The Horizon Fund was formed to take advantage of the tremendous dislocation in the commercial debt markets following the Lehman Brothers debacle resulting in CMBS bonds trading at unprecedented discounts. Uncertainty surrounding underlying property values and the lack of investor confidence in the real estate underwriting process over the past several years forced institutions grossly over-weighted in the category to flood the market pushing yield spreads on the most credit protected portions of the CMBS capital structure to unprecedented levels. While clearly the property markets were in distress, Taurus believed that the lack of transactions and reliable information surrounding property values caused most Wall Street players to over-shoot the mark with regard to loss assumptions on their securitized real estate holdings. Moreover, the financial meltdown this time around was more the result of over leverage than the oversupply that characterized the real estate bubble of the early 90’s. In addition, demand fundamentals remained relatively intact in most primary U.S. cities.
Taurus saw an opportunity to use its extensive ground level real estate expertise to create a realistic worst case scenario assumption for the assets collateralizing CMBS bonds, which is many cases was much higher than the value assumed by the bond price. Furthermore Taurus believed that Federal actions such as the TALF and PPIP programs would have the effect of restoring confidence that liquidity would return to the market over time. The Horizon Fund investment thesis was that once liquidity returned and markets moved to a more fully functioning state, pricing for the most senior portions of the capital markets would recover first, specifically CMBS bonds would trade closer to their fundamental value.
The Taurus Horizon Fund I LP was launched in June of 2009 and acquired eight CMBS bonds positions at between .45 and .70 of face value. All were of seniority within their CMBS capital structure that Taurus believed would allow them to perform to maturity under draconian loss assumption at the individual asset level. By the end of 2010 increased transaction volume had restored confidence in the underlying value in U.S. commercial real estate markets. As projected, all of the Fund’s holding began to trade at or near their par value. In March 2011 the fund exited its positions at a gross portfolio gain of 60% and a weighted average investor ROE of 50% over the approximately 20 month holding period after all fees and incentive equity splits.
The primary difference between Taurus and competing CMBS programs was that Taurus’ strategy involved re-underwriting every loan in a bond issue prior to acquisition. Taurus’ model created a forward looking projection for all the individual real estate asset(s) underlying each loan in the bond pool. Furthermore, the model considered all key attributes of the real estate assets including: product type, local market dynamics, major lease expirations, tenant credit, expected market rent deterioration, expected leasing concessions, borrowers reserves and likely recoveries in a default scenario. In summary, the Fund’s investment strategy was to pursue CMBS investment opportunities for their real estate merit and the long term credit-worthiness of the tenancy.
The second advantage of the Taurus model was time. Due diligence needed to be conducted in a time frame that allowed the trader to execute in the market. Taurus’ model automated the collection and organization of raw, current data from several sources so that analysts could make informed assumptions about every loan in the pool prior to acquisition.