Why One CMBS Investor Still Sees Value in Regional Malls

Recent sector news does not necessarily mean doom for all corners of the retail real estate market, at least to investors like Brad Friedlander, portfolio manager for Atlanta-based Angel Oak Capital Advisors.

Mention regional malls these days and images of shuttered stores pervade the public imagination. For retail real estate investors, some of that is grounded in truth. Since the beginning of 2017, more than 10 retail chains have filed for bankruptcy and about 40 have announced store closings, according to “U.S. CMBS Retail Exposure Bears Scrutiny,” a recent analysis from Fitch Ratings.

Yet the data does not necessarily mean doom for all corners of the retail real estate market, at least to investors like Brad Friedlander, portfolio manager for Atlanta-based Angel Oak Capital Advisors. NREI caught up with Friedlander to discuss what’s currently happening in the retail sector and how it goes about finding value for its portfolios.

NREI: Can you provide an overview of Angel Oak Capital Advisors’ investment parameters?

Brad Friedlander: We are a fixed-income investment firm. We take an alternative approach for investors to get real estate exposure. We manage a large public mutual fund, the Angel Oak Multi-Strategy Income Fund, as well as a high-yield corporate bond strategy, the High Yield Opportunities Fund; and a fund called the Flexible Income Fund, which is a public fund. We also manage hedge funds.

NREI: When looking at the CMBS market, what are your investment parameters?

Brad Friedlander: We would be part of the [CMBS investor group] through the new issuance cycle. We’re also able to pick up secondary market paper. A lot of debt is 10 years old, but we actually favor the ones that are three, four years old, when underwriting was stronger than it is today… With all we’re seeing with all the gloominess and the concern around retail and malls … those are the things I find interesting. I think it is quite possible we will see [an overreaction] this summer.

NREI: How have problems in the retail sector presented opportunities for you?

Brad Friedlander: The deals that are out there are trading on secondary markets pricing better than they were at the beginning of the year. So that is what we’re waiting for. We are seeing spreads on some indices, like the CMBX, widen out. We have seen a pretty substantial gap between what is happening with what they call the synthetics and the cash markets, which refers to the CMBS deals. There is some general broad cheapening. It comes in the form of lower prices for the bonds, or higher spreads. So the yields will start to creep higher on CMBS deals. Many of the class-B and class-C properties will fall by the wayside. Yet those stories are not what’s impacting a majority of the market.

NREI: Why will CMBS be the “trade of the summer?” Why are the upcoming months a good time to invest in that segment of the market? 

Brad Friedlander: It is the momentum of the negative headlines that could weigh on CMBS and the equity markets. But as certain traditional layouts of malls have come out of style, it is an area where I’m seeing value. For malls in particular, it’s really a matter of breaking up the façade, the mammoth enclosed spaces, and opening up the spaces. We’re seeing roofs being taken off structures and them being turned into outdoor malls. Landlords are breaking up large facades at old department stores, and branding the spaces so that there are there or four tenants with curb access, and outdoor entrances available for consumers to see. I am seeing value now in the spaces as a way to still reach consumers. Landlords are embracing the new tastes of consumers, and millennial generation, and that is the way to do this.

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