm sure I'm missing some too, but there has definitely been an uptick in 100% loss severities. Before the Great Recession 100+ loss severities in CMBS were rare birds, with stories such as Doctor's Hospital (pre 9/11) resulting in the arrest of the sponsor (but the head of origination that made the loan runs his own company today - its all in your perspective). I wonder if anyone has done a piece on 100%+ Loss Severities throughout history...

KeyBank adds to servicing platform with Berkadia and BAML deals

KeyBank is closing the second of two deals that will make it the third largest CMBS servicer. Globe St reports:

has arranged to buy Bank of America N.A.’s $110.5-billion CMBS servicing portfolio, along with a CMBS special servicing portfolio of about $14 billion. Additionally, the firm entered into a long-term sub-servicing agreement with Berkadia Commercial Mortgage LLC to buy up its CMBS special servicing business. If the deals go through, KeyBank will have a $205-billion servicing portfolio, becoming the third largest named servicer of commercial/multifamily loans in the US. On a pro forma basis, upon closing it will be named special servicer on approximately $47 billion of CMBS, making KeyBank the fifth largest CMBS special servicer

H/T CoS