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Text on screen: Unlocking Alternatives: Opportunities in Commercial Real Estate

Text on screen: Where is PIMCO seeing the most compelling commerical real estate opportunities today?

Text on screen: John Murray, Portfolio Manager, Commerical Real Estate

John Murray: Today, we're seeing the most compelling opportunities in the hospitality space, and we're also starting to see some early opportunities in a more distressed form in the retail space.

Split screen with chevron: TEXT ON LEFT – Opportunity 1: Hospitality, IMAGE ON RIGHT – hotels

Starting with the hotel space, clearly, just given the capital pressures, the liquidity shortfalls in that space, we're seeing opportunities to provide either rescue capital, or in some cases to acquire loans from banks looking to shed some of their exposure in advance of regulatory changes. So, as an example there, we recently acquired a loan on a newly-built hotel in the northeast, from a global bank that was looking to get ahead of some of their challenged assets, if you will. In this case, this wasn’t a deeply-distressed, non-performing loan, but it certainly was one that was technically in default.

1:07:30.4 So in this case, the bank wanted to shed some of that default risk before having to take any sort of risk reserves against the loan, and instead decided to sell it. So, we acquired the loan at a discount to PAR, and the seller actually provided financing as well on the position. Now, why we like this position is that we're essentially coming in at over a 30 percent discount to the borrowers’ basis on this newly-completed asset. Broadly speaking, when we look at the hotel sector today, the market is typically underwriting a return to 2019 revenue levels by ’23, ’24.

Split screen with chevron: TEXT ON LEFT – Opportunity 2: Retail, IMAGE ON RIGHT – retail real estate

1:08:26.5 Looking at the retail sector, it’s early days in terms of opportunities there. But we are under contract to acquire an asset today at about a 50 percent discount to where the asset was under contract just before covid. Now, to us, that is the type of quantum you need to see in pricing changes and corrections in the retail space for new ideas to make sense. In this case, to convert the property at least partially into residential uses. Again, we see that as a compelling opportunity that will build over time as distress built in that sector, but you do need to see a significant pricing correction from pre-covid levels for those opportunities to make sense.

Text on screen: How can investors take advantage of commercial real estate opportunities?

1:09:36.6 Investors can take advantage of the opportunities in commercial real estate both from a debt or an equity perspective in a number of ways, just given the massive dispersion we're seeing in the sector today. The uncertainty we're seeing, at least in parts of the commercial real estate sector today, as well as the general liquidity shortfalls that at least some parts of commercial real estate are experiencing today.

Text on screen: TITLE – Opportunities in CRE equity, SUB-TITLE – Growth / Offensive opportunities, BULLETS – Industrial, Multi-family, SUB-TITLE – Distressed / Repositioning opportunities, BULLETS – Hospitality, Retail

So, starting with the equity side, there are offensive opportunities in the industrial space, in the residential space, to develop or re-develop assets, just given the growing demand from a capital perspective in those sectors, and positive fundamentals, if you will. Conversely, on the distressed side, again, just given the lack of liquidity in the hotel space today, some of the building pressures that we're starting to see in the retail space, we do expect to see attractive opportunities from a development or redevelopment or repositioning perspective in those sectors.

1:10:34.4 Turning to the debt side, just given covid’s impacts that have kept a lot of lenders on the sidelines post-covid, what we're seeing is an opportunity for those with capital

Text on screen: TITLE – Opportunities in CRE lending, BULLETS – Rescue capital to meet liquidity shortfalls, New mortgages on value add and opportunistic real estate, Acquiring mortgages at discounted prices from banks reducing exposure

to generate loans at attractive levels through a number of different means.

Number one would be rescue capital. So, in the case of hotels or other assets that need short-term bridge financing, that’s an opportunity. As well, any sort of new acquisitions that we're seeing today, or new developments if you will, attractive debt opportunities there.

1:11:19.1 And lastly, in select cases, opportunities to acquire notes from banks looking to reduce some of their exposure, again, those banks looking to get ahead of some of the challenges that they face. And those types of situations again, what we like about the debt space is, we're seeing opportunities today to come in at post-covid valuations at lower loan to value ratios than we were seeing pre-covid, and in many cases, at spreads that are 100 basis points plus wider than they were at pre-covid levels.

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DISCLOSURE

IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

Pre-Covid refers to the period prior to March 2020 and post-covid refers to the period beginning March 2020.  The continued long-term impact of Covid-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations.

Investing in distressed loans and bankrupt companies are speculative and the repayment of default obligations contains significant uncertainties. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses.

This material contains examples of the firm's internal investment research capabilities. The data may not be related to the product discussed herein, may be stale and should not be relied upon as investment advice or a recommendation of any particular security, strategy or investment product. In selecting case studies, PIMCO considers investment performance in addition to other factors, including, but not limited to, whether the example illustrates the particular investment strategy being featured and processes applied by PIMCO to making investment decisions. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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CMR2021-0326-1581150