Former Lehman Traders Look to CRE

Chidem Kurdas

Could it be that commercial real estate presents a great investment opportunity in an environment where over-valued financial markets appear to be the norm?

Some managers and investors think so, among them evidently One William Street Capital Management, which was started in early 2008 by a group of Lehman people led by the investment bank’s mortgage securities chief David Sherr.

That was an extraordinarily tough time to found a hedge fund but – in retrospect – a great time to leave the Lehman—well before its collapse. One William Street is incongruously named, this being not the fund manager’s address but rather the original address of the old Lehman Brothers, now of course almost synonymous with the financial crisis.

In any event, One William Street reportedly achieved high returns in 2009 and 2010, attracting big investors, before experiencing a loss in 2011. Major clients, including fund of hedge funds, stayed with Mr. Sherr –in part because they’d agreed to a lock-up provision – and the fund recovered in 2012.

But growth has been slow.  One William Street managed $2.2 billion in 2010; the most recent number is $2.5 billion.

The firm describes itself broadly as an asset-based credit specialist, not just a mortgage security specialist. Asset-based credit covers a lot of ground, from car loans and credit cards to more exotic types of debt—just about any loan can be securitized.  The team is said to include analysts with skills in different kinds of credit and associated securities.

Still, it is in real-estate finance that One William Street made notable moves, such as buying troubled mortgages from the U.S. Housing and Urban Development Department.

Recently it acquired Bedrock Capital Associates, a commercial real estate lending expert. The two businesses complement each other: Bedrock originates loans; One William Street can help securitize them. There is potentially a huge demand for such bonds as investors globally continue looking for higher yield but try to be less exposed to junk corporate debt.

The American commercial real estate market has recovered from the slump but not fully. It probably has a way to go, at least if the economy stays on an upward trajectory.

Announcing the deal, Mr. Sherr also suggested a new direction for Bedrock. So far it has concentrated on fixed-interest-rate loans. “We look forward to expanding the product mix that Bedrock is able to deliver to its customers to include transitional floating rate loans and mezzanine financing,” he said.

Floating-rate commercial real estate loan securities are a growing segment of the credit market. They are generally seen as carrying a higher default risk than fixed-rate securities but on the other would act as a hedge against rising interest rates—were the Federal Reserve to allow rates to actually rise.

There may be strong demand for floating-rate CRE loan securities because many investors do want some protection in their portfolio against the day when Janet Yellen no longer keeps the lid down on rates. All in all, the Bedrock-One William Street combination is promising.

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