CRE Loan Investments Pay Off Big for Life Insurers in Q2
The second quarter return is a "major reversal" from the negative 1% in the previous quarter and made for the second biggest swing in the past 94 quarters, according to Trepp.
Life insurance companies with commercial mortgage investments fared better than expected despite the economic chaos that has ensued from the coronavirus pandemic.
They received a 4.58% return in the second quarter, according to Trepp.
“While the surge in returns was not necessarily unexpected, the magnitude of the recovery was a bit surprising,” Russell Hughes, head of data consortia initiatives at Trepp, said in prepared remarks.
The second quarter return is a “major reversal” from the negative 1% in the previous quarter and made for the second biggest swing in the past 94 quarters, according to Trepp’s August LifeComps Commercial Mortgage Index.
The Index is comprised of about 7,600 active loans with a total principal balance of $148 billion and an average loan-to-value ratio of 50%.
The higher-than-expected return is good news as it comes amid the still-raging pandemic that has most heavily impacted hospitality and retail. States and local governments across the US ordered non-essential businesses like hotels and malls to temporarily close as a way to curb the spread of COVID-19. The rate of re-openings have varied with some US cities only now beginning to emerge from lockdowns with the ultimate impact on lodging and retail yet to be gauged.
LifeComps mortgage exposure to the reeling hotel and retail asset classes varies as the exposure to lodging is low while that to retail is “material”. In favor of LifeComps is that its mortgages to retail are mainly to properties that have fared better than others thanks to their grocery store tenants, or essential businesses that have stayed open throughout the pandemic.
The life insurance companies also have investments in multifamily, industrial and office mortgages. Multifamily performed the best out of the five asset classes over the past year, boasting a 7.3% return. Industrial trailed behind with a 6.6% return and office with a 6.03%.
On a rolling four-quarter basis, life insurers’ commercial mortgages netted a 6.39% return that breaks down to 4.37% contributed from income and 2.02% from price.
The second quarter return breaks down to roughly 1.05% contributed from income and 3.52% from price. The healthy price increase is a result of consistently low interest rates and an easing of concerns over credit.
Delinquencies remained low at 0.06% and charge-offs also stayed low at 0.004%, while specific reserves increased 13%.
While there is decreased credit concern, the Trepp report noted that there are more than 120 loans with payment deferrals and more than $31 million in interest payments being capitalized.
“The credit issues, for the most part, do not appear to be structural,” the Trepp report says, “and there is a reasonable expectation that the loans will perform long term.”