Greg Lippmann, a central figure in \u201cThe Big Short,\u201d Michael Lewis\u2019s book about Wall Street\u2019s role in the subprime-mortgage crisis, is readying his next big trade, this time on beaten-up commercial mortgage bonds.<\/p>\n
\u201cPeople think it\u2019s going to be bad,\u201d Lippmann said of distress in commercial real estate debt. \u201cThat creates opportunity.\u201d<\/p>\n
\n
Lippmann, formerly a star Deutsche Bank
\n DB,
\n -0.15%<\/bg-quote>
\n trader, gained notoriety for betting against subprime-mortgage bonds before the market collapsed in 2008. After decades on Wall Street, he founded the hedge fund LibreMax Capital in 2010 to focus on structured financing, including buying the deeply discounted subprime bonds that he once bet against. LibreMax now manages $10.2 billion in assets.<\/p>\nLippmann, the hedge fund\u2019s chief investment officer, now sees a big opportunity for LibreMax in securities that helped finance a boom in offices, hotels, shopping centers and other property types in the past decade. Property prices have slumped, all but top-shelf office buildings are in trouble and U.S. commercial real estate has a mountain of debt coming due at much higher interest rates.<\/p>\n
See:<\/strong> \u2018No one is throwing good money after bad.\u2019 Why 2024 looks like trouble for commercial real estate.<\/p>\n\u201cWe think that, in a lot of cases, this sector is being sold indiscriminately,\u201d Lippmann said of the commercial mortgage-backed securities market in a MarketWatch interview. CMBSs are bonds backed by pools of property loans that Wall Street has sliced up into debt instruments with varying degrees of riskiness. <\/p>\n
As with once-toxic subprime mortgage bonds, Lippmann anticipates higher recoveries in some commercial mortgage-backed securities than prices currently reflect. In 2013, Lippmann took a similar approach to discounted bonds backed by student loans without government guarantees. <\/p>\n
Less than \u2018horrible\u2019 <\/h2>\n
Expectations for the Federal Reserve to pivot this year to rate cuts have spurred optimism across financial markets, with U.S. stocks returning to record territory, evidenced by the S&P 500
\n SPX
\n and Dow Jones Industrial Average
\n DJIA
\n reclaiming peak levels set two years ago. <\/p>\n
Credit markets also have rallied broadly, even with parts of the CMBS market still looking priced for \u201chorrible\u201d outcomes, Lippmann said.<\/p>\n
Lippmann\u2019s team is betting it can cherry-pick bonds at bargain prices that produce less dire outcomes than others anticipate, using their own risk models, reams of data and gumshoe detective work to reap big rewards.<\/p>\n
\u201cIt\u2019s not a short,\u201d Lippmann said of the strategy. It also isn\u2019t a wholesale approach to buying just any cheap bond, especially with an estimated $1.2 trillion in commercial real-estate debt coming due through 2025. \u201cThere are a lot of reasons to be cautious,\u201d he said. <\/p>\n
Read:<\/strong> San Francisco\u2019s Westfield mall sees value slashed by 75% \u2014 erasing nearly $1 billion<\/p>\nRather than focus on bonds backed by single trophy buildings, LibreMax is looking for older, mispriced securities backed by pools of loans on different property types, or conduit bonds, which can be more complicated to underwrite than a single skyscraper in Manattan.<\/p>\n
A batch of older investment-grade BBB-rated conduit bonds out for bid in January saw price talk of $42 to $65, according to Empirasign, which tracks trading activity in the secondary market. When bonds can avoid losses and fully repay at maturity, they pay the holder their full face value, or $100. LibreMax also sees an edge in riskier securities rated below investment-grade.<\/p>\n
New bond supply in the sector has been sparse since the Fed began ratcheting up its policy rate to a 22-year high of 5.25% to 5.5%, making credit for landlords more difficult and more expensive to come by. After the Fed in December signaled a pivot to cuts was coming, a batch of newly issued CMBS sold in January has been met with strong investor demand, even though BBBs and lower-rated securities are still being issued at steep discounts. <\/p>\n
Arbitrage<\/h2>\n
LibreMax isn\u2019t alone in seeing upside in downtrodden commercial mortgage-backed securities. <\/p>\n
\u201cDollars are looking at this market,\u201d said Morris Chen, a portfolio manger at Jeffrey Gundlach\u2019s DoubleLine Capital, which had $95 billion in assets under management at the end of December. \u201cWe ourselves are trying to understand ultimately what is the intrinsic value of the underlying assets,\u201d he told MarketWatch.<\/p>\n
While much hasn\u2019t changed in terms the fundamental pressures facing many commercial property markets, Chen said new optimism was sparked when the Fed signaled a pivot to rate cuts was likely this year. <\/p>\n
Investors no longer see a need to \u201cprice to a super draconian scenario\u201d in commercial real estate, Chen said, pointing to a backdrop where rates on new mortgage loans continue to climb. Rates on commercial property loans hit lows of 3% to 3.5% in the past decade but last year rose as high as 7.5% on average, putting a squeeze on owners with debt maturing. <\/p>\n
\u201cIn this environment, you can be a little blunt,\u201d Chen said of expectations for Fed rate cuts. He also said that while DoubleLine has been cautious, the firm hasn\u2019t been shying away from the CMBS market. <\/p>\n
The firm last spring launched a new exchange-traded fund called DoubleLine Commercial Real Estate ETF
\n DCMB,<\/span>
\n which has been up 0.4% on the year so far, according to FactSet. DoubleLine across its investment strategies can buy lower-rated CMBSs, but the ETF is focused on higher-rated bonds in the AAA to single-A category. It also will change its ticker symbol to \u201cDCRE\u201d effective Feb. 1.<\/p>\nLippmann declined to say whether LibreMax was raising new funds for distress in the CMBS market but said he sees it as a multiyear opportunity.<\/p>\n
\u201cEveryone knows commercial real estate has gone down in price,\u201d Lippmann said. \u201cThe opportunity isn\u2019t going away in the next three months.\u201d<\/p>\n<\/p><\/div>\n
Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"Greg Lippmann, a central figure in \u201cThe Big Short,\u201d Michael Lewis\u2019s book about Wall Street\u2019s role in the subprime-mortgage crisis, is readying his next big trade, this time on beaten-up commercial mortgage bonds. \u201cPeople think it\u2019s going to be bad,\u201d Lippmann said of distress in commercial real estate debt. \u201cThat creates opportunity.\u201d Lippmann, formerly a […]<\/p>\n","protected":false},"author":1,"featured_media":89440,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-89438","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\n
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