Text on screen: PIMCO
Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Text on screen: Ryan Mulvey, STRATEGIST
Mulvey: Hi, and welcome to this presentation on the PIMCO Flex Flexible Real Estate Income Fund, also known by its ticker REFLX, R-E-F-L-X. I'm Ryan Mulvey, a strategist at PIMCO focused on real estate alternatives for our wealth management clients. I'm pleased to be joined by Devin Chen, co-chair of the REFLX Investment Committee and lead portfolio managers across many of our private real estate strategies.
REFLX is designed to provide individual investors access to stabilized income producing real estate with the flexibility to pivot and departure the commercial real estate markets that we believe offered the best relative value. We launched REFLX late last year to take advantage of what we believe is one of the most attractive times to put capital to work in the space.
FULL PAGE GRAPHIC TITLE: Four quadrant approach allows REFLX to flexibly seek relative value
The graphic displays a "Four Quadrant Approach" diagram. The diagram describes PIMCO’s methodology for managing its Flexible Real Estate Income Fund, also referred to by its ticker title, REFLX. The four quadrants show that the fund invests across private debt, public debt, public equity, and private equity markets, with a central circle showing Commercial Real Estate Investment Opportunities. The graphic illustrates REFLX’s strategy of dynamically allocating investments across the four quadrants to seek relative value within these sectors to uncover opportunities in commercial real estate.
We have a differentiated approach, focusing on all sectors of stabilized commercial real estate, public and private debt and equity.
PIMCO has been involved in commercial real estate since 2009, but focused primarily on institutional investors.
FULL PAGE GRAPHIC TITLE: REFLX: generating returns through flexible investing; SUBTITLE- Why REFLX?
The graphic is titled "REFLX: generating returns through flexible investing." The slide offers a summary of the investment opportunities and strategies offered by PIMCO’s Flexible Real Estate Income Fund REFLX. The graphic consists of a section: Why REFLX? It lists three reasons: 1) Launched with fresh capital in what we view as one of the most attractive opportunities to invest in commercial real estate; 2) Flexible mandate to pivot across debt and equity depending on where we find best relative value; and 3) Simple interval fund structure with transparent fees. The right side of the graphic provides four photos showing examples of the types of commercial real investments the fund invests. The first photo shows a multifamily housing building, with a caption that says “Interest in private loan secured by a portfolio of 30 multifamily assets. The second photo shows a building with the caption “Public debt secured by multi-state industrial portfolio. The third photo shows a self-storage building with the caption “Public debt secured by a multi-state self-storage portfolio.” The fourth photo shows a hotel with the caption “Public debt secured by New Orleans hotel.
We've wanted to provide that same level of institutional quality commercial real estate to wealth management clients, but we're wary of the capital that was raised in the space, especially after COVID.
We were also cognizant of some of the shortcomings of other commercial real estate strategies such as a forced direct property exposure, even when valuations weren't attractive and structures that maybe less accessible for investors. We decided to launch our flexible offering last year as markets started to look more attractive, providing a better entry point into commercial real estate.
We think of our fund as an evolution in the product offering in commercial real estate with a few key differentiators, one, more flexibility to buy across public markets, private markets, debt markets, direct property markets and to ensure we are focusing on the most attractive risk adjusted returns and two, utilize PIMCO's time-tested interval fund structure, which can be bought daily, trade on mutual fund platforms, have no subscription documents and 1099 tax treatments. With that, let's turn to Devin for more insights on the commercial real estate market today.
So, Devin, what are our outlooks for commercial real estate in the next 12 to 24 months?
Text on screen: Devin Chen, Portfolio Manager, Commercial Real Estate
Chen: Hey, Ryan. Well, it's a very timely question, particularly given the movement and interest rates we've seen the last couple of months. You know, as we enter the last week of the year here, looking back on 2023, it has been a very challenging year for the US commercial real estate market.
We think valuations are probably down anywhere from 20 to 40%, depending on the sector, depending on the duration of the underlying asset and of course, this has been largely a function of the interest rate move. This has been more of a capital market dynamic than fundamentals, fundamentals outside of commodity office have actually been relatively strong. So, we're in an environment where very limited transaction activity, wide bid asks spreads, owners of real estate who don't have to sell assets in this environment are avoiding selling.
FULL PAGE GRAPHIC TITLE: Higher financing costs are providing for a favorable debt investment environment…; SUBTITLE- Continued economic uncertainty and lagging private asset pricing corrections have led to an upside down CRE capital structure
Overview of Graphic: The graphic presents a bar chart measuring the performance of CRE investments across debt and equity asset classes over seven recent quarters, spanning from Q1 2022 to Q3 2023. CRE debt assets are measured by average BBB-rated Commercial Mortgage Backed Securities, while CRE equity assets are measured by Weighted Average Cap Rates. The comparison demonstrates the impact of increasing economic uncertainty and increasing interest rates on CRE debt and equity investments. The graphic shows that when economic uncertainty and interest rates were lower, at the beginning of the period, in Q1 2022, Average Cap Rates outperformed BBB CMBS. However, when economic uncertainty and interest rates began to increase, in Q2 2022, CMBS spreads began to outperform cap rates. This trend continued to grow further over the next five quarters, with CMBS spreads reporting far greater returns than cap rates at the end of the period, in Q3 2023. The basis point spread between CMBS and cap rates begins the period at 100 basis points, favoring cap rates. The basis point spread ends the period at 336 basis points, strongly favoring CMBS. This spread trajectory, favoring CMBS, indicates that the market environment has changed to favor debt investment. Detailed Description: The horizontal axis of the bar chart represents consecutive quarters, from Q1 2022 to Q3 2023. The vertical access of the chart represents average rate of return, measuring from 0.0% to 10.0%. Each quarter, two vertical bars represent the two return rates of the different asset classes.
A blue bar represents average BBB-rated CMBS Spreads and a green bar represents Weighted Average Cap Rates. In Q1 2022, CMBS Spreads were at 4.4% while Average Cap Rates reported 5.4%, with cap rates holding a 100 basis point advantage. Cap rates remained relatively stable throughout the 7 quarters, changing only marginally. They declined to 5.3% in Q2 2022 and did not rise again until Q4 2022. Further increases were fairly marginal, with cap rates eventually peaking at 6.0% in the final two quarters of the period. Meanwhile, CMBS spreads first jumped, then soared. In Q2 2022, they first surpassed cap rates, reaching 5.6% and now holding a 30 basis point advantage over cap rates. After, they continued their rapid rise for 3 more quarters, peaking in Q1 2023, at 9.7%, and a 380 basis advantage over cap rates. After, they stabilized at 9.3% in Q2 2023, remaining at 9.3% in Q3 2023, marking the end of the reporting period.
And one consistent view we've had and our view of things continues to be going forward that in order for real estate prices to get price discovery, in order for the market to start seeing more transaction flow, interest rates need to stabilize. We're starting to see that it's incredibly important for our market because not only is, do interest rates drive financing costs, but it also drives how investors think about their exit, their exit cap rate, the direction of interest rates.
So, if interest rates can stabilize, investors have more conviction around what their borrowing costs are going to be, but also what their exit looks like and it narrows that range of outcomes that they, in their underwriting models they think about in the eventual exit and then that should we think narrow the bid as spread between would be buyers and sellers of real estate, should increase transaction activity again, if rates stabilize.
Now all that said, we still think real estate prices probably remain under pressure at least over the next 12 months and that's because big picture, if you look at rates as big of a rally as we've seen in the rates, in the rate market the last month or so. You know, the tenure is still about 250 points basis points wider than where it was at the start of 2022. Real rates, I believe are even higher than that, even more than 250.
So, our view is real estate prices still need to again adjust to the current financing environment, maybe not as much as they had to two months ago, but they still need to adjust and then you couple that with the fact that fundamentals, while still positive are starting to moderate a bit, so you don't have as much of those supporting values.
And of course, the credit market dynamic where we've seen banks continue to retrench from the market, they're a big provider of credit in our space, they've been retrenching and ultimately we think that means more pressure on the real estate market over the next 12 months, but all that said, we think this is actually continues to setup for the most attractive environment we've seen in the past decade to deploy capital into the commercial real estate market, simply because all this dislocation is creating really attractive, compelling value in certain segments of the market that REFLX is looking to take advantage of.
Mulvey: So, with that in mind, how are we trying to take advantage of commercial real estate markets today? Where are we putting capital to work in REFLX?
Chen: Yes. So, we've continued to focus on the credit side of things, both public and private credit. We like investing senior in the capital structure at this point in the cycle where we can be still relatively insulated from potential value declines in collateral, but also somewhat insulated from mark to market volatility and still generate very attractive yields.
FULL PAGE GRAPHIC TITLE: REFLX: generating returns through flexible investing; SUBTITLE- Why Now?
The graphic is titled "REFLX: generating returns through flexible investing." The slide offers a summary of the investment opportunities and strategies offered by PIMCO’s Flexible Real Estate Income Fund REFLX. The graphic consists of a section: Why Now? It lists two reasons: 1) Market dislocation has created attractive near-term opportunities in real estate debt, given wider yields relative to cap rates; and 2) Opportunity set is wide across both public CMBS and private debt markets. The right side of the graphic provides four photos showing examples of the types of commercial real investments the fund invests. The first photo shows a multifamily housing building, with a caption that says “Interest in private loan secured by a portfolio of 30 multifamily assets. The second photo shows a building with the caption “Public debt secured by multi-state industrial portfolio. The third photo shows a self-storage building with the caption “Public debt secured by a multi-state self-storage portfolio.” The fourth photo shows a hotel with the caption “Public debt secured by New Orleans hotel.
So, we've focused on CMBS, commercial mortgage-backed securities, also private loans, floating rate loans where there's limited duration risk to these types of floaters, but there's convexity. So, we are pricing these bonds or these loans on a yield to worse basis, about 8 to 12% unlevered, but with some potential to do better than that, in the case, these loans were repaid earlier. So that's been the focus. These are loans that strong sponsors as borrowers, sectors that we like, markets that we like, that we think will be resilient, the sectors that we favor right now.
We still like rental housing, although it's going through a bit of a supply glut right now, but longer term we like rental housing, all forms of rental housing, apartments, built to rent, single family rental, even student housing, we like industrial, we still like data centers. We think these are sectors that offer good long-term fundamental outlooks.
Avoiding sectors that we think are a bit more in decline like commodity malls, commodity office buildings of course. Over time, I think, you know, in terms of when I think about your 12 to 24 month horizon, I think towards the latter stages of that timeframe, I think physical real estate will present a really interesting window to get involved in private equity, buying private equity where you can get yields that, you know, as these cap rates continue to adjust to the financing environment, we're going to probably be able to buy physical real estate at cap rates, we haven't seen in over a decade and are at prices that are 20, 30, 40% discount to replacement costs and probably an environment where there's limited new construction activity. So limited new supply, which sets up well for rent growth.
So, I think in the later stages of that 12 to 24 months, physical real estate probably presents a really compelling opportunity, but for the near term, we expect credit to be where the value is.
Mulvey: Focusing on debt today, picking up on the yield, focusing on high quality, fundamentally sound sectors and look for opportunities to go into the private equity space, going forward. So final question, Devin, why partner with PIMCO for commercial real estate?
Chen: Well, as you know, Ryan, we started this real estate business during a similarly volatile time, the global financial crisis, I joined the firm in 2010. We have, I think during that time, really been able to navigate a volatile environment and source very attractive opportunities for our clients, largely from the financial institutions and we're in a very similar environment today where I think there's a lot of risk transfer occurring with the banks and other financial institutions.
FULL PAGE GRAPHIC TITLE: REFLX: generating returns through flexible investing; SUBTITLE- Why PIMCO?
The graphic is titled "REFLX: generating returns through flexible investing." The slide offers a summary of the investment opportunities and strategies offered by PIMCO’s Flexible Real Estate Income Fund REFLX. The graphic consists of a section: Why PIMCO? It lists two reasons: 1) Scaled platform with $190 billion+ in AUM across public and private debt and equity real estate markets; and 2) Ability to observe real estate through a credit lens, using proprietary analytics to make informed decisions on relative value and tenant-related risks. The right side of the graphic provides four photos showing examples of the types of commercial real investments the fund invests. The first photo shows a multifamily housing building, with a caption that says “Interest in private loan secured by a portfolio of 30 multifamily assets. The second photo shows a building with the caption “Public debt secured by multi-state industrial portfolio. The third photo shows a self-storage building with the caption “Public debt secured by a multi-state self-storage portfolio.” The fourth photo shows a hotel with the caption “Public debt secured by New Orleans hotel.
It's going to create tremendous opportunity, particularly on the credit side. So, I think this is an environment we've invested in the past and done so successfully and then when I look at our team today, we've grown to over 270 investment professionals. We manage almost 200 billion of commercial real estate assets today, both on the public and the private side.
And this, our size, I think really gives us an advantage in terms of our access to flow, whether it's from banks, whether it's from other real estate counterparties, our size gives us an advantage in terms of understanding how collateral is performing across the country, across even the globe and how risk is being priced across the capital structure in both the private and public markets and really allows us to cast a wide net and find our investors the best risk adjusted yields out there and I should say importantly our real estate team doesn't operate in a silo here at PIMCO. We are very much part of the broader real estate, sorry, broader PIMCO complex.
So, we're able to tap into resources like our credit analysts, our macro views, our analytics to really help us assess this broad universe of opportunity and again, find the best risk adjusted, assets for REFLX.
Mulvey: Thanks, Devin. Today is a massive opportunity for commercial real estate, but as 2023 has taught us, investing in the space is going to have to be different than what it has been in the past.
FULL PAGE GRAPHIC SUBTITLE- Why REFLX?, Why Now?, Why PIMCO?
The slide offers a summary of the investment opportunities and strategies offered by PIMCO’s Flexible Real Estate Income Fund REFLX. The graphic consists of three sections: Why PIMCO? Why REFLX? And Why Now? The first section shows Why PIMCO? It lists two reasons: 1) Scaled platform with $190 billion+ in AUM across public and private debt and equity real estate markets; and 2) Ability to observe real estate through a credit lens, using proprietary analytics to make informed decisions on relative value and tenant-related risks. The second section shows Why REFLX? It lists three reasons: 1) Launched with fresh capital in what we view as one of the most attractive opportunities to invest in commercial real estate; 2) Flexible mandate to pivot across debt and equity depending on where we find best relative value; and 3) Simple interval fund structure with transparent fees. The third section is Why Now? It lists two reasons: 1) Market dislocation has created attractive near-term opportunities in real estate debt, given wider yields relative to cap rates; and 2) Opportunity set is wide across both public CMBS and private debt markets.
In the years after COVID, funds with only direct real estate exposure worked well, but in a market with much more nuance, we believe having flexibility will be key to attractive returns. REFLX’s structure provides significant opportunity to utilize this flexibility to our advantage.
Having fresh capital is key, there are very attractive opportunities in the market, but only to those who have available liquidity to take advantage. In our view, REFLX has ample liquidity to do so. Longer term REFLX is designed to provide clients with the key potential benefits of owning commercial real estate, diversified risks versus traditional stocks and bonds, historical volatility, lower than the public markets and potential attractive income, some of which maybe tax advantaged. For more information on REFLX, please contact your financial advisor.
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Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.
The PIMCO Flexible Real Estate Income Fund (“REFLX” or the “Fund”) is an unlisted closed-end “interval fund.” Limited liquidity is provided to shareholders only through the fund’s quarterly offers to repurchase between 5% to 25% (expected to be 5%) of its outstanding shares at net asset value. There is no secondary market for the fund’s shares and none is expected to develop. Investors should consider shares of the fund to be an illiquid investment.
The Fund’s shares do not represent a deposit or obligation of, and are not guaranteed or endorsed by, any bank or other insured depository institution, and are not insured by the FDIC, the Federal Reserve Board or any other government agency. You may lose money by investing in the Fund. Certain risks associated with investing in the Fund are summarized below. Please see the “Principal Risks of the Fund” section of the Fund’s prospectus for additional risk information.
Past performance is not a guarantee or a reliable indicator of future results.
Investments made by the Fund and the results achieved by the Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies.
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 drawdown in the market. Outlook and strategies are subject to change without notice.
Yield to Worst is the estimated lowest potential yield that can be received on a bond without the issuer actually defaulting. The YTW is calculated by making worst-case scenario assumptions by calculating the returns that would be received if provisions, including prepayment, call, or sinking fund, are used by the bond's issuer. Estimated YTW is not a projection or prediction of the actual yield or return that a security or portfolio may achieve or any other future performance results.
Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.
A word about risk: Investments in residential and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. The Fund will also have exposure to such risks through its investments in mortgage and asset-backed securities, which are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions, while debt investments are subject to credit, interest rate and other risks. Private credit and private equity involves an investment in non-publically traded securities which are subject to illiquidity risk. Portfolios that invest in private credit and private equity may be leveraged and engage in speculative investment practices that increase the risk of investment loss. Private Credit funds may also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond the Fund’s control. 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.
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. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage-related assets and other asset-backed instruments may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Leveraging transactions, including borrowing, typically will cause a portfolio to be more volatile than if the portfolio had not been leveraged. Leveraging transactions typically involve expenses, which could exceed the rate of return on investments purchased by a fund with such leverage and reduce fund returns. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so. Leveraging transactions may increase a fund’s duration and sensitivity to interest rate movements.
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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 a long-term especially during periods of downturn in the market. An investment in the Fund is speculative involving a high degree of risk, including the risk of a substantial loss of investment. Investors should consult their investment professional prior to making an investment decision.
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