Copyright 2012, Trepp, LLC

EDR's Annual Property Due Diligence Summit

May 16, 2012

CMBS and CRE Briefing

2

Sources of Commercial Real Estate Debt

• CMBS (Securitization)• Life Insurance Companies• Commercial Banks• Credit Unions• Government• Private Equity

─ Recovering─ Peaking─ Recovering─ Emerging─ Over-heated─ Active

Obstacles to Financing

3

Source: National Association of Realtors, 2011 Survey

4

Capital Markets

5

Real Estate in the Capital Markets

• CMBS (Commercial Mortgage Backed Security)

– Securitization of CRE loans, organized a passive investment pool in a REMIC

• REIT (Real Estate Investment Trust)

– Shares in a company which holds either debt or equity in commercial real estate as actively managed investments

– Shares can be public (exchange traded) or private (non-exchange)• CLO (Collateralized Loan Obligation)

– Securities backed by various types of debt on real estate

– Adopted because “CDO” is a bad word• NPL (Non-Performing Loan)

– Securities used to finance distressed asset pools

– Liquidating trust where all proceeds go to bondholders

6

U.S. CMBS Market Overview

• Forecast for 2012 projects new issues up to $50 billion.

• Backlog of matured loans continues to grow

• Secondary trading remains active and has recovered from summer 2011 disruption

• Loans continue to pay off

• Collateral performance is poor with delinquency rates near record levels

• Regional differences in collateral performance remain significant

7

U.S. CMBS Secondary Market Spreads

Source: Trepp, LLC

8

Spreads for New Commercial Real Estate Loans

Compiled from a survey of institutional lenders. Copyright, 2010, Trepp, LLC, all rights reserved.

Trepp Real Estate Portfolio Pricing Index (TREPP-i™)Indicative Spreads for Commercial Real Estate Loans vs. Treasury

(50-59% Leverage, Amortizing, 10 year, fixed rate)

Source: Trepp, LLC

Loan Payoff Activity

9

10

CMBS 2.0 Primary Market Activity

2010• $12.7 billion

– (16 deals)• $6.4 billion in Freddie

Mac– (6 deals)

2011• $29.9billion

– (27 deals)• $13.7 billion by Freddie Mac

– (12 deals)• $395 million by FDIC

– (1 deal)

Source: Trepp, LLC

CMBS 2.0 U.S. Primary Market Activity

11

2012* • $7.5 billion

– (11 deals)• $6.5 billion by Freddie Mac

– (5 deals)• $4 billion pricing for May

– (4 deals)

*(as of 4/30/12)

Source: Trepp, LLC

Selling Non-performing Assets

The What• $132,000,000 of certificates

• Sold at 99.75%• Coupon of 4.75%

• Secured by• 320 assets with• $224 MM carrying value• $569 MM unpaid balance

The Why• Leverage• Return boosted from mid 20% to

high 30%

The How• Single class of notes• Fast-pay, 100% cash sweep• Reserves

13

Commercial Real EstateMarket Performance

14

Commercial Real Estate Bear Markets

Sources: Trepp LLC, Moody’s, NCREIF, Bureau of Economic Analysis

Period Decline DurationTime to Recover

1929 to 1933 -44% 4 years 8 years

1941 to 1943 -42% 2 years 2 years

1989 to 1993 -32% 4 years 10 years

1999 to 2002 -4% 3 years 2 years

2007 to Present

REITs: -35%Direct: -45%

3 years in Top 6

5 + yrs others?

Major Value Decline – Prospect is a Long Recovery

Annual Sales Volume office, industrial, retail, apartments, hotels and dev sites

2012

Pro

ject

ed

2011 Year in Review

Source: Real Capital Analytics

2011 Year in Review: Top Markets

Source: Real Capital Analytics

Buyer Composition

Past Five Years

2011 By Property Type

2011 By Market Size

2007

User/Other Private Public Equity Fund Inst'l Cross-Border

11%

16%

11%

4%

8%

14%

5%

19%

7%

6%

8%

34%

38%

55%

49%

34%

24%

30%

33%

49%

28%

56%

27%

39%

49%

19%

18%

7%

10%

10%

15%

32%

16%

13%

35%

11%

21%

17%

13%

17%

13%

6%

10%

25%

15%

14%

27%

14%

17%

16%

16%

21%

14%

13%

10%

13%

20%

21%

8%

9%

16%

11%

6%

16%

15%

7%

9%

7%

6%

6%

7%

18%

9%

5%

8%

12%

7%

2011

2010

2009

2008

2007

Office

Industrial

Retail

Apartment

Hotel

Dev Site

Major Metro

Secondary

Tertiary

Buyer Composition

Past Five Years

2011 By Property Type

2011 By Market Size

2007

User/Other Private Public Equity Fund Inst'l Cross-Border

11%

16%

11%

4%

8%

14%

5%

19%

7%

6%

8%

34%

38%

55%

49%

34%

24%

30%

33%

49%

28%

56%

27%

39%

49%

19%

18%

7%

10%

10%

15%

32%

16%

13%

35%

11%

21%

17%

13%

17%

13%

6%

10%

25%

15%

14%

27%

14%

17%

16%

16%

21%

14%

13%

10%

13%

20%

21%

8%

9%

16%

11%

6%

16%

15%

7%

9%

7%

6%

6%

7%

18%

9%

5%

8%

12%

7%

2011

2010

2009

2008

2007

Office

Industrial

Retail

Apartment

Hotel

Dev Site

Major Metro

Secondary

Tertiary

Equity Capital

Source: Real Capital Analytics

18

U.S. CMBS Retail Performance by Market

Source: Trepp, LLC

19

U.S. CMBS Collateral Performance

Source: Trepp, LLC

20Source: Trepp, LLC

U.S. CMBS Collateral Performance

21

U.S. CMBS Delinquency Rates: Significance of Regional Variation

10.82%

9.88%

8.46%14.57%

5.81%

10.249%

7.16%

9.29%11.19%

Source: Trepp, LLC

22

Performance Comparison: CMBS and Commercial Mortgages Held by Commercial Banks

Sources: Trepp, FFIEC, Foresight Analytics

23

Performance Comparison: CMBS and Bank Loans (Income Properties)

Sources: Trepp, FFIEC, Foresight Analytics

Delinquency Rate (30+ Days Past Due)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1Q 07 3Q 07 1Q 08 3Q 08 1Q 09 3Q 09 1Q 10 3Q 10 1Q 11p

Quarter

CMBS (Ex Pro-forma Loans) >= $100 Bn $10 Bn to $100 Bn $1 Bn to $10 Bn $100 Mn to $1 Bn

24

Opportunities

25

Growth in Defaults

Source: Trepp, LLC

26

Increased Backlog of Matured Loans

Source: Trepp, LLC

27

Cumulative Size of Matured Loan Backlog

Source: Trepp, LLC

28

Additional Opportunities in Maturing CMBS Loans

Source: Trepp, LLC

29

Aggregate Commercial and Multifamily Mortgage Maturities

Source: Foresight Analytics

30

Residential Loan Performance

Sources: FDIC

31

Residential Loan Performance

Sources: FDIC

Stress in the Bank Market

Forecast Bank Failures and Cost to the Deposit Insurance Fund in Four Scenarios(As of 4Q 2011)

Cost to Deposit Insurance Fund ($ Billion)

Scenario # of Failures* Low High

Deep Recession 514 $71.8 $107.6Moderate Recession 364 $29.3 $44.0Moderate Growth 196 $10.6 $15.9Strong Growth 131 $5.8 $8.8

* Critically Undercapitalized Banks in 2-year scenario forecast

Source: Trepp Bank Navigator

RialtoNon-Performing Loan Trust

Transaction Briefing

Appendix A

33

34

Briefing Call -- Agenda

1. Parties to the transaction2. History3. Structure of the deal4. Collateral scenario5. Economics of the deal6. Market response7. Future applications

4/19/2012

35

Parties to the Transaction

• Seller: Rialto Real Estate Fund• Asset Manager: Rialto Capital Advisors• Sponsor: Rialto Capital Management• Underwriters: JP Morgan / Wells Fargo• Trustee: Wells Fargo• Cash Manager: Berkadia Commercial Mortgage• Rialto companies are subsidiaries of Lennar

Corporation (NYSE: LEN)

4/19/2012

36

History

• Rialto Capital formed in 2007 to purchase non-performing and distressed Commercial Real Estate assets

• Purchased $5.2 billion of assets from 9 sellers in 2 years

• Rialto Real Estate Fund (“RREF”) closed in November, 2011

• RREF issued the Notes to increase capital and to leverage return on distressed assets

4/19/2012

37

Structure – Transaction Basics

RREF ($224 MM Basis)

RREF 2012 LT1, LLC $132,000,000 Notes

Distressed Sellers

Institutional Investors

Sell Loans and REO

Deposits AssetsSells Notes

Buys Notes

4/19/2012

38

Structure – Basic Waterfall

Simplified Cash Flow

Collections On Assets

Pay Servicing, Trustee and Asset Management Fees

Pay Interest on Notes

Replenish Reserves

Retire Notes

Working Capital

Reserve

Interest Reserve

4/19/2012

39

Collateral Scenario

• Seasoned Portfolio• Recovery based on property type

– 21 distinct property types

– Lowest recovery (% of balance) is 3.4%

– Highest recovery is 100%

– Average recovery is 66.8%• Estimated that recoveries will retire all notes within 2 years

4/19/2012

40

Economics

• Rialto– Add leverage to private equity fund

– Defers cash flow on investment, but

– Boosts returns from mid 20% to mid 30%

– Increases capital available for investment• Investors

– Increased return (almost 5%) in a low interest environment

– Rapid pay out

– No lingering credit risk

4/19/2012

41

Market Reaction

• Rating agencies supportive– Fitch BBB-(sf)

– Moody’s Baa3(sf)• Investors interested

– Active interest in analytics

– 9x oversubscribed

– Several orders for entire deal

4/19/2012

42

Future Applications

• Rialto plans more transactions• Distressed asset buyers plan could increase returns• Banks could bolster capital with REO financing• Government insurance funds could replenish themselves with

troubled asset financing

4/19/2012

CMBS Background

Appendix B

43

44

CMBS – A Brief (Modern) History

• Created in Response to Savings & Loan Crisis• First Used to Finance Resolution Trust Corporation

(“RTC”) Assets• Adapted to Seasoned Pools and Newly Originated

Loans in early 1990’s• Full-fledged, Stand-alone Asset Class by Late 1990’s

45

Key Features of CMBS

• Debt securities • Collateralized by the principal and interest generated

by a static pool of commercial mortgage loans• Tranched (Multiple classes) • Tranches are sequential pay instruments, with the

most senior tranche paid first

46

CMBS Sequential Pay Structure

46

Collateral Pool

Investment GradeAAA (Includes IO)

AAA

BBB

Below InvestmentGrade

BB to NR

Cashflow

Losses

PrincipalInterest

47

Parties in a CMBS Deal

• Issuer: Owns the loans and owes the bonds• Master Servicer: Collects loan payments and

manages reporting• Special Servicer: Deals with troubled assets• Trustee: Represents investors and handles cash for

the bonds • B-Piece Investor: Owns riskiest CMBS bonds and has

consultation rights• Senior Investor: Owns the AAA bonds

48

Data Reporting Structure

Idealized Data Flow

Borrowers Borrowers Borrowers

Subservicer

Master ServicerSpecial

Servicer

Trustee

Investor

Reports

Trepp

Investors

Investors

Investors

49

Trepp Company Overview

5050

Introduction to Trepp, LLC

• Trepp is the leading provider of analytics, information and technology to the global CMBS and commercial mortgage finance and banking industries

• Founded in 1979 with a 30 year history in structured finance focusing on CMBS and CRE the past 15 years

• Headquartered in New York City with offices in San Francisco, CA and London, UK

• Acquired Foresight Analytics in March of 2010, and Investcap in 2011 to expand commercial real estate and banking footprints

• Trepp is a wholly-owned subsidiary of DMG Information, which is a part of the Daily Mail Group, a multi-billion pound media company based in Britain

51

our Clients

Over 650 Firms worldwide rely on Trepp’s products and services

Trepp Product

Suite

Insurance Companies

Opportunity Funds

Broker/DealersRating AgenciesGovernment AgenciesInstitutional

InvestorsThird Parties /

Software companies

52

our Partners

53

about CMBS

• Widely recognized as the market standard for information and analytics to the global CMBS industry

• Largest commercially available database containing more than 100,000 loans which support close to $800 billion in securities

• Deal coverage includes North American, European, and Asian CMBS as well as Commercial Real Estate backed CDOs

• Products and services are used to support trading, research, risk management, surveillance and portfolio management

• Selected by the Federal Reserve Bank of New York as the collateral monitor for TALF Lending Program

• Industry thought leaders and active participant in all major industry associations

54

our Products

TreppCRE™

• Research

• Lead Finder

• LoanADVISOR™

• CreditDataExpress™

• Portfolio

• Morning Update: Loan Edition

• Trepp-i

• TreppMLS™

Trepp for CMBS

• Analytics on the Web

• Analytics on Bloomberg

• TreppWatch

• Morning Update

• Pricing Service

Powered by Trepp

• Structuring

• Trepp Engine

• Data Feed

TreppDerivative™

• CMBX

• Single Name

• Bespoke Basket

5555

for CMBS

CMBS Analytics• Powerful analytics and reporting capabilities• Rating agency default models and credit analysis

tools• Enhanced grouping capabilities• Scenario sharing• Delivered via the web or Bloomberg

Professional®• Seamless integration with TreppWatch™

TreppWatch• Web based surveillance and research tool• Portfolio reporting• Stratification and collateral statistics• Loan and property detail• Delinquency and prepay history• Prospectus, Annex A and Investor Reporting

Package (IRP & EIRP) access

56

for CMBS

Morning Update*

• Delivered daily via email in Excel format

• Quickly identify collateral events

• Contacts for servicer, special servicer, and trustee

• Adds structure to the risk management process

• Links to TreppWatch for comprehensive information

* Also available - MorningUpdate: Loan Edition

57

TREPP-i (60-65% Leverage, Amortizing, 10 year, fixed rate)

250

275

300

325

350

375

400

425

450

475

500

525

550

575

600

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675

Week Ending

Sp

read

(b

asis

po

ints

)

Multi Family

Office

Retail

Industrial/Warehouse

Hotel / Lodging

for Valuations

CMBS Pricing Service• Based on Trepp’s industry standard

library • Price investment grade securities

(BBB- and above)• Daily tier-adjusted valuations• Valuation of most actively traded

CMBS CUSIPs including IOs and Floaters

• Delivery through the Internet or secure FTP site

Trepp-i™• Indicative real-estate levels of spreads on

commercial mortgages

• Calculation methodology employed is similar to approach used for LIBOR™

• Major advancement versus spread data currently available

58

for CDS -- TreppDerivative™

Contract Creation

• Single name, bespoke basket and CMBX reference obligations

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Valuation and Analytics

• Project contract flows

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Surveillance and Risk Management

• Custom alerts based on contract and reference obligation performance

• Remittance report, Annex A, servicer watchlist commentary and prospectus

59

our Products – CRE/Mortgages

TreppLoan™ – a powerful suite of web-based research and surveillance tools designed for monitoring both securitized and non-securitized mortgages and properties

Lead Finder Portfolio Research

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275

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525

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575

600

625

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675

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(bas

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TREPP-i (60-65% Leverage, Amortizing, 10 year, fixed rate)

Multi Family

Office

Retail

Industrial/Warehouse

Hotel / Lodging

Trepp-i™• Indicative spread/pricing levels for commercial

mortgages

• Compiled through a consortium of almost 20 national lenders and insurance companies

60

powered by Trepp

Loan File

Bond

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DealFile

Client Database

Trepp Database

Data Feed

• Standard data format for all deals in .csv files

• Updated daily and delivered nightly via FTP

• History available from 1998

• Ideal for research & surveillance

Trepp Engine

• C-function library subroutines which power Trepp suite of products

• Used by leading buy-side institutions, broker/dealers, and third party fixed income providers

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• Open architecture system offers flexibility in a UNIX, Windows or Linux environment

Structuring

• “Best of Breed” CMBS structuring and reverse engineering tool

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• Flexible building block approach and wizards enhance ease of use

PropFile

61

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– 30 years of historical bank performance

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62

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Delivers daily commentary and market observations. TreppWire provides the commercial real estate community with tradable market color, market trend analysis and breaking news.

TreppWire's suite of products includes:

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