1

CMBS OUTLOOK:

2013 AND BEYOND

18th Annual Fisher Center Real Estate Conference

Session 5: Real Estate Finance

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A Brief History of CMBS

6048

3427943756865123322

72

4833

12416

228

198

167

9378

5168

4757

74

3726

16

-

50

100

150

200

250

Issua

nce (

$BB)

Agency and Private-Label CMBS New Issue Volumes

Private-Label CMBS Agency CMBS

Source: Jefferies & Co., Commercial Mortgage Alert *Projected

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

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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%

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4.00

5.00

6.00

7.00

8.00

9.00

-

50

100

150

200

250

Amou

nt C

omm

itted

($B

)

Life Company Vs. CMBS Commercial/Multifamily Mortgage Commitments and Contract Interest Rates

(2000-2012)

Life Co. Amt. ($B) CMBS Amt. ($B)

Life Company Rate (%) CMBS Mortgage Rate (%)Source. ACLI, Jefferies & Co. Note: No CMBS data in late-08 through YE09. *Annualized 2012

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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

CMBS Issuance Volumes Show Slow But Consistent Annual Growth

0

10

20

30

40

50

60

Issua

nce (

$B)

New Issue CMBS by Deal Type

OtherFloatersSingle BorrowerConduit/Fusion

Source: Jefferies & Co., CM Alert

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

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

7

79 102122207

308354

513

13960

123180

300

0

100

200

300

400

500

600Sa

les Vo

lume

($B)

CRE Property Transaction Volume

Source. RCA *Est.

CMBS 3.0 – Increasing Leverage As Per the Rating Agencies

8

60

80

100

120Fixed-Rate Conduit/Fusion CMBS Stressed LTV (%)

Source: Jefferies & Co. *YTD 2012 Data

0.80

1.00

1.20

1.40Fixed-Rate Conduit/Fusion Stressed DSCRs

Source: Jefferies & Co. *YTD 2012 Data

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

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020406080100120140

-

2,500

5,000

7,500

10,000

Loan Curr. Bal. ($B)Lo

an C

ount

Fixed-Rate Conduit/Fusion Maturity Schedule (Excludes Defeased Loans)

OutstandingBalance ($B)Loan Count

Source: Jefferies& Co. Excluding Defeased Loans. *as of 11/12

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 10 3

Vintage

Avg.Coupon

(%) Avg. Cap Rate (%)

Avg. Loan Spread (BPs)

Avg. Pool LTV (%)

Avg. 10 Swap Rate

(%)1998 8.25 8.56 300 69.3 5.251999 7.99 8.45 234 69.2 5.642000 9.48 8.64 233 69.4 7.152001 8.20 8.41 238 68.7 5.822002 7.19 7.98 202 68.9 5.172003 6.14 7.67 173 66.8 4.412004 6.18 7.25 149 68.9 4.692005 6.03 6.79 130 68.7 4.732006 6.67 6.36 135 68.0 5.322007 8.51 5.74 328 69.1 5.242008 8.62 5.36 438 66.8 4.242009 NA 6.72 NA - 3.442010 5.83 6.20 258 57.9 3.252011 6.36 5.82 246 63.9 3.902012 5.77 4.26 272 62.1 3.05

Sources: J efferies, Trepp, NCREIF. *Across all property types.

Fixed Rate Coupons and Capitalization Rates by Vintage

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

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75

100

125

150

175

200Commercial Real Estate Values Past the Trough (as of 10/12)

National CPPI

Source. Moody's Investors Service, S&P

159.02 162.27 154.72 161.24164.19

123.51 131.83 141.97

0.00

40.00

80.00

120.00

160.00

200.00

CPPI by Property Type: 2008 vs. 2012 10/31/08 10/31/12

Source: Moody's/REAL CPPI

Improving Commercial Real Estate Valuations– An Uneven Recovery

12

75

100

125

150

175

200

225

Moody's/REAL CPPI by Major/Non-Major Markets vs. National

Major Mkts.

Non-MajorMkts.National

Source. Moody's Investors Service

Source. Moody's, *as of 10/12.

75

100

125

150

175

200

225

Moody's/REAL CPPI by Property Type

Office

Industrial

Retail

Apartment

Source. Moody's Investors Service

Source. Moody's, *as of 10/12.

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

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-

50,000

100,000

150,000

200,000

250,000

300,000

Net C

ompl

etion

(SF x

1000

)

National Net Completion (SF) for Retail, Office and Industrial Properties

RTOFIN

Source. CB Richard Ellis

-

100

200

300

1,950

2,000

2,050

2,100

2,150

2,200

Units (x1000)

Room

s (x1

000)

National Net Completion Data for Multifamily and Hotels

HT

MF

Source. CB Richard Ellis

Important Disclosures

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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.