Pretium to Acquire BH Management Services to Expand Residential Real Estate Footprint

PRESS RELEASE

Pretium to Acquire BH Management Services to Expand Residential Real Estate Footprint

February 29, 2024

Marks Entrance into Multifamily Rental Property and Investment Management

NEW YORK – February 29, 2024 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that it has agreed to acquire BH Management Services (“BH”), one of the nation’s premier property management platforms in multifamily, student, and single-family housing. The transaction is expected to close early in the second quarter.

Founded by Harry Bookey in 1993, BH is at the forefront of the institutional multifamily investment and property management industries. BH currently manages approximately 114,000 homes across 370 housing communities in 31 states.

“BH’s multifamily property management platform prioritizes the resident and employee experiences and is critical to enhancing communities at a time when quality housing options are in short supply,” said Don Mullen, Founder and CEO of Pretium. “The addition of BH is a natural adjacency to Pretium’s residential ecosystem and enables us to continue providing diverse housing options for residents based on their preferences and stages of life. We look forward to working with the entire BH team to continue to strengthen BH’s model and market position.”

Mr. Bookey added, “BH has established itself as one of the leaders in the industry, and I am proud of where we are today – one of the largest and most respected companies in multifamily. Therefore, it was personally important to me that we take a thoughtful approach to the future of BH. Beyond being a force in its own right, Pretium shares our core values of embracing evolution and putting people first, making it the right fit for BH.”

“This is an inflection point for BH and an opportunity to further invest in our centralized services platform, as well as advance our proprietary business intelligence systems. This transaction will also expand our operating footprint,” said Joanna Zabriskie, CEO of BH. “What’s exciting to me is what BH and Pretium will do together. We’re cut from the same cloth: we’re both overachievers. However, it’s in the places we’re different – BH as a leader in multifamily, and Pretium as a leader in specialized residential investments – that’s where new opportunities exist.”

“We have a long-standing relationship with BH and are pleased to be joining forces” added Jonathan Pruzan, President of Pretium. “Harry created, and Joanna has scaled, an impressive platform, which is at the forefront of the industry through its technology- and people-focused culture. This combination enhances our existing vertically integrated model and allows us to capitalize on compelling opportunities we see in the residential space.”

BH will become a Pretium operating company and continue to operate as BH Management Services, providing the same property management, construction, and investment services to its clients and residents across the country. BH will also continue to be led by Chief Executive Officer Joanna Zabriskie and the current management team, with its headquarters remaining in Des Moines, Iowa.

Advisors

Wells Fargo acted as financial advisor, and Sidley Austin LLP acted as legal advisor to Pretium.

The CenterCap Group acted as financial advisor, and Faegre Drinker Biddle & Reath LLP acted as legal advisor to BH.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 50 offices, including its New York headquarters, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.

About BH Management Services

BH is a people-first multifamily owner and operator that grew from a small startup into one of the nation’s largest commercial real estate companies. Founded in 1993, BH is celebrated for its simple commitment to doing business the right way and investing in its team. Today, BH manages approximately 114,000 units, employs 2,800 people, and owns its processes in-house. Powered by innovation and a can-do attitude, BH improves daily, striving to construct a smarter way to live, invest, manage, and grow. For more information, visit livebh.com.

Contacts
Lyle Weston / Erik Carlson Joele Frank,
Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Pretium and Hunter Point Capital Announce Strategic Partnership

PRESS RELEASE

Pretium and Hunter Point Capital Announce Strategic Partnership

February 27, 2024

Pretium and Hunter Point Capital Announce Strategic Partnership

NEW YORK – February 27, 2024 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced a strategic partnership with Hunter Point Capital (“HPC”). This partnership, which includes a minority investment from HPC, aims to support the long-term growth of Pretium’s existing strategies – residential real estate and corporate and structured credit – and enable the firm to expand into adjacent areas to create additional value for its clients, residents, and employees.

Since its founding in 2012, Pretium has built one of the most comprehensive residential and credit ecosystems in asset management. Today, Pretium is one of the largest investors in non-agency residential mortgage loans, one of the largest residential business purpose lenders, one of the largest investors in the creation of new homes, and the largest owner-operator of single-family homes in the United States.

“This milestone is a testament to the accomplishments of our 4,400-plus person team and the many opportunities that lie ahead for our firm,” said Don Mullen, Founder and CEO of Pretium. “Avi and Bennett have built a differentiated model of partnership and share Pretium’s passion for building businesses. We look forward to drawing upon HPC’s strategic expertise, value-added operational capabilities, and global network to propel Pretium’s development into our second decade.”

“Pretium’s strategic focus and execution have accelerated its growth into a multi-strategy firm with a national presence and an expanding opportunity set,” said Avi Kalichstein, CEO and Co-Founder of HPC. “We look forward to supporting the talented team at Pretium as the firm builds on its success and expands its platform. Under Don’s leadership and with the recent addition of Jon Pruzan as President, Pretium is at an exciting inflection point.”

“During a time of significant growth and consolidation in the alternative asset management industry, HPC’s investment advances many of our top growth initiatives and strengthens our ability to capitalize on the compelling opportunities we see in the residential and credit markets,” said Jonathan Pruzan, President of Pretium. “The persistent undersupply of homes coupled with the disruption in the banking landscape will offer significant investment potential for the foreseeable future.”

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 50 offices, including its New York headquarters, Miami, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.

About Hunter Point Capital

Hunter Point Capital is a leading independent investment firm providing capital solutions to alternative asset managers that are poised to build enduring franchises and define the next generation of leading investment firms across the globe. Hunter Point Capital believes that being a strategic partner for growth to investment managers makes it a preferred choice for successful and promising GPs seeking tailored capital solutions. For more information, please visit www.hunterpointcapital.com.

Contacts

Pretium
Jon Keehner / Lyle Weston / Erik Carlson
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Hunter Point Capital
Joshua Rosen / Julia Sidi
Prosek Partners
pro-hunterpointcapital@prosek.com

Pretium’s Housing Insights, November 2023

INSIGHTS

Pretium’s Housing Insights, November 2023

November 2023

The popular housing narrative overstates the mortgage rate lock-in effect

Structural supply-demand imbalance is the reason home prices are rising, not higher mortgage rates

Despite the most substantial mortgage rate impact on homebuyers in the modern history of housing, US single-family home prices are up roughly 5% year-to-date through the third quarter.1 The surprising resilience of home prices has confounded housing observers and led most housing narratives to focus in on the mortgage rate lock-in effect as the root cause of rising home prices. Even Federal Reserve officials have publicly stated that rising interest rates have contributed to rising home prices through the mortgage rate lock-in effect.2 Mortgage rate lock-in as a driver of reduced mobility is a documented phenomenon3 and it is likely that some homeowners have not listed their homes as a result of the sharp increase in mortgage rates; however, we believe the lock-in phenomenon has been overemphasized in the popular housing narrative. Moreover, the argument that mortgage rate lock-in aggravates housing’s supply-demand imbalance (and therefore increases home prices) confuses listings of existing homes for housing inventory, in our view. If rates fall, Pretium believes it is more likely that housing’s supply-demand imbalance will incrementally worsen, not improve. As we have written previously, the pandemic structurally increased demand for single-family homes after a prolonged period of underproduction.4 This structural supply-demand imbalance remains a more likely candidate for why home prices have been resilient during 2023 rather than the mortgage rate lock-in effect.

The main argument of the mortgage rate lock-in thesis is that listings of existing homes have fallen due to higher rates but Exhibit 1 shows that this isn’t the case. Active listings fell from 2019-2021 as mortgage rates fell and have been increasing since the beginning of 2022. The pace of transactions has fallen at a faster rate than the pace of new listings, driving up both overall resale listings and months of supply. Fannie Mae’s National Housing Survey asked earlier this year whether mortgage rates were a factor in homeowners’ plans to stay longer in their current homes and the results “…suggest that a fairly strong majority of mortgage borrowers’ future moving plans may not be affected by their mortgage rate”.5 As shown in Exhibit 2, there was little difference in the moving intentions of mortgage borrowers vs. outright owners.

An important underlying assumption of the mortgage rate lock-in effect thesis is that homeowners’ choice not to list their homes reduces housing inventory; however, if rates fell and a greater number of homeowners listed their homes, they would be both buyers and sellers. Furthermore, according to the lock-in thesis these households would largely be discretionary buyers/sellers and therefore unlikely to accept offers that would cause home prices to decline. Finally, to the extent that most homeowners cannot perfectly time the sale of their current home and the purchase of their new home, increased transactions by locked-in homeowners would likely lead to some households temporarily occupying two homes thereby decreasing overall housing inventory.


Statements throughout the research above represent the opinions and beliefs of Pretium. There can be no assurance that these will materialize.


  1. CoreLogic, US Home Price Insights as of November 7, 2023.
  2. “Higher Rates Contribute to Rising Home Prices, Fed’s Harker Says”, Bloomberg, October 16, 2023.
  3. “Mortgage Lock-In, Mobility, and Labor Reallocation”, Fonseca and Liu, June 2023.
  4. “In forecasting home prices, the last housing cycle is a poor guide for this one”, Pretium Housing Insights, September 21, 2022.
  5. “’Lock-In Effect’ not the only reason for housing supply woes”, Fannie Mae as of October 30, 2023.

Pretium’s Housing Insights, October 2023

INSIGHTS

Pretium’s Housing Insights, October 2023

October 2023

The share of US rental housing that is single-family has been falling since 2014

SFR is the only major real estate asset class to see supply shrink in recent years

Measuring single-family rental supply is important to evaluating supply-demand fundamentals; however, there is limited data on the subject. There are several frequently quoted sources that attempt to measure investor buying activity;1 however, they don’t accurately capture trends in supply because they mostly ignore sales of single-family rentals back to the homeownership market; moreover, the difficulty of working with tax and county records results in widely varying conclusions about investor buying activity. We explored this in the October 2022 Pretium Housing Insights.2 The US Census American Community Survey (ACS) provides the only national annual count of the number of single-family rentals in the US. 2022 ACS data was recently released, and it shows that the supply of single-family rentals continued to decline last year.3 The overall supply of single-family rentals has now been falling for six consecutive years, including through the pandemic. Combined with multifamily supply that has increased meaningfully over the past decade, single-family homes have accounted for a steadily shrinking share of US rental housing since 2014, as shown in Exhibit 1. At 31.4%, single-family rental share in 2022 is almost as low as it was in 2006 when home ownership was near all-time highs.4

The long-term trend of declining single-family rental supply stands in contrast to supply trends for other major US real estate asset classes, which have all seen net supply growth over the past five years including through the pandemic. As shown in Exhibit 2, Industrial has added 1.4 billion in square footage over the past five years representing 8.5% growth. The multifamily sector has seen a net increase in units of 2 million or 12.1%. Robust supply growth in the asset types that investors have most focused on makes sense; however, it is more surprising that office and retail have also experienced net growth in square footage of 260 million (+3.2%) and 225 million (+1.9%), respectively, over the past five years. We described in last month’s Pretium Housing Insights5 how investment in single-family housing has grown over the long-term; however, ACS data reveals that most of this investment has gone towards owneroccupied housing, not rental housing. Single-family rental stock has shrunk by more than 700,000 over the past five years, or a decrease of 4.8% while single-family owned stock has increased by roughly 7 million.6 Overall, the increase in investor interest in single-family rentals in recent years hasn’t been sufficient to drive supply higher. Looking ahead, continued home price growth and economic/rate volatility are likely to depress single-family rental supply further in the coming years as smaller investors remain motivated to sell more homes than they buy.


Statements throughout the research above represent the opinions and beliefs of Pretium. There can be no assurance that these will materialize.


  1. CoreLogic, US Home Investor Share as of August 17, 2023; Redfin, Real Estate Investors Data as of August 30, 2023; National Association of Realtors, Impact of Institutional Buyers as of May 2022; Freddie Mac, Drivers of Home Price Growth as of June 9, 2022.
  2. Pretium Housing Insights, “Investor activity in housing had no discernible impact on homeownership during the pandemic”, October 2022.
  3. US Census, American Community Survey 2022 1-Year Estimates as of September 14, 2023.
  4. US Census, Housing Vacancies and Homeownership as of August 2, 2023.
  5. Pretium Housing Insights, “Resilient single-family home prices have diverged from commercial real estate prices”, September 2023.
  6. US Census, American Community Survey 2017 and 2022 1-Year Estimates as of September 14, 2023

Pretium’s Housing Insights, September 2023

INSIGHTS

Pretium’s Housing Insights, September 2023

September 2023

Resilient single-family home prices have diverged from commercial real estate prices

Supply-demand imbalance has supported home prices despite record rate shock

Since the Federal Reserve began its campaign to raise interest rates in early 2022, there has been a marked divergence between the price trends of single-family and traditional commercial real estate. Major commercial property price indices show declines from recent peak values of as much as 10-15%1 ; meanwhile, single-family residential prices declined only briefly during 2H22 and have gone on to set new all-time highs during 2023.2 This price divergence is illustrated in Exhibit 1 and is a departure from prior rate cycles when different real estate sub-sectors had similar rate sensitivities.

Differing financing structures is one widely discussed factor that has likely created greater rate sensitivity for commercial real estate – its financing is typically shorter in term and relies more on floating interest rates. More than 40% of commercial real estate debt matures through 2025; furthermore, roughly one-third is floating rate.3 For single-family homes, 80-90% of mortgage loans originated over the past decade have had fixed 30-year rates with most of the remainder fixed for either 5 or 7 years.4 While financing differences are important, they don’t fully explain why single-family home prices have set new highs despite the largest rate shock in the modern history of US housing. A less discussed but potentially more important factor explaining the surprising resilience of singlefamily prices is a more favorable supply-demand dynamic when compared to commercial real estate.

The pandemic has likely structurally increased demand for housing, especially single-family homes.5 In terms of supply, single-family housing has seen less investment relative to demand since the Great Financial Crisis (GFC). This is illustrated in Exhibit 2, which compares construction spending for different real estate asset types. Multifamily and industrial have emerged as the two pillars of most investors’ real estate strategies and in response investment in new construction has increased more than fivefold over the past quarter century. By contrast, fundamentals for retail and office have proven more challenging and construction has grown slowly. Single-family construction grew during the mid-2000s, but it has seen slower growth during the post-GFC period. Overall, single-family investment has grown in-line with office investment despite a stronger demand profile.

Within single-family housing, single-family rentals have experienced a net reduction in supply over the past few years as described in the October 2022 Pretium Housing Insights.6 Single-family rentals are arguably the only real estate asset type to have seen supply shrink over the past few years. Looking ahead, Pretium expects that favorable supply-demand dynamics will continue to underpin single-family fundamentals in the coming years, both in terms of rent and price growth.


Statements throughout these materials, including these regarding the opportunity, Pretium’s advantages and the market represent the opinions and beliefs of Pretium. There can be no assurance that these will materialize.


  1. Real Capital Analytics, Commercial Property Price Indices as of July 20, 2023; Green Street, Commercial Property Price Index as of August 4, 2023.
  2. CoreLogic, Home Price Index as of September 5, 2023.
  3. Mortgage Bankers Association, Quarterly Commercial/Multifamily Mortgage Debt Outstanding as of June 29, 2023.
  4. CoreLogic, “Rising Rates Lead to Increase in Adjustable-Rate Mortgage (ARM) Activity”, June 26, 2023.
  5. Pretium Housing Insights, “Increased long-distance migration persisted in 2022”, January 2023.
  6. Pretium Housing Insights, “Investor activity in housing had no discernible impact on homeownership during the pandemic”, October 2022.

Jonathan Pruzan, Former Morgan Stanley COO & CFO, Joins Pretium as President

PRESS RELEASE

Jonathan Pruzan, Former Morgan Stanley COO & CFO, Joins Pretium as President

September 5, 2023

Jonathan Pruzan, Former Morgan Stanley COO & CFO, Joins Pretium as President

NEW YORKSept. 5, 2023 /PRNewswire/ — Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that Jonathan Pruzan has joined the firm as President and a member of the Executive Committee, effective immediately. In this newly created role, Mr. Pruzan will oversee many of Pretium’s strategic and operational initiatives, reporting to Don Mullen, Pretium’s Founder and CEO.

Jonathan Pruzan

Mr. Pruzan brings over 30 years of financial services and asset management experience, a proven track record of creating and capitalizing on growth opportunities, and a demonstrated ability to develop and lead high-performing teams across diverse economic environments. Mr. Pruzan spent the last 28 years with Morgan Stanley, serving in a variety of leadership positions, including Chief Operating Officer, Chief Financial Officer, and Head of Corporate Strategy. As part of Morgan Stanley’s leadership team, Mr. Pruzan played a key role in Morgan Stanley’s acquisitions of E*Trade Financial, Eaton Vance, and Solium Capital. Prior to holding these corporate positions, Mr. Pruzan built his career as an investment banker and was Head of the Global Financial Institutions Group, where he advised financial institutions and governments around the world on hundreds of billions of dollars of capital raisings, mergers, restructurings, and other strategic transactions.

“Adding a strategic leader of Jon’s caliber demonstrates the strength of Pretium’s model and market position as one of the leading investors in real estate and credit,” said Don Mullen, Founder and CEO of Pretium. “Pretium is a fast-growing, integrated firm that supports the entire asset lifecycle by embracing opportunity where others resist complexity. Jon is part of an elite class of financial services leaders, having excelled as an operating executive and a dealmaker. At a time of significant consolidation in the asset management space, we look forward to benefiting from Jon’s long history of success driving organic growth and identifying compelling acquisitions and partnerships to take the firm to the next level.”

“Pretium’s unique ecosystem is built on Don’s pioneering vision to produce, curate, and manage assets with a high barrier to entry across the residential and corporate credit markets,” said Mr. Pruzan. “Successful acquisitions such as Anchor Loans, Deephaven Mortgage, and Selene Finance are a testament to the Pretium team’s entrepreneurship and ability to effectively integrate new platforms. I am extremely excited to be joining the firm and to work closely with Don and the entire team to capitalize on the tremendous opportunities ahead to grow the business.”

Mr. Pruzan earned a Bachelor of Arts in Political Science and Economics from Tufts University and serves on its Board of Trustees. Mr. Pruzan is also a member of the Board of Trustees of the New York-Presbyterian Hospital, the Board of Directors of the Peterson Institute of International Economics, the Board of Directors of The American Ditchley Foundation, and a Trustee Emeritus and past Board Chair of the educational nonprofit, Summer Search NY.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 50 offices, including its New York headquarters, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.

Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Is CLO Outperformance Sustainable?

INSIGHTS

CLO Performance Report, August 2023

August 11, 2023

A portfolio of U.S. CLO equity and CLO BB debt securities should outperform HY bonds across a variety of potential future economic scenarios

Introduction

The junior portion of the CLO capital structure has seen solid performance so far in 2023. Over the course of the past several months, Pretium has highlighted this outperformance and made the argument that CLO mezzanine securities were undervalued relative to HY single-name credit, supporting this latter point by comparing the currently wide CLO BB spreads to the historical spread relationship the two asset classes have traditionally maintained. Given the uncertainty surrounding where the economy and the Federal Reserve may go from here, we have received inquiry from our investor base as to whether or not we view this outperformance as sustainable. In summary, we believe it is. Pretium believes that current CLO mezzanine and equity pricing reflects worst-case assumptions related to forward defaults and recoveries. While Pretium expects loan default rates to rise and recovery rates to remain depressed, we believe that current CLO spread and yield levels more than compensate for the fundamental strain that credit markets have already begun to realize and are likely to continue to experience over the coming quarters (Exhibit 1 below).

CLO BBs and CLO equity provided +8.6% and +7.6%, respectively, in (non-annualized) total returns over the first six months of the year vs. just +4.8% for HY corporate bonds1. Pretium believes this strong YTD performance for CLO instruments is sustainable across a variety of possible forward market outcomes. The market environment in the first half of 2023 reflected only muted spread changes and close to flat point-to-point long-term interest rate moves. Thus, the strong 23H1 CLO results for that period reflect what we see as only slightly above average expected returns for a sector which entered the year offering particularly generous spreads and yields.

BB CLOs began 2023 with average yields of approximately 14%, reflecting SOFR margins at the time of over 900 basis points2. The strong total return for BB CLOs over the first half of 2023 largely reflected interest carry, as opposed to mark-to-market price gains which might have been harder to replicate in the future. By contrast, BB corporate bonds have yields-to-maturity of just 7%, with correspondingly smaller scope for carry returns (Exhibits 2-3 below).

To assess the sustainability of CLO outperformance going forward in greater detail, we review expected returns for CLOs across a range of possible future interest rate and macro-economic scenarios. Our analysis suggests that mezzanine CLOs should outperform generic HY corporate bonds over a short-term (e.g., 1-year) horizon across most scenarios, with an even higher probability of outperformance over a hold-to-maturity horizon. Long-term expected returns for CLO BBs remain elevated under adverse scenarios at current pricing levels due to the fact that the investments benefit from significant structural protections which allow for full principal repayment under all but the most extreme default and recovery rate assumptions (Exhibit 4 below).

While CLO BBs can provide long-horizon downside protection in deep recession scenarios, CLO equity can complement the profile of CLO debt by offering a return distribution with significant upside potential in scenarios involving only mild recession or recovery. Combined, a portfolio which incorporates both CLO equity and CLO debt securities produces a highly attractive distribution of returns across a range of potential future economic outcomes.

Interest Rate Scenarios and Their Impacts on CLO Returns

The scenarios we include in our analysis are:

  • 1. Follow Forwards (high probability). Current interest rate curve plays out in line with current forwards, inflation continues to move down from current spot levels but remains above 2% target, unemployment ticks up modestly and corporate earnings stay flat or see a muted pullback: a soft landing scenario in which credit will outperform vs. current pricing and realized defaults are slightly below the market baseline forecast.
  • 2. Higher for Longer (high probability). Interest rates stay higher for longer, remaining close to current spot levels, inflation comes down slightly but remains elevated, unemployment ticks up and corporate earnings stay flat or see a muted pullback: a soft landing scenario in which credit will marginally outperform vs. current pricing and defaults are in-line with the market baseline forecast.
  • 3. Stubborn Inflation (low probability). The Federal Reserve hikes rates over the next twelve months in response to stubborn inflation and strong corporate earnings, inflation remains unchanged vs.current spot levels and unemployment remains low: a short term bullish market for credit with default rates lower than forecast due to strong corporate earnings.
  • 4. Hard Landing (low probability). Material economic weakness emerges in the second half of 2023, inflation trails lower towards target and unemployment becomes elevated: a hard landing scenario for the economy and credit with short term and long term default rates above baseline forecasts and pulled forward.

Further detailed assumptions regarding these scenarios, including the assumed unemployment rate, inflation rate and short and longer term interest rates, are provided in Appendix A.

The calculations of expected CLO and corporate bond returns under the alternative scenarios incorporate both projected coupon income (e.g., with lower income for floating rate CLO instruments in falling rate scenarios) combined with, over the short horizon, expected mark-to-market price changes, and, over the longer term, potential realized credit losses.

Short-Term Outlook

Exhibit 5 below shows the estimated scenario returns over a one-year horizon holding period. In scenarios 1 to 3 the returns for BB CLOs are projected to significantly exceed those for BB corporate bonds. This outperformance is driven by higher coupon income for CLOs. In effect, the projected outperformance of CLOs in these scenarios mirrors the recent historical outperformance of CLOs vs. HY bonds, which has also been largely driven by superior carry for the CLOs.

For scenario 4, a Hard Landing, CLO BBs are projected to deliver lower returns than fixed rate HY bonds. This modeled underperformance is a consequence of an expected decline in CLO floating rate coupons as the Federal Reserve cuts interest rates in response to an economic contraction, combined with an assumption that generic fixed rate bond spreads widen less sharply than CLO BB spreads into the contraction.

The short-term CLO equity performance estimates shown in Exhibit 5 are calculated from the cash-on-cash equity yields expected in these scenarios combined with expected instrument price changes; the price change estimates, in turn are estimated based on the historical relationships between CLO equity and HY bond prices across different market environments. In scenarios 1 to 3, CLO equity is projected to significantly outperform BB corporate bonds as high current carry is offset by only marginal changes in cash flow discount yields. Near-term changes to discount rates remain range-bound as default expectations over the first year are primarily constructed from credits that are already identified as candidates for default as a function of their current trading price. In scenario 4, CLO equity is projected to underperform as the pull-forward of defaults in credits that are currently trading above $90 is likely to result in a downward revision to forward cashflow projections combined with an increase in market yields used to discount the cashflows.

Hold-to-Maturity Outlook

Exhibit 6 shows the expected hold-to-maturity returns for the different asset classes across scenarios. Here, CLO BBs are projected to outperform HY BB bonds across all the scenarios, including the Hard Landing. Historically, only a small percentage of BB CLOs have ever experienced principal losses, including during the global financial crisis period, due largely to the structural protections from which the bonds benefit3. Accordingly, we project no CLO BB losses under the four scenarios considered. Generic HY corporate bonds lack these structural protections and hence, are projected to experience small but non-zero performance drags due to defaults, which are modeled here as ranging from a 0.1% annualized yield degradation in the more benign scenarios to a 0.3% yield impairment in the Hard Landing scenario. Most of the projected BB CLO vs. BB corporate bond outperformance though, comes not from differences in credit loss assumptions but rather, from the substantially wider spreads CLO BBs currently contain, which helps generate much stronger carry income over the lives of the respective bonds.

While CLO debt is seen in Exhibit 6 to provide high prospective yields and significant long-horizon downside protection, CLO equity offers a return distribution with significant upside potential in scenarios involving milder recession or recovery. For example, in the Follow Forwards scenario, CLO equity would be expected to deliver a 17% annualized return. Combined, a portfolio incorporating CLO equity and CLO BB securities can produce a risk-return profile superior to those available in public equity or single-name HY credit markets.

The hold-to-maturity CLO equity performance estimates in Exhibit 6 are based on IRR calculations which project CLO equity cash flows under the alternative scenarios. The modeled CLO equity held-to-maturity return is lowest in the Hard Landing scenario, in which loan default rates are assumed to be relatively elevated and CLO equity cash flows are consequently reduced. Lower interest rates in this scenario also put downward pressure on CLO equity cash flows in this adverse scenario. Even in the Hard Landing scenario however, we project a portfolio of CLO equity securities to ultimately deliver low double-digit IRRs given the currently favorable pricing of these instruments

Summary

Our analyses suggest that the strong total returns delivered by CLO mezzanine debt and equity securities in the first half of 2023 are sustainable going forward given current pricing. An analysis of the projected returns for CLOs vs. fixed rate HY corporate bonds suggests that CLOs should outperform over a 1-year horizon across most economic scenarios, with outperformance even more probable over longer holding periods. Pretium believes the attractive relative value provided by a portfolio of CLO equity and CLO BBs clearly indicates that CLOs should be an integral component for every allocator looking to optimize their corporate credit exposure in this environment.

Appendix A — Economic scenario assumptions


1 Source: Bank of America, Bloomberg, JPM, data as of June 30, 2023.
2 Source: JPM CLOIE, data as of July 17, 2023.
3 Source: “CLO Performance”, Federal Reserve Bank of Philadelphia, WP 20-48, November, 2021.

Disclosure

This confidential presentation was prepared exclusively by Pretium for the benefit and internal use of the party to whom it is directly addressed and delivered (the “Recipient”). None of the materials, nor any content, may be altered in any way, transmitted to, copied, reproduced or distributed in any format in whole or in part to any other party without the prior express written consent of Pretium. As used in this presentation, “Pretium” refers to Pretium Partners, LLC and/or its affiliates.

Pretium’s Credit investment strategies are focused on corporate credit, structured products collateralized by corporate credit, and legal opportunities financing. The team invests in broadly syndicated loans, as well as securities issued by CLOs. Investments in non-investment grade companies are subject to greater risk of loss of principal and interest than higher-rated investments and are generally considered to be predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal. Litigation finance depends on whether the cases in which the fund invests will be successful, will pay the targeted returns and will pay those returns in the anticipated time. Assessing the values, strengths and weaknesses of a case is complex and the outcome is not certain. Should cases, claims, defenses or disputes in which the fund invests prove to be unsuccessful or produce returns below those expected, the performance of the fund could be materially adversely affected. Furthermore, laws and professional regulations in litigation funding can be complex and uncertain and details of certain cases are unlikely to be disclosed because of confidentiality and other restrictions.

There can be no assurance that Pretium’s objectives will be achieved, that any risk management will adequately protect against downside losses, or that an investor will receive any return on its investment. An investment should only be considered by persons who can afford a loss of their entire investment. Past activities of investment entities sponsored by Pretium provide no assurance of future results. Past or targeted performance is not a guarantee, projection or prediction and is not necessarily indicative of future results.

These materials do not constitute, or form part of, any offer to sell or issue interests in an investment vehicle or any other entity. Any such offer or solicitation will be made solely by means of a definitive offering document, which will describe the actual terms of any securities offered and will contain material information regarding the securities. Any information contained herein will be superseded by information delivered to Recipient as part of an offering document. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein.

Past performance is not necessarily indicative of future results and there can be no assurance that targeted returns will be achieved. There can be no assurance that Pretium will achieve results comparable to or that the returns generated will equal or exceed those of other investment activities of Pretium or that Pretium will be able to implement its investment strategy or achieve its investment objectives. Pretium does not make any representation or warranty, express or implied, regarding future performance.

Certain information contained in these materials constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “project,” “estimate,” intend,” continue,” “target,” “plan,” “believe,” the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results of the actual performance of an investment vehicle or strategy may differ materially from those reflected or contemplated in such forward-looking statements.

Certain information contained in this presentation has been obtained from published and non-published sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Pretium has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof.

These materials are intended to assist the Recipient in connection with its due diligence and to assist the Recipient in understanding the strategies that Pretium intends to pursue to seek to maximize portfolio performance. They are not intended as a representation or warranty by Pretium as to the actual composition or performance of any future investments that would be made by Pretium. Assumptions necessarily are speculative in nature. It is likely that some or all of the assumptions underlying the potential investments will not materialize or will vary significantly from any assumptions made (in some cases, materially so). The Recipient should understand such assumptions and evaluate whether they are appropriate for its purposes.

Recipients should note that COVID-19 has, among other things, significantly diminished global economic production and activity of all kinds and has contributed to both volatility and a decline in all financial markets. The ultimate impact of COVID-19 — and the resulting precipitous and near-simultaneous decline in economic and commercial activity across several of the world’s largest economies — on global economic conditions, and on the operations, financial condition and performance of any particular industry or business, is impossible to predict, although ongoing and potential additional materially adverse effects, including a further global or regional economic downturn (including a recession) of indeterminate duration and severity, are possible. The extent of COVID-19’s impact will depend on many factors, including the ultimate duration and scope of the public health emergency and the restrictive countermeasures being undertaken, as well as the effectiveness of other governmental, legislative and financial and monetary policy interventions designed to mitigate the crisis and address its negative externalities, all of which are evolving rapidly and may have unpredictable results. Even if and as the spread of the COVID-19 virus itself is substantially contained, it will be difficult to assess what the longer-term impacts of an extended period of unprecedented economic dislocation and disruption will be on future macro- and micro-economic developments, the health of certain industries and businesses, and commercial and consumer behavior.

Michael Campbell Joins Pretium as Senior Managing Director, Head of International Real Estate

PRESS RELEASE

Michael Campbell Joins Pretium as Senior Managing Director, Head of International Real Estate

July 13, 2023

Experienced Global Real Estate Investment Professional Will Expand Capabilities Outside of the United States

NEW YORK – July 13, 2023 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced the addition of Michael Campbell as Senior Managing Director, Head of International Real Estate. In this newly created role, based in London, Mr. Campbell will lead the firm’s efforts to expand its real estate investing to markets outside of the United States and support international relationships.

“Pretium has been a leader in single-family rental housing in the United States for over a decade,” said Don Mullen, Founder and CEO of Pretium. “With the addition of Michael, our team is better positioned to explore international residential markets with attributes similar to the U.S. housing market, where we have been successful. We believe that our visionary and technology-driven investment approach applied to new global markets can unlock significant value for our stakeholders.”

Mr. Campbell brings to Pretium over 30 years of experience launching and growing real estate investment management platforms on a global scale, having previously held both institutional and entrepreneurial investment and advisory leadership roles across a variety of property sectors in North America, Latin America, Europe, the Middle East, and Asia. Prior to joining Pretium, Mr. Campbell spent nearly a decade spearheading the global real estate investment platform at Mubadala, where he was responsible for all international real estate investment activities.

“Expanding to markets in Europe and outside of the United States is a logical extension of our business given the opportunity for institutional investment in residential markets across the developed world,” said Josh Pristaw, Senior Managing Director, Head of Real Estate. “Michael brings compelling global real estate investment experience and relationships with international investors to our team. We are confident Michael is the right leader to support these new efforts and help drive our next phase of strategic growth.”

“It has been a privilege to work with a number of esteemed investor-fiduciaries in our industry. Pretium’s innovative approach coupled with the scale the firm has achieved since its founding are a testament to its talented team,” said Mr. Campbell. “I look forward to contributing to the expansion of our geographic footprint.”

Prior to his role at Mubadala, Mr. Campbell was Managing Partner at Phene Capital, a real estate investment boutique. Previously, he served as Chief Operating Officer and led all U.S. investment and operational activities at a European family office. He also served as a Managing Director and member of the real estate investment and operating committees at UBS Wealth Management, building and managing its diversified real estate investment management business, and as a Principal at JP Morgan as part of the original team to buildout its global private equity real estate businesses. He began his career at Ernst & Young and Arthur Andersen.

Mr. Campbell earned a Bachelor of Arts from Princeton University and a Master of Business Administration from Wharton School at the University of Pennsylvania.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.

Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

Pretium’s Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

PRESS RELEASE

Pretium's Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

July 10, 2023

Pretium's Real Estate Team Expands by Adding Experienced Portfolio Manager Jason Lewis as Managing Director

NEW YORK, July 10, 2023 – Pretium, a specialized investment firm with more than $50 billion in assets under management, today announced that Jason Lewis has joined the firm as a Managing Director and Portfolio Manager on the Real Estate team. Mr. Lewis will be focused on the performance and expansion of Pretium’s single-family rental (“SFR”) vehicles.

Mr. Lewis brings over 15 years of experience in managing large, diversified real estate portfolios across product types and investment strategies. His experience spans portfolio construction, asset management, capital raising, performance measurement, and he has overseen more than $10 billion in investment transactions. Mr. Lewis joins Pretium from UBS Realty Investors, where he served as an Executive Director and Portfolio Manager. Before UBS, Mr. Lewis was the Head of Asset and Portfolio Management at CA Residential. He began his real estate career at Capri Capital Partners, LLC., most recently as a Partner, Head of Asset Management and lead portfolio manager for some of the firm’s largest separate accounts and commingled fund vehicles.

“The addition of Jason to our growing Real Estate team demonstrates the continued success of our strategy and our platform,” said Josh Pristaw, Senior Managing Director and Head of Real Estate at Pretium. “We are excited to welcome Jason to Pretium, and I am confident his expertise in executing winning portfolio management strategies and forming strong client relationships will be an asset to our firm.”

“Pretium is a leader in the single-family rental industry and has a strong track record of delivering value for its stakeholders,” said Mr. Lewis. “I am looking forward to partnering with such a talented team and to leveraging my experience as we expand the firm’s investment management capabilities, optimize portfolio performance for its global investor base and continue to pursue innovation within the housing sector.”

Mr. Lewis earned a Master of Business Administration, with a concentration in Real Estate and Finance from Columbia Business School and a Bachelor of Science in Mathematics from Morehouse College.

About Pretium

Pretium is a specialized investment firm focused on U.S. residential real estate, residential credit, and corporate credit. Pretium was founded in 2012 to capitalize on investment and lending opportunities arising as a result of structural changes, disruptions, and inefficiencies within the economy. Pretium has built an integrated analytical and operational ecosystem within the U.S. housing, residential credit, and corporate credit markets, and believes that its insight and experience within these markets create a strategic advantage over other investment managers. Pretium’s platform has more than $50 billion of assets, comprising real estate investments across 30 markets in the U.S., and employs more than 4,000 people across 30 offices, including its New York headquarters, Dubai, London, Seoul, and Sydney. Please visit www.pretium.com for additional information.


Contacts

Jon Keehner / Kate Thompson / Lyle Weston
Joele Frank, Wilkinson Brimmer Katcher
212-355-4449
Media-SFR@pretium.com

SCI Pretium – Mezz Opportunities

INSIGHTS

SCI Pretium - Mezz Opportunities

July 2023

Pretium structured credit and CLO liabilities MD Ian Wolkoff and Director Marty Young argue that mezzanine CLO bonds should be on the radar screens of most asset allocators with long investment horizons.

Mezz opportunities

Pretium structured credit and CLO liabilities MD Ian Wolkoff and Director Marty Young argue that mezzanine CLO bonds should be on the radar screens of most asset allocators with long investment horizons

US CLO mezzanine debt offers high expected return rates, with yields maintained under a default scenario more extreme than the GFC credit cycle and with upside potential in a market recovery scenario.

CLO debt offers strong long-run expected returns with bounded downside

In the current market context, macro uncertainty and the potential for a growth downturn loom large while valuations across many sectors still screen as relatively expensive. Given this set-up, asset allocators are searching even more actively than usual for investment opportunities which offer high potential yields but with contained downside protection in bearish scenarios. CLO mezzanine debt is a sector which appears to offer this combination.

The US CLO market has grown to over US$950bn in outstanding balance, with over US$160bn of balance in mezzanine (single-A through single-B) tranches. As a result, a CLO mezzanine debt strategy addresses a market large enough to allow investors to allocate selectively while still targeting high yields with contained risks.

Yields on CLO mezzanine debt securities have moved up sharply over the past two years; double-B CLO bonds purchased in the secondary market offer average lifetime quoted yields of 14.4% as of June 2023 versus 7.7% in mid-2021. The current baseline yields for double-B CLOs compare quite favourably to the yields available from other similarly rated fixed income assets: double-B leveraged loans and double-B corporate bonds, for example, currently yield just 7.6% and 7.2% respectively.

The extra yield earned by double-B CLOs versus double-B corporate bonds does not appear to reflect added default risk as the comparison holds debt ratings constant; indeed, during the 2008 financial crisis episode, CLO bonds had significantly lower default rates than similarly rated corporate bonds. CLO transactions are designed so that the bond classes can withstand elevated default rates on the underlying loan portfolios without taking principal losses; the double-B CLO bonds benefit from multiple structural protections, including overcollateralisation and excess spread that absorb losses before they can be passed to the double-B bonds.

A price-yield analysis of a double-B tranche from a sample 2021 vintage CLO transaction indicates that the double-B bond yield remains in double-digits under a scenario in which 28% of the underlying loan assets default over the next five years with a 60% recovery rate – a default intensity over 1.6 times the five-year cumulative default rate experienced following the global financial crisis. Indeed, the double-B tranche yield remains positive, even if the assumed five year cumulative loan default rate rises to 35%, more than 2x the level seen during 2007-2013. CLO double-B bond yields remain positive in this high default rate scenario, despite the fact that much of the bond principal would be projected to be written down in such an event, as the high projected coupon payments over the lifetime of the bond would compensate for the principal loss.

CLO debt offers upside potential in a market recovery scenario

Per above, double-B CLOs can offer around 14% yields under a moderate recession baseline scenario. The bonds can maintain these double-digit yields in a loss scenario comparable to that experienced during the global financial crisis and can continue to earn positive yields in scenarios significantly more extreme than in 2008. Thus, the long-run downside risk for the majority of bonds in the double-B CLO sector, while not zero, appears bounded.

At the same time, the bonds provide meaningful potential return upside in a scenario in which double-B CLO spreads partially normalise relative to their current wide levels. Double-B CLO spreads are currently trading 250bp above the level that would be predicted, given their historical relationship to high yield corporate bond spreads. If 60% of this pricing anomaly were to be slowly corrected over a two-year period, the double-B CLO horizon yields would be expected to reach around 18%, with 14% of the yield coming from coupon income and 4% from price appreciation.

Summary

Mezzanine CLO yields are currently elevated relative to the yields available on comparably rated corporate bonds. While CLO bonds may experience short-term mark-to-market price volatility, over a longer-term horizon, yields would be expected to remain in double-digits across a wide range of loss scenarios – including scenarios featuring default rates more extreme than those that were realised during the challenging 2007-2013 period.

At the same time, mezzanine CLO bonds offer realistic chances of return upside if bond spreads partially revert back to more historically typical levels. Given this favourable risk/return profile for mezzanine CLO debt, Pretium believes the sector should be on the radar screens of most asset allocators with long investment horizons.

Based on Pretium’s research, data and estimates from publicly available sources. Statements throughout these materials, including those regarding the market, represent the opinions and beliefs of Pretium. There can be no assurance that these will materialise.

This article was published in Structured Credit Investor on 28 June 2023.

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June 2022

Pretium’s State of ESG Report

Read here to learn more.