Daily market intelligence on mortgages, equity raising, investment sales, and CMBS.

Wednesday, 15 January 2020

Low Interest Rates Drive Surge in CMBS Defeasance Activity

The volume of loans defeased, or replaced by government securities, through last November totaled $12.79 billion. That's up 46 percent from $9.7 billion in 2018.

By Jyoti Yadav, Trepp LLC

After a couple of calm years during which CMBS defeasance volumes declined substantially from their post-recession peaks, 2019 saw significant growth in the activity in large part because of super-low interest rates.

Defeasance activity in the CMBS universe had reached a post-recession peak of $21.2 billion in 2015, which coincidentally was the peak of the so-called "wall of maturities." It dropped to $15.9 billion in 2016 and a mere $6.4 billion a year later, as few loans were in their peak defeasance windows.

In 2018, however, defeasance activity increased by 51 percent, to $9.7 billion. And last year through November, volumes had increased by 46 percent to $12.79 billion. In terms of the number of defeased loans, 2019 had 763 versus 554 the previous year.

                        Defeasance Volume

DefeasanceBAR

Source: Trepp LLC

Securitized commercial mortgages typically are locked out from early prepayment to ensure lenders receive the cash flows they expected for the loan's term. If a borrower would like to pay off a loan before it becomes open to prepayment, for instance, in the event of a sale or refinancing, they can take the defeasance route.

Defeasance is a process through which a borrower replaces a loan's scheduled payments with a commensurate cash flow from government securities. It could be a costly process, however, particularly if the loan being defeased has a substantial amount of term remaining and prevailing interest rates have declined substantially. That would require a large number of lower paying securities to be purchased to replicate the defeased loan's cash flow.

Nonetheless, property owners will turn to defeasance in order to take advantage of what might be substantially lower mortgage interest rates, or to tap the equity created by an increase in property values. While the latter is typically the key factor in boosting defeasance activity, substantially low interest rates as of late have become the significant driver.

Given current rates, the surge in defeasance activity is no surprise, as borrowers seek to refinance higher-coupon loans with today's lower rates. The average coupon rate for all loans defeased this year was 5.02 percent. That compares with a 4.43 percent average coupon for all securitized conduit loans last year.

 

       Share of Outstanding Balance by Property Type

 

DefeasancePIE

 

Source: Trepp LLC

 

What is surprising, however, is that more than 50 percent of the loans defeased in 2019 had more than four years left until maturity - up from 40 percent the previous year. Because the cost to defease a loan increases as the time to maturity increases, borrowers tend to defease closer to maturity. But rates have declined so much, and property values increased enough to justify the higher costs, driving more borrowers to refinance their loans through defeasance.

On an individual state level, New York accounted for the largest share of defeasance volume, with a 25 percent total concentration. It was followed by Washington, with a 14 percent share, and California, at 12 percent. Each state includes a major market - California has at least three - where property prices have seen extremely large value increases since the recession.

Top Defeased Loans - 2019

Mo. of Defeasance

Deal Name

Property Name

City

Property Type

Balance $mln

Coupon %

DSCR (NCF)

UW Maturity Date

September

OBP 2010-OBP

Bank of America Tower at One Bryant Park

New York City

OF

650.00

4.65

4.30

7/13/2020

May

FTST 2006-4TS

Four Times Square

(The Conde Nast Buliding)

New York City

OF

536.23

5.59

2.53

12/11/2020

May

CGRBS 2013-VNO5

666 Fifth Avenue

New York City

RT

390.00

3.61

2.93

3/6/2023

February

CGBAM 2015-SMRT

StorageMart Portfolio

Various

SS

312.57

3.80

1.83

4/6/2020

November

GSMS 2016-GS4

225 Bush Street

San Francisco

OF

213.00

3.68

4.70

11/6/2021

July

MSC 2013-WLSR

Wilshire Courtyard

Los Angeles

OF

193.00

3.53

1.22

1/7/2020

January

ACRE 2010-ARTA

ART Portfolio-A2FX

Various

WH

150.33

4.96

2.34

1/11/2021

July

UBSCM 2012-C1

Dream Hotel Downtown Net Lease

New York City

OT

120.00

5.18

1.27

3/6/2032

January

JPMCC 2012-C6

200 Public Square

Cleveland

OF

117.40

4.82

1.63

4/1/2022

February

MSBAM 2013-C9

Colonnade Office

Addison, Texas

OF

109.52

4.26

1.68

4/1/2023

April

CGCMT 2015-GC29

3 Columbus Circle

New York City

OF

100.00

3.61

1.91

3/6/2025

October

GSMS 2013-GC13

345 Park Avenue South

New York City

OF

100.00

4.43

2.21

6/6/2023

January

GSMS 2011-GC3

Inland / Centro JV Portfolio I

Various

RT

94.48

5.91

1.69

12/6/2020

September

COMM 2015-CR23

DFW / Raleigh Portfolio

Various

MF

93.66

4.43

1.57

4/6/2025

October

COMM 2013-CR11

Metro 22 Portfolio

Various

SS

90.00

5.14

2.58

8/6/2023

January

COMM 2014-LC17

80 and 90 Maiden Lane

New York City

OF

90.00

4.26

1.57

9/6/2019

April

COMM 2015-CR23

3 Columbus Circle

New York City

OF

90.00

3.61

1.91

3/6/2025

November

JPMBB 2013-C14

589 Fifth Avenue

New York City

MU

87.50

4.09

2.24

6/1/2023

November

JPMCC 2013-C13

589 Fifth Avenue

New York City

MU

87.50

4.09

2.24

6/1/2023

January

GSMS 2011-GC3

Inland / Centro JV Portfolio II

Various

RT

86.53

5.91

1.85

12/6/2020

October

CGCMT 2014-GC23

Hyatt NYC Portfolio

New York City

LO

85.06

4.30

1.62

7/6/2024

April

COMM 2015-CR22

3 Columbus Circle

New York City

OF

85.00

3.61

1.91

3/6/2025

April

DBJPM 2016-C3

Center 21

Oakland, Calif.

OF

83.00

4.14

2.16

7/1/2026

January

WFRBS 2011-C3

Hilton Minneapolis

Minneapolis

LO

82.89

5.46

1.51

5/1/2021

January

ACRE 2010-ARTA

ART Portfolio-D

Various

WH

82.60

7.45

2.34

1/11/2021

November

WFRBS 2011-C5

Puck Building

New York City

MU

81.07

5.35

1.74

7/1/2021

January

MSBAM 2012-C5

US Bank Tower

Denver

OF

80.01

4.67

1.11

7/1/2022

June

JPMCC 2016-JP2

Center 21

Oakland, Calif.

OF

80.00

4.14

2.28

7/1/2026

July

WFRBS 2013-C13

188 Spear Street and 208 Utah Street

San Francisco

OF

79.80

3.73

2.74

3/1/2023

October

MSBAM 2013-C10

Goodyear Global HQ Office

Akron, Ohio

OF

75.40

4.20

1.76

4/1/2038

January

JPMBB 2015-C27

One Campus Martius

Detroit

OF

75.00

4.59

2.51

1/6/2020

April

WFCM 2015-LC20

3 Columbus Circle

Oakland, Calif.

OF

75.00

3.61

1.91

3/6/2025

August

WFCM 2015-C30

Somerset Park Apartments

Troy, Mich.

MF

73.50

4.55

2.49

7/6/2025

June

GSMS 2012-GCJ9

9201 Sunset

West Hollywood

OF

70.00

3.95

3.36

11/6/2022

July

WFCM 2015-LC22

Somerset Park Apartments

Troy, Mich.

MF

70.00

4.55

2.49

7/6/2025

Source: Trepp LLC

Of the 763 loans that were defeased last year, 26 percent were backed by multifamily properties, 18 percent by retail and 15 percent by office. Those three property sectors also have the greatest representation in the overall CMBS universe.

The largest loan defeased in 2019 was the $650 million mortgage against Bank of America Tower, a 2.3 million-square-foot office property at One Bryant Park in Manhattan. That interest-only loan, securitized through One Bryant Park Trust, 2010-OBP, paid a coupon of 4.65 percent, requiring $30.2 million of annual interest payments, and wasn't set to mature until July 2020. Its collateral had generated $122 million of cash flow 10 years ago, and was appraised at a value of $2.2 billion.

The loan was defeased with proceeds of a $950 million loan that was securitized through BAMLL Commercial Mortgage Securities Trust, 2019-OBP. That loan also requires only interest payments. It pays a coupon of 2.594 percent, requiring $24.6 million of annual interest payments.

Meanwhile, the property's cash flow increased to $132.7 million in 2018, which resulted in an impressive 59 percent increase in its appraised value to $3.5 billion.

Another worthy example is the $213 million loan package against the 575,363-sf office building at 225 Bush St. in San Francisco. That loan was securitized through GS Mortgage Securities Corp. II, 2016-GS4, and GSMS 2017-GS5.

The interest-only loan - a $122 million senior mortgage and $113 million subordinate note - wasn't set to mature until 2021 and paid a blended coupon of 3.951 percent, requiring $8.4 million of annual interest payments. The property, owned by the Kylli Inc. unit of Genzon Investment Group of China, in 2017 had generated $19.8 million of cash flow and was appraised at a value of 450 million.

The loan was defeased with proceeds of a $306 million loan that was included in the collateral pool for three transactions: Benchmark Mortgage Trust, 2019-B14; COMM, 2019-GC44; UBS Commercial Mortgage Trust, 2019-C18; and CF Trust, 2019-CF3.

That five-year loan pays a coupon of 3.303 percent, requiring $10.1 million of annual interest payments. But the property, whose appraised value has increased to $589 million, now generates $24.5 million of cash flow.

Comments? E-mail Jyoti Yadav or call her at (212) 754-1010.





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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

cppichart FP

 

 

CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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