DuPont homes in on vintage CMBS as new issuance spreads stay tight

Many of these bonds are yielding much more than the 10-year Treasury, which is hovering in the range of 2 percent.

DuPont Capital Management, a Wilmington, Delaware investment management company, believes the secondary market for commercial mortgage-backed securities is the place to be, with portfolio manager Karlis Ulmanis telling Real Estate Capital USA that he sees strong value in vintage securities with strong retail concentrations.

“It’s in the secondary market, primarily the legacy [deals] where I’m seeing value. And it’s mainly the retail space many investors fear because of what has happened with covid,” Ulmanis told Real Estate Capital USA.

Ulmanis is seeking bonds with a near-term maturity that are paying high coupons, preferably above 5 percent. Even if the underlying properties are facing distress, the rich income stream from the bond and short duration minimizes risk. Many of these bonds are yielding much more than the 10-year Treasury, which is hovering in the range of 2 percent. 

 “Last week, I picked up a piece that was yielding 12 percent,” Ulmanis said.

Still bearish on retail over the long haul

Despite near-term value opportunities, Ulmanis is still skeptical of retail’s long-term prospects as consumers continue to move towards online shopping and away from brick- and-mortar. 

“People are ready to go out, start shopping and go into malls. And I think that will be [a] short-term positive. But long-term, I’m still negative on retail because we still have that transition from physical stores to more electronic transactions,” Ulmanis said. “That’s why most of my investing has been focused on short bonds in the retail space in the CMBS market because investors are fearful right now. And once that fear goes away, those bonds backed by that collateral will provide a nice boost.”

Inflation concerns

One thing Ulmanis is concerned about is inflation’s potential to dampen retail sales. Moreover, he isn’t convinced interest rate hikes will quell inflation.

“If the [rate hikes are] successful, it shouldn’t be any problem,” Ulmanis said. “But if inflation continues to linger, you still have an impact on the people, things are still getting more expensive, you’re going to get lower sales. Revenues are going to go down for the businesses so it’s kind of hard to trust in a recovery with inflation and COVID things pulling both ways negatively.”