The investment process for CMBS is centered on security selection and allocation among credit rating classes and real estate sectors. We strive to preserve principal and to mitigate the risk of a downgrade. Whether CMBS investments are underwritten for a total return strategy or a buy-and-hold portfolio, they are underwritten with a long term perspective. Therefore, no investment is pursued that is perceived to be at risk of an interim principal loss, downgrade or loss at maturity.

The commercial MBS strategy is sector specific; however, the sector is highly heterogeneous and security selection is therefore paramount. Issues that are chosen pass a disciplined bottom-up real estate credit analysis with the intent of identifying investment opportunities that will perform in the top quartile of the CMBS marketplace. We have a bias towards investing in issues secured by highly diversified pools of loans secured by high quality properties. However, to the extent there are compelling relative value opportunities in CMBS secured by a single-asset or otherwise non-diversified pools, the emphasis will be on high quality collateral. We carefully evaluate the structure of each security considered for purchase. This involves the comprehensive examination of a security’s structural attributes—senior/subordinated, single asset, conduit, large loan—as well as its yield maintenance provisions, and prepayment lock-outs. Finally, the relative value of a security versus other candidates is determined through the analysis of such aspects as yield spread, liquidity, and subordination levels.