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CMBS OUTLOOK: 2013 AND BEYOND

CMBS OUTLOOK: 2013 AND BEYOND. 18th Annual Fisher Center Real Estate Conference Session 5: Real Estate Finance. A Brief History of CMBS. 3. CMBS Spread Projections in 2013. CMBS spreads will continue to decline in 2013, although at a slower pace than in 2012, due to:

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CMBS OUTLOOK: 2013 AND BEYOND

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  1. CMBS OUTLOOK: 2013 AND BEYOND • 18th Annual Fisher Center Real Estate Conference • Session 5: Real Estate Finance

  2. A Brief History of CMBS 3

  3. CMBS Spread Projections in 2013 CMBS spreads will continue to decline in 2013, although at a slower pace than in 2012, due to: • Historically low rates • Technicals: • Reduced securitized products • Run off in CMBS • Improving CRE fundamentals • Relative value vs. competing sectors • More readily available leverage • Continued tame spread volatility 3

  4. CMBS Conduit Lender Competitiveness Growing • Wider/volatile CMBS spreads and ineffective loan pipeline hedging tools drove up conduit loan rates during 2H11 • Only effective hedge was building in cushion via a higher rate to absorb the spread volatility • Reduced volatility and strong demand for high-grade risk assets yielded tighter CMBS spreads and sharply lower mortgage rates in 2012 • Conduit mortgage rates closing in on portfolio lender rates, but can’t touch the GSEs • Conduit rates of 3.90% to 4.50% • Life Co. rates of 3.50% to 4.50% • Regional bank rates of around 5.00% 3

  5. CMBS Issuance Volumes Show Slow But Consistent Annual Growth 2007: $228 Billion Total Issuance • 64 Fixed-rate Conduit CMBS – $192b • 2 Single-borrower CMBS – $11b • 13 Floating-rate CMBS - $20.8b ----------------------------------------------------------------------------------------- 2009: $2.74 Billion Total Issuance • 3 Single-Borrower CMBS – 144(a) • 2 Private Freddie K CMBS ----------------------------------------------------------------------------------------- 2010: $11.6 Billion Total Issuance • 7 Conduit CMBS – 144(a) • 4 Single-borrower /Other CMBS – 144(a) • 5 Private Freddie K CMBS ----------------------------------------------------------------------------------------- 2011: $32.2 Billion Total Issuance • 18 Fixed-rate Conduit CMBS – Public, 144(a) • 8 Single-borrower /CMBS – Private 144(a) • 11 Private Freddie K CMBS ----------------------------------------------------------------------------------------- YTD 2012: $48.0 Billion Total Issuance • 27 Fixed-rate Conduit CMBS – Public, 144(a) - $32b • 21 Single-borrower /CMBS – Private 144(a) - $10.1b • 16 Private Freddie K CMBS - $3.3b • 3 Non-Performing CMBS – Private 144(a) - $486mm 3

  6. CMBS Volume Projections in 2013 CMBS Volume will exceed $70mm in 2013, due to: • More competitive CMBS spreads relative to bank and life company lenders • High levels of debt and equity capital • Increasing property transactions • Growing pool of refinanceable loans, particularly given outlook for historically low mortgage rates • Increasingly aggressive first mortgage underwriting • Expanding subordinate debt markets 3

  7. Rising Debt and Equity Capital for CRE: Transaction Volume Up from the Trough

  8. CMBS 3.0 – Increasing Leverage As Per the Rating Agencies

  9. CMBS Maturities Level Off in 2013 and 2014 Before Heading Into the Wall

  10. Ability to Refinance Depends on Vintage/Seasoning • Majority of loans maturing in ‘13 originated in ‘03 and ’04 • ‘03 loans are structurally more sound, but adverse selection issues weigh on outlook • Amortizing • Higher loan coupons at origination than today • Higher cap rates at origination and thus equity build-up as cap rates lower today • $18B of fixed rate 10-year ‘03 vintage loans to mature in ’13 • $6.2B of fixed rate 9/10-year ‘04 vintage loans to mature in ‘13 3

  11. CRE Values Remain Depressed Nationally, But Many MSAs in Recovery Mode • Commercial Property Prices (as of 10/12) • Lower by 22% from 10/07 peak • Declines vary by asset type/quality/location • By Property (peak thru 10/12) • Retail: -35% • Office: -25% • Industrial: -23% • Multifamily: -12% • But Recovery Well Underway • National all-property composite has regained 43% of its peak-to-trough loss • Core MSAs in Full Recovery, Non Major MSAs Lag • Non-major markets recovered 27% of peak-to-trough loss • Major markets recovered 65% of loss 3

  12. Improving Commercial Real Estate Valuations– An Uneven Recovery

  13. CRE Supply Technicals Bode Well for Valuations • Retail: Completion taking further dip • Office: Completion dip surpassed the previous lows of 1994 and 2004 • Industrial: Showing similar trend to office with triple dips at 1993, 2003 and now 2012 • Hotels: Showing a great pick-up in completions, at the peak currently • Apartments: lowest completions since 1994

  14. Important Disclosures This material is provided for informational purposes only and is intended solely for your use. It may not be quoted, circulated or otherwise referred to without our express consent. This material is a product of Jefferies & Company, Inc. (“Jefferies”) trading and sales desk personnel. This material is not a research report and the commentary contained herein may contain views that differ from the Jefferies Fixed Income Research Department. Jefferies may have accumulated a long or short position in the subject security or securities or in related financial instruments on the basis of this analysis prior to its dissemination. All prices, yields, estimates and opinions expressed are indicative only and are subject to change without notice. This material is based on sources that we believe to be reliable, but we do not represent that it is accurate or complete. Additional and supporting information is available upon request. Certain transactions or securities mentioned herein, including those involving future, options, and other derivatives products give rise to substantial risk and are not suitable for all investors. Jefferies transacts business with counterparties on an arm’s length basis and on the basis that each counterparty is sophisticated and capable of independently evaluating the merits and risks of each transaction and that each counterparty is making an independent decision regarding any transaction. This information is not to be considered an offer to sell or solicitation of an offer to buy the securities or other products discussed herein. Jefferies may have a long or short position in the securities or in related financial instruments or other products discussed herein, and may make purchases from and/or sales to customers on a principal basis or as agent for another person. Jefferies also may have acted as an underwriter of such securities or other products, and may currently be providing investment banking services to the issuers of such securities products. Pursuant to this relationship, Jefferies may have provided in the past, and may provide in the future, financing, advice, and securitization and underwriting services to these clients in connection with which it has received or will receive compensation. 3

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