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CMS Mortgage Strategies CRE Debt as Fixed Income Portfolio - PowerPoint PPT Presentation

Nov 30, 2023 •360 likes •461 views

CMS Commercial CMS Mortgage Strategies CRE Debt as Fixed Income Portfolio Enhancement CMS TacOpps I Targets Higher Expected Yields CMS enhances traditional fixed income portfolios by offering higher expected yields and may provide a

  1. CMS Commercial CMS Mortgage Strategies CRE Debt as Fixed Income Portfolio Enhancement

  2. CMS TacOpps I Targets Higher Expected Yields CMS enhances traditional fixed income portfolios by offering higher expected yields and may provide a diversifying risk profile, with less exposure to corporate credit and greater protection against rising interest rates Public Corporate Debt Yields (%) Public Real Estate Debt Yields (%) Private Real Estate Debt Yields (%) 12-15 9.5 6.4 6.2 6.1 5.3 3.9 3.7 3.6 IG HY Levered CMBS CMBS REIT Senior Mezz CMS Bonds Bonds Loans (Senior) (Junior) Bonds CRE CRE Strategy Interest Rate Risk Credit Risk Illiquidity Min Risk Max Risk As of 3.22.19. Source: Bloomberg, Cushman & Wakefield. Expected yields are indicative only . It is not possible to invest directly in a benchmark. Please see the appendix for additional benchmark details and for further information on CMS Target Returns. CMS Strategy is net of CMS fees and expenses. CMS Commercial Pg. 1 Mortgage Strategies

  3. Interest Rate Risk Mitigation Uncertain interest rates and tight credit spreads pose a challenge for fixed income investors. CMS TacOpps I expects to focus on floating rate and short-term loans with high current income that can help mitigate these risks Significant Interest Rate Uncertainty and Historically Low Credit Spreads Protections Mitigate Rate Risk or Wider Spreads 6.98 • Floating rate loans, with 6.56 predominately monthly resets and 10 Year effectively zero duration, help protect UST (%) against interest rate risk • Short-term investments allow maturing loans to be reinvested into new loans that offer wider spreads, if credit markets weaken • Current income from existing loans can be invested into new loans with 2.54 higher rates or wider credit spreads, if credit markets weaken 1.25 • Risk profile of the underlying properties expected to improve, as IG Credit assets approach stabilization. Less Spread (%) reliant on credit spread “beta” 1997 2000 2003 2006 2009 2012 2015 2018 As of 3.21.19. Source: Federal Reserve. CMS Commercial Pg. 2 Mortgage Strategies

  4. Priority Claim on Real Estate in Gateway Markets CMS TacOpps I seeks to invest in B-Notes and other credit instruments with comparable leverage. These loans provide capital preservation via a priority claim on the underlying property, ahead of the borrower’s equity and other subordinated debt CMS Investments Summary • CMS TacOpps I investments will be backed by underlying land or buildings • Strategy focuses on B-Notes or Partner Bank investments with similar LTVs Term Financing • B-Notes represent an interest in a (“A - Note”) property’s senior mortgage, Senior 0-50% LTV financed with term bank debt Mortgage • All other investors, besides the bank, would be junior to CMS CMS TacOpps I Investment Primary Focus on Gateway Markets (“B - Note”) • Gateway and primary markets: 50-65% LTV NY, SF, LA, Chicago, D.C. and Mezzanine Boston 65-80% LTV • Largest and most liquid markets help mitigate risk • The Fund may also selectively Equity invest in other major U.S. cities 80-100% LTV Additional Protections • Covenants and recourse help protect against downside risk • Loans typically include recourse to CMS TacOpps I focuses on investments backed by real estate in gateway markets. borrower for specific events, key Loan covenants and borrower recourse provide additional protection funding milestones and debt service reserve requirements Hypothetical investment structure for illustrative purposes only. Actual CMS TacOpps I investments may differ. CMS Commercial Pg. 3 Mortgage Strategies

  5. Historical Performance of CRE Debt is also Supportive The private real estate debt markets have historically performed well. The asset class has historically offered an attractive risk- reward profile, with returns driven by current income and low or moderate correlations to traditional asset classes Senior CRE Debt Correlations Private Real Estate Debt has Provided Strong Returns with Limited Volatility Gov Bonds IG Bonds HY Bonds Equity Senior Gov Bonds IG Bonds CRE Debt 0.4 0.5 Annualized Returns (%) 7.2 6.7 6.1 5.8 HY Bonds Equities 4.6 0.1 -0.2 Return / 0.9 1.2 0.7 0.4 1.5 Return Contribution from Current Income Risk 4.1 4.9 5.0 24% 95% Volatility (%) Annualized Stocks 9.9 Bonds 80% 100% 16.4 CRE Equity Sr. CRE Debt E xample for illustrative purposes. CMS TacOpps I investments may differ. Past performance not indicative of future results. Source: Bloomberg, Giliberto-Levy, NCREIF. Latest available data. Returns and correlations from 1998-2017. Income share from 1978-2016. Senior CRE debt returns represented by the Giliberto-Levy Index referencing a portfolio of senior commercial real estate mortgages. CMS Commercial Pg. 4 Mortgage Strategies

  6. CRE Debt has a History of Stable Returns and Current Income Senior CRE debt has only experienced 2 calendar years of negative total returns during the past 45 years Senior CRE Mortgage Calendar Year Total and Income Returns 30% NBER Recessions Total Returns (%) 25% 20% Income Returns (%) 15% 10% 5% 0% (5%) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 E xample for illustrative purposes. Past performance not indicative of future results. It is not possible to invest in an index. Please see the appendix for additional benchmark details. As of 10.1.18. Source: Bloomberg, Giliberto-Levy. Returns Senior CRE debt returns represented by the Giliberto-Levy Index referencing a portfolio of senior commercial real estate mortgages. CMS Commercial Pg. 5 Mortgage Strategies

  7. CRE Debt has Historically Benefited Fixed Income Portfolios Adding CRE debt (represented by the Preqin CRE Debt index) has historically benefited investment grade fixed income portfolios (represented by the Barclays U.S. Aggregate index) with higher returns and a more diversified risk profile Historical Returns and Volatility of IG Portfolios with Varying Allocations to CRE Debt Portfolio Construction Process 4.2 • Investment grade fixed income 40% portfolio represented by the 50% Allocation to Barclays U.S. Aggregate index Private CRE Debt 30% (50% IG Fixed Income) 4.0 • CRE debt represented by the Annualized Return (%) Preqin CRE Debt index • Preqin index tracks the 20% performance of a basket of private CRE debt funds 3.8 Potential Benefit of Diversification and Enhanced • Illustrative portfolios were Yield from Private CRE Debt Allocations constructed using various 10% allocations to CRE debt, ranging from 0% to 50% 3.6 • Quarterly returns data with quarterly portfolio rebalancing 0% Allocation to Private CRE Debt • 11 years of data from 2007 (100% IG Fixed Income) through 2018 includes the impact 3.4 of the financial crisis 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Annualized Standard Deviation (%) Combining private CRE debt funds with fixed income portfolios has historically offered attractive risk-adjusted returns E xample for illustrative purposes. CRE Debt Index returns are net of any fund fees. CMS TacOpps I fees and investments may differ. Past performance not indicative of future results. It is not possible to invest in an index. Please see the appendix for additional benchmark details. As of 12.31.18. Source: Bloomberg, Preqin. Quarterly data from 2007-2018. Constructed using the Barclays U.S. Aggregate and Preqin CRE Debt indices with quarterly rebalancing. CMS Commercial Pg. 6 Mortgage Strategies

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