Digest this stark statistic: a Collateralized Loan (CLO) portfolio with over 300 loans is showing a weighted average debt service coverage ratio of just 0.63. It is basically a disaster and one that my guest today is shorting – heavily.

Gabe Bernarde is co-founder of Viceroy Research and has written a report called “Slumlord Millionaires”, that covers a well-known bridge lender who has been doing a lot of lending to multifamily sponsors. The report reveals an entire portfolio of multifamily loans that appear to be underwater and that are wrapped up in CLOs.

In theory, CLOs are bullet proof because the lender who owns/manages them can swap out poorly performing loans for better performing ones, protecting the integrity of the entire portfolio. It’s a bit like having a fund with apartment buildings in it where the sponsor can swap out sub-performing assets for others to keep the funds’ finances healthy.

What Gabe's research concludes is that this structure is fine until all the loans in a portfolio, or a substantial majority of them, are bad. Then you have nothing good to replace the bad.

I've been researching CLOs ever since I spoke to James Eng of Old Capital for the podcast a few weeks ago. He reported having brokered $2 billion and told me 90% were underwater. Then I spoke to Dan McNamara at Polpo Capital, who is famous for having successfully shorted malls in 2020 who also thought that some CLOs were in dire straits and ripe for shorting.

Look, there are multiple ways to make money in a real estate downturn.

You can buy discounted assets from sponsors who are forced to sell or buy non-performing loans or REO from banks. You can provide rescue capital or set up a debt fund.

Or you can short the stock of real estate companies you think are overvalued and that is exactly what my guest today, Gabe Bernarde at Viceroy Research, is doing.

Learn what he is doing, how he's doing it, what he sees, why he thinks there is a very significant likelihood that multifamily real estate assets are going to hit rock bottom in the next few months, and discover his angle to making money in this market.

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In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our free newsletter here. 

Today’s guest, Jeremy Roll, president of the Roll Investment Group,  is a seasoned multi-cycle real estate and alternative asset investor who is a voracious reader and analyst of market conditions, what's going on in the market, what's going on in the broader macroeconomic world, and in the industries that he invests in.

I've known Jeremy for a long time, and what you're going to hear from him today are some insights into just how conservative he is in his investment approach, what he has been doing for the last few years and what he has not been doing, where he sees the market going and where he sees opportunities emerging over the next few years.

Jeremy talks about how the market transitioned around 2016, prompting investors to adopt value-add strategies due to soaring property values. He shares why he chose to step back from value-add deals, preferring stabilized, more conservative investments.

You’ll hear why prudent investors exercise caution particularly towards the tail end of economic cycles and why Jeremy believes this is the most perilous time to engage in higher risk/return strategies like value-add – and why he thinks it’s like an aircraft running short on take-off runway, highlighting the risks when market prices are at their peak, and an economic downturn is on the horizon.

Jeremy discusses the challenges he faced finding opportunities during 2021 and 2022, a period dominated by floating-rate, value-add apartment deals and why his unwavering preference for ten-year fixed-rate debt meant walking away from deals others were piling into as they chased high, short-term returns.

You are going to hear insights about the current state of the market, the importance of positive leverage, and why now is the time to wait for sellers to adjust their price expectations.

If you are like Jeremy and me who prioritize protecting invested capital over chasing high risk, higher returns, you’ll find the conversation today makes a lot of sense. And if you are now facing capital calls on deals you’ve invested in, Jeremy’s insights, though too late for this cycle, will help you prepare to make money in the next cycle – and to be better prepared for its ultimate, inevitable downturn.

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In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our free newsletter here. 

My guest today is Brian Pascus, finance reporter at Commercial Observer. Brian wrote a detailed article comparing CMBS (commercial mortgage backed securities) with collateralized loan obligations (CLO) as ways to finance real estate and so I asked him if he would talk about the differences between these two financial instruments, and what has been the impact on them of interest rate increases and other market forces over the last couple of years.

You’re going to learn about the difference between CLO and CMBS, how both are being hit with significant defaults, and that the market for both has pretty much collapsed, creating a liquidity crisis for CRE.

Brian provides a detailed explanation of both types of finance, explaining their structures, risk profiles, and how they differ in the commercial real estate market. He explains the impact that economic factors, particularly the rise in interest rates, have had on the attractiveness and issuance of these securities and how this has led to changes in borrowing costs and influenced the overall dynamics of the commercial real estate market.

This episode is an advanced discussion about real estate finance where you’re going to gain a thorough understanding of the complexities and challenges associated with these financial products, as well as discovering who invests in CMBS and CLOs, including pension funds and high-net-worth individuals.

Plus, you’ll also learn what is the single most important thing in commercial real estate finance that will bring the market back to some semblance of normality.

This is an important episode for anyone tracking opportunities in the market and who wants a deep dive into how we have got to where we are today, and where we are headed in the coming months.

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In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our free newsletter here.