YouSaid · the spoken record

Dan McNamara

lines on the record: 100
first: 2023-04-12
most recent: 2023-04-12
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Office space. So we got to figure out a way to kind of alleviate the pressure the BNC kind of zombie offices would call them, you know, what they're doing on the market in general.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“No, you know, and I think office supply will slow down because you can't get a construction loan today. And those have provided a lot of those are being provided by the regional banks. But the one thing that we need to do is we're oversupplied and we need to figure out a way to what do we do with kind of the obsolete buildings. That's the biggest question. We have to figure out a way to redevelop. We have to work with the government and figure out a way to kind of incentivize people to redevelop some of these buildings that are otherwise just going to sit empty. So I don't know the answer there. Redeveloping office is difficult, but there has to be an answer for that because it's not just stopping new supply coming onto the market because a lot of the new supply that's already been started, that already has its construction loan that's coming on probably will do fine. I mean, the Hudson Yards of the world and the one Vanderbolts, they're nice new properties. But what they're going to do is steal from the beach.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Final question, Dan. I promise is eventually if you're right, we're over office, we have too many offices, and it's a long-term secular thing. Office constructions should stop or slow to a space. And ultimately demand and supply could converge. So you're not a office perma bear, right?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“I don't think if we're having a recession, it's even a conversation anymore, a 12 economist meeting in a room up in Boston or wherever decided whether we have a recession or not. I'm not a big believer in that. But I fully think we're in a recession, unfortunately, the fuel on the fire was last month with the regional banks. Recession is one of the worst things that can happen to commercial real estate, but usually it's cyclical. So usually, you know, what we like to do is kick the can. This time, you know, we'll kick the can on some things, some better assets, but there's going to be some real losses too.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And Dan, it's a question I forgot to ask. It increasingly is not becoming a fringe view that a recession in the US is approaching quite quickly based on your outlook on offices. What is your view on a recession? And if we don't have a recession, I mean, well, sort of your shorts not play out and work against you.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Pricings in other sectors. So, yeah, I'm excited. I think that the reason we started Popo Capital was because I felt at some point, didn't know the timing exactly that commercial real estate and CMBS would be at the heart of distress this time through. And I think so far it's looking that way.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“It's going to play out over a long period of time. I don't think this is like a one year or two year trade, given the duration of our assets. It's going to take a long, long time. This is not going to be a blip like COVID where asset prices sold off dramatically and then recovered dramatically. This also like, it's not cyclical in every sector. And I think that that's one of the most important things. I try to get across to people. We have fundamental shifts in the way we shop and the way we go to work. And I don't think those are changing. You know, technology has changed and the commercial real estate market, which is a very, very slow moving market in the CMBS market by way of that needs to kind of keep up with this. So I think that's going to provide a lot of opportunities on the long and short side and in taking advantage of kind of these themes, whether that be an office or certain parts of retail or just kind of the minor reproduction.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“I think all senior AAA CMBS in 2008 were money good. You had some junior ones that took small losses. But, you know, for the most part, 30% credit enhanced CMBS, it's going to be fine.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, and JP Morgan came out with a piece, I think it was last week, and they gave some base case losses for different vintages in CMBS. And I believe their base case loss on a deal was somewhere around 9% or 10%. They had a lot of different scenarios. And I don't throw our own loss numbers out there just because it's all such, you know, there are deals that we think will take 15, 20% losses and there are deals we think that will take 4%. So it's so deal dependent because every deal is different. But I think that, you know, if you kind of use 10% as a baseline, what you're getting at is, you know, you're eating into the BAAB security, sometimes depending on the security, you're wiping out the BBB. But there's not this major worry like there was in 2008 where you had all these subprime bonds that were donuts. AAA, CMBS, I think all senior AAA CMBS, we have some what we call junior and senior AAAs, but.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Right. And the damage from the great financial crisis 2007, 2008, 2009 was immense because assets that financial institutions thought of as essentially risk free, AAA, AAA, they were severely impaired and the losses were immense. It sounds like your base case is the double bees still have some way to go. There can be a lot of keys in the mail, some banking issues, but that it won't be as systemic as the great financial crisis. Do I have that right? And sort of, yeah, how systemic do you think this will be?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, traditionally, I would say traditionally a lot of times it's the money managers that are on the other side, on the long side. And that's just because, at least I think, because when they get money in, it's a lot easier and quicker to buy an index. They get inflows and outflows in every day. So CMBS market isn't super liquid. So they're not going to be able to go out and find a bond that quickly. So they may buy the index. So a lot of times the longs, if you kind of break it out, a lot of times the longs down the capital stack are money managers. Not to say all of them are. And primarily, the hedge funds who more alongshort, they traditionally use the CMBX index to be short.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Got it. So when you're short, a double B tranche and it's mostly owned by hedge fund managers such as yourself and a few long-only shops, essentially someone on the other side of the trade is a hedge fund against such as yourself. So you're betting against another hedge fund or a money manager.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so it's you know 80% of the market, and it's not the market we play in, but 80% of the market's AAA. So they roughly. So your traditional fixed rate conduit deals that we were talking about that are in CMBX, they're originated by all the big players, you know, Wells Fargo, JP Morgan, Goldman Sachs, et cetera, Bank of America, all the big major banks have a CMBS new issue business. It's a very profitable business too because these loans sit on their books for a fairly short period of time in normal markets. And they securitize them and they sell the top to insurance companies, banks, even though they've obviously slowed down what I would say real money buyers of these asset classes. Insurance companies are big buyers. Money managers, as you get down the capital stack and you get below your AAA securities and down the primary place.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Then in the securitization market, who originates these commercial mortgage-backed securities, the non-agency ones, agency ones originated from the government agencies, but who originates the non-agency stuff that your world in and who retains the stuff other than you? Who owns it?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it's, I think it's just this one look at it. I think it's probably too early to tell everything. I think you're going to have a lot of them come out and raise capital after the fact. It's tough to say exactly. There's probably not one thing I'm laser focused on. But given what we do in our market, it's clearly the exposure to the commercial real estate market. But generally, one individual bank is not going to change our investments. It's more of a broader picture. And we know the broader picture. I mean, the regional banks are so important to our market. So as we enter this wave of refinancing, we got to figure out a way to kind of roll some of these better loans. And then on some of the more distressed things, we got to find a new buyer base and a new valuation. So it's going to be painful on the loss side, but we'll figure it out. The securitization market always finds a way.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And getting an all clear and really price discovery. We haven't had price discovery yet. So I think this bank earning season is going to be the most important bank earning season in a very long time. And I think you're going to have a lot of banks come out, you know, mid-sized to small banks come out and raise equity because they have to. I mean, they really do. We've kind of looked under the hood a little bit at a few of these situations. And, you know, it's not looking great. But I don't think it's a solvency risk. I think it's an equity risk. Just blindly buy these banks without fully understanding what's under the hood. It might be a little early for that.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, I think that the regional banks in general, I think what the government's done so far, basically backstopping deposits. I mean, obviously they haven't come back, come out and said that. But I think that was an important step because no one wants any more bank runs. And I hope that we've stopped that. But what's happening here is that the equity of these banks are down dramatically. And again, I don't invest in regional banks, but I know the writing on the wall, given what they own, is that there's going to be massive write-downs on their portfolio, whether it's interest rate related or credit related. And they're going to have to raise a ton of equity. So that's going to put more pressure on their stock prices. So, you know, I would just caution on that side of things that, you know, be patient because, you know, again, catching the bottom here is not the goal. You know, it's about kind of getting comfortable with the risk.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Does the banking sector face similar challenges as holders, owners of commercial mortgage-backed securities if banks themselves hold commercial mortgage-backed securities and they make commercial real estate loans? Like, can you draw a conclusion about sort of the future health of, let's say, the regional banks, not the globally systemically important banks, given that maybe they're in kind of a similar point of view to people who own fixed income CMBS?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“General, I mean, we talked a lot about multi. Multi is just an interest rate issue. You know, there's a lot of supply coming on the market that worries some. But I think multi is going to be fine. We just got to digest this new pricing interest rate environment we're in. And valuations will probably stall out or come down a little bit. Same with industrial. We were priced to perfection. I mean, we had stuff trading in a three cap. It's not possible. And then in industrial and with your warehouses and everything, you've seen Amazon come out and say they're going to put a pause on building or leasing. So that threw a little bit of a wrinkle there. But there are headwinds across the board. But there's definitely, you know, you can kind of pick through the heap of trash. There's definitely some gems out there. And you definitely have some stuff out there that if you're patient, you can find some real interesting longs too.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, that's a great question. I mean, hospitality is one area we haven't touched on. And hospitality is definitely kind of a tale of the haves than have-nots, right? So if you look at since COVID, when things started to open up again, you're starting to see these leisure hotels. They're doing amazing. They're doing much better than 2019 numbers. But on the other side, you have these kind of limited service hotels or these hotels that cater to more business travel. And they're still struggling. Business travel is nowhere close to where it was in 2019. So you have a very bifurcated market in hospitality. So it's tough to say that I have one view in hospitality, but that's what it's nice because as a credit picker and someone that goes long and short, you want that. You don't want, you know, to be Uber bearish or Uber bullish in one sector.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“What's your outlook on non office properties if people are still paying their rent in multifamily, if the retail situation, it's fine, not as bad as office and these CMBS CMBX structures that in some cases you are short, they are not consisting only of office, but other, the whole sort of range of commercial real estate What's your outlook on those non-office CMBS?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Is going to be a huge kind of experiment in price discovery. And it's going to force other people to take some marks that maybe they don't want to take”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“At the time, they thought let's say six, seven, eight year duration, and it extended to a 15 or 20 year duration. So that is just asset liability mismatch at its finest. There was no credit issues there as far as I know. I'm not a bank analyst, but the signature bank situation was a little more different. I thought what was telling was I think it was New York Community Bank that bought their loans, but they left their commercial real estate behind. So that to me is not a great sign because if someone looks under the hood who's also a large lender in the commercial real estate market, you know, it could have been, it could have been a concentration thing and maybe that's all it is. But the fact that they didn't buy the commercial real estate loans and that the FDIC is going to auction the loans off, that's not worrying a little bit. And I think it should be worrying for all the banks because you're starting, you're going to get price discovery. And nobody really wants price discovery when you're already long these assets. So it's going to be, I think the signature bank situation and the auction of these commercial real estate loan loans.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, those are two different situations there, right? So Signature Bank was one of the largest lenders in New York City metro area, mostly multifamily. And, you know, they were very aggressive in that space. And again, we were talking about multifamily, which out of all the asset classes in commercial real estate has done pretty well, you know, valuations are down a little bit, but there are issues were different. Silicon Valley Bank was they're buying 2% mortgages and they had, like you said, they had a deposit base that could take their money out at any time. And their 2% mortgages when interest rates go up 300,000, 400 basis points. What happens in the residential mortgage market that doesn't happen to commercial real estate market is your duration gets a lot longer. And the only reason your duration gets a lot longer simplistically is because there's nobody that's pre-paying a 2% mortgage because they're not going to go refi into a 6% mortgage. So they're sitting on all this paper that.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So always, and that's why banks have to be so regulated, or definitely people have to keep a close eye on that. You referenced earlier, like Blackstone, okay, they may be having some issues with their commercial loan book, commercial properties. But yeah, people can only withdraw so much money every single month. It's a open-ended fund, but it's closed-end. There's a limit. There was a piece by the European Central Bank about open-ended real estate funds that have that mismatch where people can take their money at any time. And what is a better example of an open-ended real estate fund than a regional bank? Because they have deposits that can be called at any time. Like, you know, I'm hoping that when banks report that the deposit flight has stopped or slowed down significantly, I'm hoping that's correct and that they don't and that they can replace the funding in time, even if it's at a higher cost. They'll have to raise deposit costs, whatever. But what if the bank runs continue? What happens to those?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Right. So banks rather than having to foreclose on a property, they'll just sell it at a discount. I want to ask about the sort of asset liability mismatch, which banks kind of always face in that their demands are can be called overnight because so frequently they don't get called overnight. And in fact, some people have had bank deposits for 50 years assign a duration to the bank deposit.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And what they do is between the special servicer and the CCR, they will foreclose or get a deed in low so they're not to go through the process. And they will take over the property and then they will liquidate it at the, you know, in whatever time and they feel is the best interest of the trust. So it's going to be a combination of a lot of different things. But you're going to see a lot of note sales and on the asset side, you're going to see a lot of assets come out of CMBS Trust.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So, what's gonna, I think, what's gonna happen is on the regional banking side, what you'll see is they don't want to foreclose. They don't want to, it's a lengthy process depending on the state, and they don't want to own the real estate. So what's going to happen is you're going to, you're starting to see it now, you know, these debt funds that are looking to buy assets out of these banks. So they'll sell the note at a deep discount so that they don't have to deal with the foreclosure. They don't, you know, a lot of these regional banks, they're lending to their local community. They don't want to be seen as this vulture that's taking over a building. And in fact, they didn't want the building anyways. It's just that no one paid the mortgage. So you're going to see a lot of loans up for sale. You're definitely going to see that. On the CMBS side, we have a special servicer that does this. They work closely with the CCR, which is the controlling class representative, which is for the most part just basically the owner of the bottom piece that's left in a deal.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And how severe do you think this sending the keys in the mail phenomenon will be individually it might be good for some real estate investment trust because they have other properties investors are saying, oh, they're not going to waste money, throwing good money after bad, as you say. But on a systemic issue, if lenders start to, instead of owning bonds that promise them a secure income going forward, they start owning a lot of keys, which will have a lot of buildings. That's a problem. I mean, if I'm a banker, I'm a banker. I make loans. I'm not a real estate developer. I don't know what to do. Like, how does this, how does this end up? If I'm a, if I'm a commercial mortgage, I bought CMBS because salesman told me it was a good idea. Suddenly I own part in a securitized building. I own like the AA tranche of the 13th floor. Like, what's going on here? How does this end up?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, no, that's true. That's true. But what happens with some of these public companies too is when they give the keys back, their stock usually trades out because the market's not stupid. You know, if you're sitting on an asset that doesn't have any equity in it and you're pouring cash into it, it's not a good long-term strategy. Throwing good money after bad's a bad strategy. So, you know, I think that some of the public companies giving the keys back in certain situations will actually, you know, help their stock price. We saw it with some of the mall operators. You know, some of the lower quality mall operators probably should have done it sooner before they went bankrupt. But, you know, we did see Brookfield and Simon, some of the savier high, you know, mall operators. They were happy to give the keys back on assets that just weren't going to fit their long-term strategy. So I think you're going to see that in the office space. It's just going to take longer.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“So, I think that's the one thing that we need to get our arms around is the fact that this refinancing, just refying and taking cash, that's over. It's not going to happen. It's going to be a long time soul starts happening again.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And you don't want to have long exposure to commercial real estate. So for me, it's something that we all as commercial real estate and CMVS professionals need to get our arms around is that next time you come to ReFi, your proceeds are going to be lower and your rate's going to be higher. And that could be for the rest of our careers. You know, it's not going to be about this refinancing wave. And we talked a lot about equity in some of these properties, you know, 30% equity and now it's zero. Well, in reality, if we took a step back, if you owned this property for 40 years and you refined it four times, you don't have any skin left in the game. You've taken so much equity out of that property that you're fine now. So you probably have, if you have a big enough time horizon and you're smart enough to look at the big picture, you're very happy walking away. You're not happy walking away, but you're okay walking away because you're going to say this was an amazing trade for 40 years for my family or my business.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And maybe Ponzi scheme is not the right word, but I was probably talking about the fact that one thing you don't, we don't touch on enough is that the commercial real estate market in general for the last however many years, 40 years colleges, just because I like to use the 40-year rate interest rate bull run. It's all been about a refinancing game, right? So it doesn't really matter as long as interest rates are lower than you're going to be able to get a better rate and more proceeds. So it's really just been about refinancing the entire time. It hasn't necessarily been about anything else. And we are now entering a world where interest rates are not, you know, we're in a different world. Interest rates are not, in my belief, interest rates are not going back to zero. I think that the pricing and the forward curves are a little aggressive. I know everyone's pricing and cuts this summer. But if we're cutting this summer, there's some much bigger issues out there.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Don't feel like you're, you know, you need to hop in right now because catching the bottom is almost impossible. But there will be a sign, there will be some signs out there where it feels like it's an all-clear. And when that happens, even if this thing's up 5, 10, 15%, you can get in then and still make a killing.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“You're right, the leverage in general is usually fairly contained with a lot of these reads. So can they go to zero? I doubt it. We're talking about the SL greens of the world that have been around forever and their stock price is hovering somewhere around they were in like the mid-90s. These are companies that are run by very intelligent people that know the market just as better than most. So I don't know if it's time to buy these yet. There's a lot of headwinds in the office space and there's going to be a lot of money that needs to be spent to upgrade these buildings. But it's the most interesting thing right now, I think, in commercial real estate is looking at the office space, whether it be on the reit side or the credit side and trying to find bargains. You know, we think it's coming. It's just, you know, the timing. I'd rather be a little late than a little early. So I would, you know, my advice in general would say, just be patient.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Got it. So prices have to go down a fair amount before you get quite very interested on being aggressive on the long side. So if you said the credit curve's not flat enough, you're not being paid at the sort of academic way to put it that risk premium is not wide enough. You need to be paid a lot more to take that double B risk. Below the double B is the equity or sometimes that is the equity. The actual equity that can be represented from the real estate investment trusts like SL Green or Ornado, those are down 80%, 85% seems quite steep with the caveat that nothing that you say is investment advice or nothing that I say and that I don't think you invest in these real estate investment trusts. You only do the credits.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Base case losses and still not take a dollar of principal hit, which is pretty onerous. You know, a lot of those things come around timing, year end, quarter ends, where you have uneconomic selling. But overall, we're staying away from the real distressed credit bonds because we just think that they're not fully priced yet. It's almost like we talked about bid offer being large in the commercial real estate market where sellers were looking for yesterday's pricing. We get that in the CMBS credit market too. So there will be an event. There will be something that forces the hand of some of the weaker players where they are going to need to raise money or for whatever reason there's downgrades and there needs to be sellers. And then I think it's when we'll jump in when the pricing is a little more appropriate.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yep, so the credit curve is just your AAA is down to whatever you want to measure. It could be the double B's we'll use because that's what we're using CMBX. So if we think it's too flat, we think that you're not getting paid enough to take risk at the bottom of the securitization. We think that the pricing relative to AAAs needs to widen so that AAABs need to get to be lower in price or higher in yield. So when I say the credit curve is too flat and needs to steepen, we believe that we're credit players. That's what we want to do. We want to buy the riskiest stuff. But if you're not getting paid for it, you got to wait because buying something at the wrong price can really hurt you down the road. So we think that the credit curve will continue to steep and we think there'll be losses coming through. We really like the interest-only trades. You know, we've picked up a few season credit bonds that we like and kind of the low double digits that are, you know, with our underwriting, you could double.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“What do you mean, credit cards? So, I, a lot of my viewers, we're familiar with a Treasury yield curve upward sloping when it's inverted trouble. Then there's the swaps curve, credit curve, what kind of curve is that?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, the credit side of things away from the, I mean, the majority of our book is IO just given the way we view the world and think that there's going to be significant losses. And we think the credit curve is still too flat. We've been saying it for a year and a half now.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“What do you like on the long side other than IOs interest only? And by the way, earlier you said PO, that's a principle only. I think principal is like the $100 interest is like the yield on top of that. And then, yeah, I mean, are you thinking what kind of yield to worse can you get in some of the highest yielding things that you would be interested in on the long side? I mean, is it, I know there's all sorts of commercial real estate. I mean, there's, you know, there's a commercial, there's a real estate investment trust that owns like movie theaters, you know, and bowling alleys like sort of pick whatever you want. I mean, it's in multifamily retail offices. What do you kind of like just on the credit side?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Investing in good securities after the crash. So our view is if you can be aggressive and stay hedged and make some money in a tough environment, there's going to be the other side of the rainbow. There's going to be a ton of opportunities. And that's really what we're waiting for is stay hedged, be thoughtful about risk, make some money here, but I do think that the bigger opportunity is kind of on the other side.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Pretty market neutral. And I think we're going to be pretty market neutral for the foreseeable future until something really cracks. We did add some risk last month when things got a little sloppy. But, you know, my view is I think that there's some money to be made shorting CMBX without a doubt. And there's money to be made being short. But I think the bigger trade here is when we sort of get a feeling that the market's priced correctly is picking up the pieces. In the big short in 2008, you know, we all heard the same big names who made a ton of money. But in reality, there was a lot more money made post-2008, picking up all the pieces. You know, the hardest part was identifying the short and putting it on for a lot of those people. And they were amazing at what they did. But even there were many more people who made a lot more money.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Okay, and then, you know, if I were to ask you are you net long CMBS or net short CMBS? It sounds like you got some long, so you got some shorts, but you know, if I'm long Apple, short Microsoft, I got a lot of different spreads and trades going on. But like if someone ever asked me, are you long the market? Are you short the market like beta? Are you long or short? And how much?”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so you're right. The loans are fixed. It's all based off the floating component of it. So you don't have any sort of duration in the index, just like high yield. It's just like HY CDX, I forget what it is, is 30.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Because higher rates are going to hurt refinanceability. So if you own something that you want to extend, it's better in a higher interest rate environment. And that's where we started to get into the trade is we saw interest rates start to move and we were looking for something to hedge our CMBX shore positions. But yeah, it's for this environment right now, I think it's the most interesting part of the market. And it's a little bit overlooked. And that's because it's a small niche in our market. You have some of these I.O.s that are, you know, five, six, seven million dollars the entire deal. So it's a bit of an overlooked niche part of the market, but that's probably why we really like it.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“No, excellent point. So the CMBX is a floating rate instrument, so you don't have any interest rate. So it's not like HYG and high yield where you actually have a duration component to it. It's more like high yield CDX. So you remove the duration in CMBX. It's an excellent point on the IO, right? So your duration is lower because it's an interest-only security versus a PO where if it was a PO, we don't have POs in our market, but the PO would be have a massive amount of duration because you're not getting any cash flow till the end. Whereas the IO, you're collecting cash every day. Weirdly enough, you know, extensions, it's the only product that you could be long in CMBS where extensions are good for you or that higher rates are good for you.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“And is there an interest rate component to this as well, where you said a lot of these are fixed rate loans. So if it's a 10-year fixed rate loan, part of that is going to lose value as interest rates go up, like a 10-year treasury note is worth less now than it was two years ago when the interest rate was close to 100 basis points. And now it's a multiple of that. In other words, you said the double B.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Extend and pretend, and it's just inevitable the keys will still come back so that your interest only securities, all they are is just cash flows that trade at one, two, three cents on the dollar. But now because we thought they were two-year cash flows, but now they're three-year cash flows, they're home runs with extensions. So that's what we have a very unique view on the world where we're trying to short the most levered properties, but we're actually trying to take a view on kind of the middle ground of properties where we think that, listen, this is a good property, this is a good sponsor, the valuation's down, they're going to have a hard time refinancing, but we think that that's actually a good thing when you buy the IO is what we call it.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT
“Principal bonds and they don't return par. All they are is the excess interest in a CMBS securitization. So the reason we like these is if you can buy enough of these unique structures that have, let's just say you buy one that's a two-year interest-only security, but you know you've identified some loans that they're not that bad about, you know, maybe they were a 55 LTV and now they're an 85 LTV, but it's a good asset. It's a good sponsor. We think that the keys are not coming back. We actually like interest-only securities off that because we know what's going to happen. The special servicer's incentivize to extend these things. They're going to get so many keys in the mail from over levered bars that if they think they can give an extension and it's good for the trust, then they're going to do it. So we pair these shorts with interest-only securities playing for the extended pretend on one hand. And it's not extend and pretend, sometimes extensions are good.”
2023-04-12 · Forward Guidance · The Commercial Real Estate Default Cycle Has Only Just Begun | Dan McNamara · IDENTIFIED FROM THE TRANSCRIPT