Jeremy Grantham and GMO, the Boston-based wealth manager he co-founded, are not afraid to swim against the tide. With Wall Street sounding the alarm on commercial real estate, it’s no surprise they’re looking for deals there.
Higher interest rates have hurt bondholders after office buildings have already suffered from vacancy. A withdrawal by the banks could add to the stress. GMO, meanwhile, is buying highly rated mortgage bonds backed by commercial real estate, known as CMBS.
The additional yield offered by top-rated CMBS relative to government bonds has increased, while corporate bond yields have been little changed. The regional banking panic helped CMBS fall to their lowest-ever prices relative to investment-grade corporate bonds in March.
GMO’s Joe Auth said the current turbulence in the real estate market is an opportunity for investors to show what they can do.
Auth, GMO’s head of developed fixed income, began his career originating commercial mortgages. He managed bond portfolios for the Harvard University Foundation before joining the company nine years ago.
“We’re not sitting here saying that commercial real estate is going to see a rapid recovery,” Auth said. “We focus on the safest bonds.”
The so-called safest bonds that Auth refers to are rated AAA and are prime capital bonds, meaning they are protected from a potential default. A place where they placed their bets: The Bellagio. GMO owns three tranches, or portions, of a debt deal backed by the Las Vegas Resort and Casino.
Americans and tourists continue to spend on services and experiences, flowing into the high-end hotel and gaming sectors. GMO expects lease terms to protect its investment even if a recession eats into revenues.
“It’s a good time to invest,” Auth said. Read more about GMO contrarian betting below.