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Slide 1 - American Securitization Forum

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									®
CMBS 101
           CMBS 101®
           An Introduction To Commercial
           Mortgage Backed Securities
           (CMBS)

           Prepared by

           The Education/Research Committee of
           the Commercial Mortgage Securities
           Association
Joseph Franzetti, Citigroup Global Markets

Gale Scott – Standard & Poor’s




               2
The CMBS Process
                     The Participants in a Securitization
                                                                                                6
                                                                                 Investors
                                                                                                                                 5
                                                                Securities
                                                                                 Investors                     Trustee/
                                                                                                             Fiscal Agent

                                                                                 Investors
                                               3
                                               3                             4
            1              2                       3     Depositor (SPE)
                                   Loan
                Mortgage
Borrowers                       Originator/                  Issuer/
                Bankers
                                Loan Seller            Investment Banker


                                                                                  Primary or
                                                                                 Sub Servicer
                                                                                                7

                                                                                   Master
                    Financial                              Engineering             Servicer                             7
                                                                                                                        7
                   Statements     Appraisals
                                                             Reports




                                                                                                    Agency



                                                                                                              Agency



                                                                                                                       Agency



                                                                                                                                Agency
                                                                                                    Rating



                                                                                                              Rating



                                                                                                                       Rating



                                                                                                                                Rating
                                                                                   Special
                                                                                   Servicer




                  2 months (Loan Funding) + 2 months (Bond Issuance)



                                                       4
The Participants in a Securitization

1   Borrower:            Owns the property, has repayment and performance obligations


2   Mortgage Banker:     Intermediary between borrower and loan originators/loan sellers



3   Loan Originators/    Lends money to the borrower, secured by a first priority lien, enters into a mortgage loan purchase
    Loan Sellers:        agreement (“MLPA”) to sell the loan to the securitization depositor


4   Depositor:           An entity set up by the investment bank sponsoring the securitization purchases commercial mortgage
                         loans and immediately sells loans to a trust.

4   Investment Banker:   Overall responsibility for structuring the securitization, selling the bonds/certificates to investors, helps
                         maintain a liquid secondary market for trading the bonds/certificates.

4   Issuer:              The trust is the record owner of the commercial mortgage loans, formed by the depositor pursuant to a
                         pooling and servicing agreement (“PSA”).


5   Trustee:             Responsible for administering the trust on behalf of and making payments to the investors.


6   Investors:           Different investors with varying risk appetites purchase certificates rated from AAA/Aaa to B/B to and
                         unrated certificates.




                                                         5
The Participants in a Securitization

7   Master Servicer:    Responsible for servicing all mortgage loans owned by the trust.




7   Primary or Sub      May be the originating mortgage bankers, often the initial point of contact for the borrower.
    Servicer:

7   Special Servicer:   Named at the issuance of the CMBS to be responsible for servicing any mortgage loans that may
                        default in the future.



8   Rating Agencies:    Assigns risk of loss ratings on certain bonds/certificates issued for a securitization transaction, monitors
                        performance after securitization funds.




                                                      6
The Participants after the Securitization is Completed

                                       Investors


                                       Investors                         Trustee/
                                                                       Fiscal Agent

                                       Investors




               Investment Bank/                               Trust
              Secondary Traders




Borrowers

                                      Master Servicer

                                                                      Rating Agencies
                                  Primary or Sub-Servicer /
                                      Mortgage Banker


                                      Special Servicer




                                        7
                               Where the Money Goes
                                                                                  Loan Originator /
 Assignments of Rents and Leases
                                                                                    Loan Seller
                                                                                     (Lender)
     Loan Proceeds

                                                                     Mortgage                         Securities Sale
                                                                        Notes                         Proceeds at Closing


                                   Servicer-                                         Trustee-
                Debt Service                    Debt Service
Borrowers                          Collection                                       Distribution
                & Escrows                       Less Servicer Fee
                                    Account                                          Account
                                                Plus Advances
                                                                       Monthly
                                                                          Bond                     Securities Sale
                                                                       Coupon                      Proceeds at Closing
                                                                    & Principal

                                                                                     Securities




                                                                                     Investors




                                                8
                                       Transaction Timetable

Activity                               1   2   3   4   5   6       7   8   9   10   11   12   13   14   15   16   Participant
Initial analysis                                                                                                  LO, IB
Due diligence for securitization                                                                                  LO, IB, SC
Structuring process                                                                                               LO, IB
B-buyer due diligence                                                                                             LO, IB, BB

Rating agency review                                                                                              LO, IB, RA
Selection of servicer & trustee                                                                                   LO, IB, SV
Legal documentation, both                                                                                         ALL
private & public securities offering
Pre-marketing of securities                                                                                       IB, Inv, RA

Marketing / pricing
  Private offering:                                                                                               IB, Inv, BB, RA
  Pricing of below-investment grade
  Public offering:                                                                                                IB, Inv, RA
  Pricing of investment grade
Closing of securities                                                                                             ALL

 LO Loan Originator                        SV Servicer             UC Underwriter's Counsel Inv Investor
 IB Investment Bank                        RA Rating Agency        SC Seller's Counsel      BB B-Piece Buyer
                                                               9
Build-A-Bond
        Hypothetical Structure: Credit Tranching
                                                Last            Lowest
                                                Loss             Risk



                              $85MM
                         Investment Grade
                              CMBS:
                             Aaa/AAA




                                                Loss Position
                               $9MM




                                                                  Credit Risk
                      Other Investment Grade:
                              Aa2/AA
                                A2/A
     $100MM
                             Baa2/BBB
Pool of Mortgages
                              $4MM
                          Non-Investment
                           Grade CMBS:
                             Ba2/BB
                                                First           Highest
                               B2/B
                                                Loss              Risk

                              $2MM
                         Non-Rated CMBS


                              11
  Basic CMBS Structure — $100 MM, 10-Year, Fixed Rate


Class             Size     Rating          Coupon   Expected Life   Subordination


Class A          $85 MM   Aaa / AAA        5.25%       9 years          15%

                           Aa2/AA
Class B          $9 MM      A2/A           5.50%      9.5 years          6%
                          Baa2/BBB

                           Ba2/BB
Class C          $4 MM                     7.50%     9.75 years          2%
                            B2/B

Class D          $2 MM       NR              —        10 years           —

NR = Non-Rated




                                      12
     Senior / Subordinated Structure — 10 Year Security

                  First            After              After            After
                 9 years         9.5 years         9.75 years         10 years




                                                       A                 A
           P+i      A
                                       A               A                 A

Mortgage
  Pool
             i      B      P+i         B               B                 B
             i               i
                    C                  C     P+i       C
                                                                         C
            i                                  i
                    D        i         D               D        P+i      D


                                  13
                                   Basic CMBS Structure

        Class                  Rating                  Size            Subordination     Coupon
           A                 Aaa/AAA                  $85MM                  15%          5.25%
                             Aa2/AA
           B                  A2/A                    $9MM                    6%          5.50%
                            Baa2/BBB
           C                  Ba2/BB                  $4MM                   2%           7.50%
                               B2/B
           D                    NR                     $2MM                        0         ---

Subordination could be calculated as follows for Aaa/AAA level stress:

Foreclosure Frequency      X            Loss Severity   =
    30%                    X                50% = .15 or 15% coverage or subordination




                                                       14
              Hypothetical Class Structure

                   Loss Coverage/
 Rating    Size                         Loss Frequency       Loss Severity
                    Subordination
Aaa/AAA    $85MM        15%         =        30%         X       50%
 Aa2/AA    $3MM         12%         =        30%         X       40%
  A2/A     $3MM         9%          =        30%         X       30%
Baa2/BBB   $3MM         6%          =        20%         X       30%
 Ba2/BB    $2MM         4%          =        20%         X       20%
  B2/B     $2MM         2%          =        10%         X       20%
  NR       $2MM          —                    —                   —




                               15
                            How To Decide How Much Subordination?
                                     Loss Rate Scenarios
                                                             Default                             No Default
                                                             19.6%                                80.4%




                                     Liquidated                                          Restructured                               Become Current
                                        55%                                                 25%                                         20%



                                     Loss Rate                                             Loss Rate                                  Loss Rate
                                       33%                                                   16.5%                                       0%


     Equally Weighted Portfolio Loss Rate =

          (0.196)(0.55)(0.33)              +                  (0.196)(0.25)(.0165)           +                   (0.196)(0.20)(0)
                                                                                                                                               .0436 or 4.36%
              0.0356                       +                           0.008                 +                    0                        =



Source: Morgan Stanley. “Update: Commercial Mortgage Defaults: 30 Years of History.” September 2004
(Cumulative loss rates for about 18,000 commercial mortgages originated by eight life insurance companies between 1972 and 2002.)

                                                                                        16
                          Basic CMBS Structure
          $100 MM, 10-Year, Fixed Rate with Interest Only Strip (IO)
               Class                       Size                        Rating                   Coupon                  Average Life                      Subordination

              Class A-1                  $85 MM                      Aaa / AAA                    5.00%                      9 years                             15%



              Class A-X                 Notional1                    Aaa / AAA                    0.25%                                   Not Meaningful1

                                                                      Aa2/AA
               Class B                    $9 MM                        A2/A                       5.50%                       9.5 years                             6%
                                                                     Baa2/BBB

                                                                       Ba2/BB
               Class C                    $4 MM                                                   7.50%                      9.75 years                             2%
                                                                        B2/B


               Class D                    $2 MM                           NR                        —                         10 years                              0%




1   For illustration purposes, the INTEREST ONLY (IO) strip collects interest of 0.25%, or 25 bp on a NOTIONAL amount of $85MM. The notional amount could be the same as
    the size of an associated class or the size of the entire security. Here, the interest on Classes A-1 and A-X total the coupon of Class A alone in the earlier example.

                                                                                           17
               Hypothetical Class Structure

                                                       Spread At Issue
Class   Size       Rating           Coupon (“C”)        (Yield, or “Y”)   Average Life
 A-1    15%       Aaa/AAA              5.25% PR               70 bp         5 years
 A-2    70%       Aaa/AAA              5.30% PR                75           10 years
 B      3%         Aa2/AA              5.45% PR                90           10 years
 C      3%          A2/A               5.55% PR               100           10 years
 D      3%        Baa2/BBB            6.00% PAR               150           10 years
 E      2%         Ba2/BB               6.50% D               300           10 years
 F      2%          B2/B                6.50% D               700           10 years
 G      2%           NR                 6.50% D               1200          10 years

                  IF Y < C, then it is a premium bond (PR)
                     IF Y = C, then it is a par bond (PAR)
                   IF Y > C, then it is a discount bond (D)
                               Assumptions:
                           5-year Treasury = 4.4%
                           10-year Treasury = 4.5%




                                       18
The CMBS Market
 Holders of Commercial & Multifamily Mortgage Loans
$626 billion of the $2.5 trillion U.S. commercial and multifamily mortgage loans
     outstanding are held as securities, a significant increase since 1990

                           1990                                                                2005 3Q

                                  CMBS Issuers
                                     4%



 Commercial                                        Life Insurance        Commercial                                           CMBS Issuers
 Banks 36%                                            Cos. 22%           Banks 43%                                               25%




                                                   Savings                                                                   Life Insurance
                                                 Institutions                                                                   Cos. 10%
                                                     18%
              Others 18%                                                          Others 11%
                                  Government                                                                    Savings
                                                                                                Government
                                  Sponsored                                                                   Institutions
                                                                                                Sponsored
                                  Enterprises                                                                     8%
                                                                                                Enterprises
                                     2%
                                                                                                   3%



     Source: Federal Reserve, Flow of Funds
                                                                    20
                     CMBS Issuance: U.S. and Non-U.S.
                                                      ($ Billions)

250                                                                                                     69




200



150
                                                                                                   34


                                                                                    23        21
100
                                                                                         29             169
                                                                     1
                                                                          9
                                                                               12

50                                                         4                                       93
                                                 1                   74             74        78
                                       3    1                             57
                         0       0.3                                           49        52
        1        1                                        37
                                 17    17        26
                 8      14                  16
 0      3
        90      91       92      93    94   95   96       97         98   99   00   01   02   03   04   05

                                                       Domestic      Non-US
  Source: Commercial Mortgage Alert.
                                                          21
                                            U.S. CMBS Issuance
                                                                ($ Billions)

180
                                                                                                                              169.2

160

140

120

100                                                                                                                    93.1

                                                                                                                77.8
80                                                                         74.3                   74.4

60                                                                                  56.6
                                                                                           48.7          52.1

40                                                                 36.8
                                                          26.4
20                         14.0      17.2   17.4   15.7
                  7.6
        3.4
 0
         90        91        92       93     94     95     96       97         98    99     00     01     02    03      04     05

 Source: Commercial Mortgage Alert
 US only, non-agency, non-CDO.                                      22
                                                                                                          Issuance ($ billions)




                                                                                            10
                                                                                                 20
                                                                                                             30
                                                                                                                        40
                                                                                                                                      50
                                                                                                                                           60
                                                                                                                                                70




                                                                                        0
                                                                                90 1Q
                                                                                90 3Q
                                                                                91 1Q
                                                                                91 3Q
                                                                                92 1Q
                                                                                92 3Q
                                                                                92 1Q
                                                                                93 3Q
                                                                                94 1Q
                                                                                94 3Q




     Source: Commercial Mortgage Alert and Federal Reserve
                                                                                95 1Q
                                                                                95 3Q
                                                                                96 1Q
                                                                                96 3Q
                                                                                97 1Q
                                                                                97 3Q




23
                                                             US CMBS Issuance
                                                                                98 1Q
                                                                                98 3Q
                                                                                99 1Q
                                                                                99 3Q
                                                                                00 1Q
                                                                                00 3Q
                                                             10-Yr Treasury     01 1Q
                                                                                01 3Q
                                                                                02 1Q
                                                                                02 3Q
                                                                                03 1Q
                                                                                03 3Q
                                                                                04 Q1
                                                                                                                                                     U.S. CMBS Issuance and Interest Rates




                                                                                04 Q3
                                                                                05 Q1
                                                                                05 Q3
                                                                                        3
                                                                                             4
                                                                                                      5
                                                                                                                   6
                                                                                                                                  7
                                                                                                                                           8
                                                                                                                                                9




                                                                                                          10-year Treasury (%)
                              Multifamily Mortgage Securitization
             700                                                                                                                    40%


             600                                                                                                                    35%


                                                                                                                                    30%
             500




                                                                                                                                          Share of total securitized
                                                                                                                                    25%
             400
$ Billions




                                                                                                                                    20%
             300
                                                                                                                                    15%

             200
                                                                                                                                    10%

             100                                                                                                                    5%


               0                                                                                                                    0%
                    90      91       92         93   94   95     96     97    98     99     00    01     02      03       04   05
                                                                                                                               3Q

                                        Multifamily Mortgages Outstanding     Securitized    Share of Total Securitized

       Source: Federal Reserve, Flow of Funds
                                                                             24
                            Commercial Mortgage Securitization
             2000                                                                                                                      25%

             1800

             1600                                                                                                                      20%

             1400




                                                                                                                                             Share of total securitized
             1200                                                                                                                      15%
$ Billions




             1000

              800                                                                                                                      10%

              600

              400                                                                                                                      5%

              200

                0                                                                                                                      0%
                     90       91       92       93   94   95    96     97        98     99     00   01     02      03        04   05
                                                                                                                                  3Q

                                        Commercial Mortgages Outstanding         Securitized    Share of Total Securitized

       Source: Federal Reserve, Flow of Funds
                                                                            25
                        Single Family and Commercial/Multifamily Securitization
                         70.0%
                                          Market Penetration
                         60.0%
                                                                                                                                                     59.6%

                         50.0%
Share of outstandings




                         40.0%



                         30.0%
                                                                                              23.7%

                         20.0%



                         10.0%



                          0.0%
                                                                                              4)




                                                                                                                                                          4)
                                 1
                                     2
                                          3
                                              4
                                                   5
                                                        6
                                                             7
                                                                 8
                                                                       9
                                                                      10
                                                                      11
                                                                                   12
                                                                                   13


                                                                                             15
                                                                                                   16
                                                                                                   17
                                                                                                        18
                                                                                                        19
                                                                                                                20
                                                                                                                21
                                                                                                                     22
                                                                                                                     23
                                                                                                                           24
                                                                                                                           25
                                                                                                                                  26
                                                                                                                                  27
                                                                                                                                         28
                                                                                                                                         29
                                                                                                                                               30
                                                                                                                                               31
                                                                                                                                                    32
                                                                                                                                                    33
                                                                                            00




                                                                                                                                                        00
                                                                                         (2




                                                                                                                                                     (2
                                                                                        14




                                                                                                                                                    34
                                                                         Commercial/Multifamily (year 1=1991)    Single Family (year 1=1971)

                        Source: Federal Reserve, Flow of Funds
                        Date through 2004, year 14 (CMBS) and year 34 (Single Family)              26
                      CMBS Issuance: Shift from RTC to Conduits
              80


              70



              60


              50
$ Billions




              40


              30



              20


              10


               0
                        1990              1991   1992    1993            1994          1995       1996   1997   1998

                                                        RTC*    Conduit Issuers   Other Issuers

             Source: Commercial Mortgage Alert
             * RTC: Resolution Trust Company                        27
                                         Au
                                           g-




                                                   0
                                                       50
                                                            100
                                                                  150
                                                                        200
                                                                              250
                                                                                    300
                                                                                          350
                                               9
                                         De 6
                                            c-
                                              9
                                         Ap 6
                                            r- 9
                                         Au 7
                                           g-
                                               9
                                         De 7




     Source :Morgan Stanley
                                            c-
                                              9
                                         Ap 7
                                            r- 9
                                         Au 8
                                           g-
                                               9
                                         De 8
                                            c-
                                              9
                                         Ap 8
                                            r- 9
                                         Au 9
                                           g-
                                               9
                                         De 9
                                            c-
                                              9
                                         Ap 9




                              Aaa/AAA
                                            r- 0
                                         Au 0
                                           g-
                                               0
                                         De 0
                                            c-
                                              0
                                         Ap 0
                                            r-




                              Aa2/AA
                                         Au 01




28
                                           g-
                                               0
                                         De 1
                                            c-
                                              0
                                         Ap 1
                                            r- 0




                              A2/A
                                         Au 2
                                           g-
                                               0
                                         De 2
                                            c-
                                              0
                                         Ap 2
                                            r- 0
                                         Au 3
                                           g-
                                               0
                              Baa2/BBB
                                         De 3
                                            c-
                                              0
                                         Ap 3
                                            r- 0
                                         Au 4
                                           g-
                                               0
                                         De 4
                                            c-
                                              0
                                         Ap 4
                                            r- 0
                                         Au 5
                                           g-
                                               0
                                         De 5
                                            c-
                                              05
                                                                                                CMBS Spreads Over 10-Year Treasury: Investment Grade




                                                   0
                                                       50
                                                            100
                                                                  150
                                                                        200
                                                                              250
                                                                                    300
                                                                                          350
                                       Au
                                         g-




                                                 0
                                                     100
                                                           200
                                                                 300
                                                                       400
                                                                             500
                                                                                   600
                                                                                         700
                                                                                               800
                                                                                                     900
                                                                                                           1000
                                                                                                                  1100
                                             9
                                       De 6
                                          c-
                                            9
                                       Ap 6
                                          r-
                                       Au 97
                                         g-
                                             9
                                       De 7




     Source: Morgan Stanley
                                          c-
                                            9
                                       Ap 7
                                          r-
                                       Au 98
                                         g-
                                             9
                                       De 8
                                          c-
                                            9
                                       Ap 8
                                          r- 9
                                       Au 9
                                         g-
                                       De 99
                                          c-
                                            9
                                       Ap 9
                                          r- 0
                                       Au 0
                                         g-
                                       De 00
                                          c-
                                            0
                                       Ap 0
                                          r- 0
                                       Au 1




                              Ba2/BB


29
                                         g-
                                       De 01
                                          c-
                                            0
                                       Ap 1
                                          r- 0
                                       Au 2




                              B2/B
                                         g-
                                       De 02
                                          c-
                                            0
                                                                                                                               Non-Investment Grade




                                       Ap 2
                                          r- 0
                                       Au 3
                                         g-
                                             0
                                       De 3
                                          c-
                                            0
                                       Ap 3
                                          r- 0
                                                                                                                         CMBS Spreads Over 10-Year Treasury:




                                       Au 4
                                         g-
                                             0
                                       De 4
                                          c-
                                            0
                                       Ap 4
                                          r- 0
                                       Au 5
                                         g-
                                             0
                                       De 5
                                          c-
                                            05
                                                 0
                                                     100
                                                           200
                                                                 300
                                                                       400
                                                                             500
                                                                                   600
                                                                                         700
                                                                                               800
                                                                                                     900
                                                                                                           1000
                                                                                                                  1100
                                                           Au
                                                             g-




                                                                     0
                                                                         20
                                                                              40
                                                                                   60
                                                                                        80
                                                                                             100
                                                                                                   120
                                                                                                         140
                                                                                                               160
                                                                                                                     180
                                                                                                                           200
                                                                 9
                                                           De 6
                                                              c-
                                                                9
                                                           Ap 6
                                                              r- 9
                                                           Au 7
                                                             g-
                                                                 9
                                                           De 7




     Source: Morgan Stanley
                                                              c-
                                                                9
                                                           Ap 7
                                                              r- 9
                                                           Au 8
                                                             g-
                                                                 9




                              Gap
                                                           De 8
                                                              c-
                                                                9
                                                           Ap 8
                                                              r- 9
                                                           Au 9
                                                             g-
                                                                 9
                                                           De 9
                                                              c-
                                                                9
                                                           Ap 9
                                                              r- 0
                                                           Au 0
                                                             g-
                                                                 0
                                                           De 0
                                                              c-
                                                                0
                                                           Ap 0
                                                              r-




                              CMBS Aaa Spreads (10-year)


30
                                                           Au 01
                                                             g-
                                                                 0
                                                           De 1
                                                              c-
                                                                0
                                                           Ap 1
                                                              r- 0
                                                           Au 2
                                                             g-
                                                                 0


                              Swap Spread
                                                           De 2
                                                              c-
                                                                0
                                                           Ap 2
                                                              r- 0
                                                           Au 3
                                                             g-
                                                                 0
                                                           De 3
                                                              c-
                                                                0
                                                           Ap 3
                                                              r- 0
                                                           Au 4
                                                             g-
                                                                 0
                                                                                                                                 CMBS Spreads and Swap Spreads




                                                           De 4
                              Average Gap of Period




                                                              c-
                                                                0
                                                           Ap 4
                                                              r- 0
                                                           Au 5
                                                             g-
                                                                 0
                                                           De 5
                                                              c-
                                                                05
                                                                     0
                                                                         20
                                                                              40
                                                                                   60
                                                                                        80
                                                                                             100
                                                                                                   120
                                                                                                         140
                                                                                                               160
                                                                                                                     180
                                                                                                                           200
                                                Market Size Comparison
                                                                    (as of 12/31/04)
              600
                                                                                                                           $548

              500



              400
                                                                                                      $359
 $ Billions




                             $290
              300
                                                                   $264


              200



              100



                0
                     REITs Market Cap 1                    Microsoft Market Cap                  GDP of Switzerland   Commercial and
                                                            (largest in NYSE) 2                    (17th largest) 3     Multifamily
                                                                                                                      Securitizations 4
Source : (1) NAREIT; (2) Microsoft Website; (3) World Bank; (4) Federal Reserve, Flow of Funds
                                                                                  31
                                            Market Size Comparison
                                                  (as of September 30, 2005)
               10                                                                                               10

                9
                                                                                                  $8.8          9

                8                                                                                               8

                7                                                                                               7

                6                                                                                               6
 $ Trillions




                                                                                   $5.2
                5                                                  $4.6                                         5

                4                                                                                               4
                                                $3.0
                3         $2.5                                                                                  3

                2                                                                                               2

                1                                                                                               1

                0                                                                                               0
                    All Commercial +        Corporate Bonds    US Government    Single Family   Single Family
                    Multifamily Mortgages                        Securities       Securities     Mortgages
                                                          Current CMBS Outstandings
Source: Federal Reserve, Flow of Funds
                                                                  32
Investors of CMBS
                          Who Buys CMBS?


   Institutional fixed income securities investors buy public bonds
   Real estate high yield investors buy private bonds
   Varies by class, by rating, by structure, by underlying collateral




                                     34
                              Investors of CMBS in 2004
                                   Banks
                                    25%




                                                            Insurance Companies
                                                                    24%


            Government
         Sponsored Entities
               9%




               Opportunity Funds
              Finance Companies
                 Pension Funds
                                                Investment Advisors/
                     14%
                                                  Money Managers
                                                       28%


Source: Morgan Stanley
                                           35
                               Why?


   Yield differential (relative value investing)
   Credit performance
   Asset allocation (satisfy allocation to real estate debt)
   Non-correlated risks (compare to MBS and corporates)
   Comparative Credit Risk
Remember:
   Credit Risk ≠ Yield



                                  36
                                                                       Yield Differential
                                                                (10-Year Sector; Yield over Treasury)
                             100
                                                88
                              90

                              80                           78                                                              77
Basis points over Treasury




                              70                                                                                                  65
                                                                                                      62
                              60                                                                            56

                              50
                                                                          42
                              40                                                 36

                              30

                              20

                              10

                               0
                                               Aaa CMBS                   Agencies              Aaa Credit Card ABS   Single-A Industrials


                                                                    Recent (as of 12/09/05)   6-Month Average


                                   Source: Merrill Lynch
                                                                                       37
                                  Credit Performance
                       Corporate vs. CMBS Bond Defaults: 1990–2003 (%)



                                                –––––– Cumulative Defaults –––––
                                                  Corporate        CMBS

                       Investment Grade              2.10 %                  0.10%
                       Below Investment Grade        55.00%                  1.61%
                       All Bonds                     11.00%                  0.19%


                                                –––– Average Annual Defaults –––
                                                  Corporate        CMBS

                       Investment Grade               0.15%                  0.01%
                       Below Investment Grade         3.94%                  0.12%
                       All Bonds                      0.78%                  0.01%




                                         Maturity of markets
                                         Position in Asset Class
                                         Past performance is no guarantee of future success
Source: FitchRatings


                                                   38
         Satisfying Asset Allocation to Real Estate Debt


 Risk based capital treatment for insurance companies gives advantage to CMBS

     Mortgages = 3% Risk Based Capital (depending on insurer’s experience)

     Investment Grade Public Securities = 0.3% Risk Based Capital

   Cost of management (direct loan vs. securities investment)

   Liquidity (ease of trading in and out of the portfolio)

   Creates diversified investment portfolio




                                             39
                        Non-Correlated Risks

                             CMBS                                       MBS                              Corporates

PRIMARY RISK   Real estate credit risk                   Prepayment risk                      Corporate credit risk




MATURITY       Some extension risk                       No extension risk                    No extension risk




DEFAULT        DSCR is a predictor of default            LTV is a predictor of default risk   Corporate credit risk a better
               risk                                                                           predictor of default risk



LIQUIDITY      Growing but smaller overall               Highly liquid market                 Highly liquid market
               market than MBS and corporates



INFORMATION    Different for public buyers versus        Widely disseminated                  Widely disseminated
               private buyers




                                                    40
                  Investing in Non-Correlated Risks

                                   CMBS                                   MBS                               Corporates


RATING AGENCIES     10 years of experience                 30 years of experience               100 years of experience




SECURITY            Set pools of assets; first priority    Set pools of uniform assets; first   Unsecured; investors exposed to
                    mortgage liens                         priority mortgage liens              future decisions at the
                                                                                                corporation



PERFORMANCE         Should outperform MBS and              More interest rate sensitive         Interest rate sensitive
                    corporates in falling rate
                    environment


RATINGS             Volume of AAA and Non-                 Almost all AAA and AA                Mostly A, BBB
                    Investment Grade




                                                          41

								
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