Morris Chen, head of DoubleLine’s Commercial Mortgage-Backed Securities (CMBS) and Commercial Real Estate Debt (CRE) team, on April 18, 2023, discusses the merits of his asset class with hosts Jeffrey Sherman and Samuel Lau. He describes CMBS-CRE both as a timely investment in the wake of repricing in 2022 and as a strategic portfolio allocation. With a primary focus on bonds rated A to AAA, Mr. Chen takes listeners behind the news headlines of defaults by commercial mortgage borrowers (2:39). In many cases, he says, these defaults, which began in 1Q2023, represent serious problems, especially in office mortgages, but have obscured healthy fundamentals in other property types. Many of these represent borrowers following necessary protocols to open the process of negotiations with lenders ahead of actual maturities. Often the better outcome for lenders will be maturity extensions and changes to loan covenants rather than foreclosure and property liquidation.
In the wake of the Great Financial Crisis, the capital structures of high-grade CMBS have undergone significant improvement (15:13). For example, Mr. Chen notes in 2007, “AAA bond had essentially had 11% subordination, which means the bond can withstand 11% of losses before that bond is impacted, at least in terms of principal. Today, an 11% subordination level equates to a single A rated security.”
Mr. Chen discusses (19:35) his team’s investment process, which includes research into the borrowers and loans securitized into CMBS; the properties securing those loans, including the tenants, utilization rates, leases and loan-to-value ratios; and bond structure. The discussion then turns to property types (26:53). Mr. Chen is most negative about office buildings. While some shopping malls are dying, other retail properties are doing well, notably grocery-anchored shopping centers. Mr. Chen and his team also are finding investment opportunities in mortgages secured by multifamily (apartments) and industrial properties.
The conversation concludes (38:58) with a discussion of the place of high-grade CMBS as a strategic allocation to a diversified fixed income portfolio. Among other factors, Mr. Chen says that investment grade CMBS at present offer attractive yields compared to corporate bonds carrying the equivalent letter-grade credit ratings while providing diversification to investors’ corporate exposures. In addition to the yield pickup, high-grade CMBS is backed by real property as collateral and beneath the subordinated debt is 30-35% equity.
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As DoubleLine’s Deputy Chief Investment Officer, Jeffrey Sherman oversees and administers DoubleLine’s Investment Management sub-committee coordinating and implementing policies and processes across the investment teams. He also serves as lead portfolio manager for multi-sector and derivative-based strategies. Mr. Sherman is a member of DoubleLine’s Executive Management and Fixed Income Asset Allocation Committees. He can be heard regularly on his podcast “The Sherman Show” (Twitter @ShermanShowPod, ShermanShow@Doubleline.com) where he interviews distinguished guests, giving listeners insight into DoubleLine’s current views. In 2018, Money Management Executive named Jeffrey Sherman as one of “10 Fund Managers to Watch” in its yearly special report. Prior to joining DoubleLine in 2009, Mr. Sherman was a Senior Vice President at TCW where he worked as a portfolio manager and quantitative analyst focused on fixed income and real-asset portfolios. He was a statistics and mathematics instructor at both the University of the Pacific and Florida State University. Mr. Sherman taught Quantitative Methods for Level I candidates in the CFA LA/USC Review Program for many years. He holds a B.S. in Applied Mathematics from the University of the Pacific and an M.S. in Financial Engineering from the Claremont Graduate University. Mr. Sherman is a CFA® charterholder.
Mr. Lau joined DoubleLine in 2009. He is a Strategist on the Fixed Income Asset Allocation (FIAA) Committee and a contributing member on the Global Asset Allocation and Macro Committees. Mr. Lau is a Portfolio Manager on DoubleLine’s strategic commodity strategy while working in portfolio management and trading for derivatives-based and multi-asset strategies, including DoubleLine's Shiller Enhanced CAPE®, Shiller Enhanced International CAPE®, Real Estate and Income, and Multi-Asset Trend strategies. He also co-hosts the Sherman Show (Twitter @ShermanShowPod, ShermanShow@Doubleline.com) and Monday Morning Minutes (Twitter @DLineMinutes, Minutes@Doubleline.com) podcasts. Prior to DoubleLine, Mr. Lau was a Vice President at TCW where he worked under Jeffrey Gundlach as a Research Analyst in the Mortgage Group. He holds a B.S. from the University of Wisconsin, Madison and an MBA from the Marshall School of Business at the University of Southern California.
Mr. Chen joined DoubleLine at its inception in 2009. He is a Portfolio Manager leading the CMBS/CRE Debt Investment team and CRE New Investment Review Group, and is responsible for the oversight and management of all CRE Debt related investments at DoubleLine. Mr. Chen is a permanent member of the Fixed Income Asset Allocation and Structured Products Committees providing valued insight into the CMBS sector. He is also an active participant and speaker at CREFC events. Prior to DoubleLine, Mr. Chen was a Vice President at TCW where he was responsible for CMBS credit analysis and trading from 2004-2009. He holds a BS in Business Administration with concentrations in Business Development and Finance from the University of California, Riverside.
