Commercial Mortgage-Backed Securities (CMBS) are fixed-income securities that
are backed by loans on things like office buildings, malls, apartment buildings, retail
properties and hotels. The underlying asset in a CMBS is a pool of real estate loans.
The cash flow from the underlying loans comes from principal and interest payments.
For investors who have a positive view on the commercial real estate market, CMBS
may be a way to gain exposure with potentially less risk.
CMBS sit highest in the real estate capital structure, which means they are the first lien holders
on the underlying property assets and first payees in the case of default. They are structured in
classes — or tranches — representing different levels of risk and return.
- Senior ranking classes receive a lower coupon, but take on less risk of non-payment in the event of default by a loan within the pool.
- Lower ranking classes receive a higher coupon, and in return, bear a greater risk of non-payment in the event that one of the loans in the pool defaults.
Our class or tranche selection varies based on the market environment, the underwriter as well as
the specifications of the underlying loans and properties/collateral.
Interpreting CMBS holdings
Securities such as MSC 2007 T27 AJ (5.823) 06/11/42 listed among Invesco Global Real Estate
Income Fund's top holdings are CMBS and denote the following information:
- Underwriter. The first portion of the name (Morgan Stanley Capital in this case)
- Year of issuance. 2007
- Identification. Letters and numbers used to differentiate CMBS issued in the same year (T27)
- Tranche. AJ (Junior AAA)
- Interest rate. 5.823%
- Final distribution date. Anticipated final distribution date of the entire trust (June 11, 2042)
Compelling income and capital appreciation opportunities
When compared to other types of fixed income securities with comparable credit quality, CMBS offer
compelling yield. As of Dec. 31, 2012, CMBS BBB rated yielded 5.1% compared with REIT corporate
debt BBB rated at 4.6% and non-REIT corporate debt BBB rated 4.8%.1 CMBS represent a significant
portion, about 67%, of the public US and non-US real estate fixed income market.
In the past, CMBS spreads to treasuries were quite low with little differentiation between CMBS
credit qualities. As a result of the financial crisis, spreads widened significantly — especially for the
lower-quality CMBS. This has presented capital appreciation opportunities as spreads have, and
continue to, tighten from those high levels reached during the financial crisis. CMBS AAA spreads
have tightened significantly, but still remain above pre-2007 levels. As the market environment
has improved, we have increasingly dipped into lower-quality CMBS to increase yield and capital
The demand for CMBS has strengthened as investors intensify their search for income in a lowyielding
environment. CMBS serve a number of different functions within the Invesco Global Real
Estate Income Fund and offer investors the following key benefits:
1 Source: Invesco Real Estate
- Lowest credit risk in the event of default
- Flexibility to fine tune risk/reward profile
- Higher yield potential
- Larger investment universe