Distressed Investors Eye Commercial Mortgage Bonds

Distressed real estate investors are digging through commercial mortgage-backed securities to seize, repair, and convert distressed real estate. (iStock)

Distressed property investors who are short of distressed properties have turned to a crisis-era favorite to find potential deals: commercial real estate bonds.

Hedge fund Axonic Capital and startup Metamorphosis Hotel Capital Partners are searching commercial mortgage-backed securities for ways to seize, repair, and convert distressed properties for profit, Bloomberg reported, citing sources familiar with the matter.

Corporations followed a similar strategy during the global financial crisis. Now investors are looking for mortgages that may have been bundled into bonds on the assumption that if they fail to pay, those debts are more likely to be sold.

At the start of the pandemic, money management firms made billions promising investors big returns from the slaughter of commercial real estate – hotels, offices, and malls that couldn’t pay their mortgages. But lenders were offering extensions, betting that a return to normal would allow property owners the business to make payments, the publication reported.

Axonic and Metamorphosis, who refused to comment on the release, are betting that there are still some owners who can’t.

“This is an interesting strategy that has proven successful in other asset classes,” Paul Norris, head of securitized loans at wealth management company Conning & Co., told Bloomberg. “We expect more hedge funds to do this.” Norris said he’s not pursuing the strategy himself.

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