Commercial MBS – US Conduit Collateral NOI Trends Align with Price Indices and Credit Performance




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Executive Summary

In this report we analyze net operating income (NOI) trends for the main types of collateral

backing commercial mortgage-backed securities (CMBS) conduit loans. Our NOI index series

covers the period between 2004 and 2014 and tracks year-over-year changes in “same

store” property financials that were reported by borrowers and processed by master servicers

(typically to the CREFC standard). A data supplement is available here.

NOI trends help assess credit drift because changes in NOI reflect changes in borrowers’

ability to pay debt service and because NOI changes may move independently of other

observables, such as market value. NOI reflects operating leverage at the property level

before financial leverage is factored in. For example, given a property with $100 of rental

income, $50 of expenses and a NOI of $50, a 5% drop in rental income would lead to a 10%

drop in NOI, assuming expenses are unchanged. A decrease in NOI results in a decrease in

debt service coverage (DSCR), which in turn results in an increase in term default risk.

There are several limitations to CMBS conduit-based NOI indices, which we discuss in more

detail in Appendix 1. Not all borrowers report NOI each year between loan origination and

maturity. Loans can be added to the conduit universe via new issuance or can exit for either

credit positive reasons (paid off, defeased) or credit negative reasons (defaulted, liquidated).

While the CMBS conduit NOI indices follow the reporting framework of the Moody’s/

RCA Commercial Property Price Indices (CPPI), the data are drawn from different types of

observations (regularly scheduled NOI reports from CMBS collateral, periodic sales among

the overall property market), and the indices are compiled and calculated differently. As

CMBS NOI index data come from the subset of loans that are both performing and reporting,

they are best used to inform changes in earnings power of the collateral backing CMBS loans

on a relative basis (e.g., comparisons between asset classes, markets, or vintages).


Among the key findings:

» Conduit collateral NOI trends generally align with credit and CPPI price trends. The vintage that had NOI fall below baseline

levels (2007) was also the one with the highest realized and expected losses. For both NOI and price trends, apartment properties

generally outperformed commercial properties, major market properties generally outperformed non-major market properties,

CBD office properties generally outperformed suburban office properties and hotels were by far the most volatile.

» While commercial property prices have recovered nationally and now top pre-crisis peak levels, conduit collateral NOI has not yet

fully recovered. Conduit NOI at year end 2014 was up about 9% from its 2004 baseline level, and down about 2% from its precrisis


» The 2007 vintage had only a brief uptick in NOI before the onset of the financial crisis. Among the pre-crisis vintages it was the

only one to fall below its initial level and took about 4 years to recover. The post crisis vintages 2011-2013 have each ridden the

wave of recovery to increasingly higher NOI. Each stood 4% to 9% above its initial level as of year-end 2014.

» Among loans that reported in both 2007 and 2014, roughly two thirds saw their income remain within plus or minus 30% of their

initial level. Roughly 10% of the properties saw their income decline by 31% or more while 10% saw their NOI grow by 39% or


» Hotel NOI was the most volatile among the major asset classes backing CMBS conduit loans. Hotel room rates, and thus hotel

NOI, re-price to market on an almost daily basis. Hotels have among the highest expense ratios, which magnify the impact of

revenue changes on NOI both when revenue is on the way up and when it is on the way down. Hotel NOI rose more than 20%

above its baseline level at the pre-crisis peak before falling to about 20% below the baseline at the post-crisis trough. Hotel NOI

has since recovered to about 10% above its 2004 level.

» Among the 10 largest metro area/asset class parings in conduit CMBS only New York retail and New York apartments have NOI

higher than at the pre-crisis peak. New York apartment was the star performer, with its NOI rising by 40% over the last 10 years.

On the flip side, New York hotel was among the poorest performing of the large metro/asset class pairs, having fallen during the

financial crisis to about 75% of its initial 2004 level and not yet fully recovering to its 2004 level. The decline was due to significant

amounts of new hotel construction in New York, with the new hotels impacting the NOI of the existing hotels within the indices


National Indices

National Core Property Composite Index

While core commercial property prices nationally have exceeded pre-crisis peaks, the CMBS conduit NOI counterpart had not as of

year-end 2014. Core property NOI has been steadily recovering since the financial crisis and may well match or top prior peak levels

when calendar year 2015 data is reported.

Exhibit 1 shows that NOI increased by about 11% from the inception of the index in December 2004 through the pre-crisis peak before

declining on average by about 6 percentage points during the financial crisis. From the trough through the end of 2014 NOI has been

recovering, resulting in a cumulative increase of about 9% over the 10-year reference period.

SEE IT ALL: pdf.

Moody’s US CMBS NOI Index (1)



Executive Summary 1

National Indices 3

Vintage Indices 4

Conduit CMBS Component NOI Indices 10

Conduit CMBS National Hotel NOI  Index 20

Top 10 Largest Asset Type-MSA Pairs in

Outstanding CMBS 22

Appendix 1: Calculating the NOI Series 24





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