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Declining Loan Values Ding Life Companies’ CRE Returns in Q1
Commercial mortgage investments held by life insurance companies posted a negative total return of -0.80% in the first quarter of 2021. That’s a 1.65% decrease from the positive 1.22% return realized in Q4 2020 and represents the first negative returns in at least four quarters.
Trepp says the negative total return is attributable to a decline in reported loan values of -1.77%. Income returns continue to be positive and contributed 0.97% in Q1. Perhaps surprisingly, loans tied to lodging properties posted the best total return in Q1, although the lowest return over the past four quarters.
“Treasury yields have significantly increased this past quarter, which contributed to the decline in loan values,” reported Trepp’s Tom Fink and Jennifer Dimaano. The yield on the 10-year Treasury rose to 174 basis points, a new high since the prior peak of 192 bps reached in Q4 2019.
Fink and Dimaano cited growing market concern for higher inflation in the near future. “The same growing concerns could also increase borrower demand for life insurance company loans as borrowers look to take advantage of lower interest rates,” they wrote.
Although credit concerns remain evident among lenders, some measures of credit stress have come down from previous quarters: The overall delinquency rate for life company loans—customarily among the lowest of any lender type due to conservative underwriting—is unchanged from Q4 2020 at 0.04%; and lender deferrals and forbearance are down 12% quarter over quarter, with only $21 million in interest capitalized in Q1 2021.
Cumulative charge-offs on existing loans decreased by a net of $15 million from Q4 2020 to Q1 2021, primarily from a reversal of prior office property charge-offs. The quarter-over-quarter change in specific reserves decreased by a net of $17.7 million, resulting in a $131-million specific reserve balance.
On a rolling four-quarter basis (Q2 2020 through Q1 2021), income contributed 4.10%, while appreciation added 2.71% for a total 12-month return of 6.81%.
Of the four major property types, industrial properties performed best over 12 months with a total return of 8.10%, although returns came in at -0.87% in Q1. Industrial was followed by multifamily at 7.81%, office at 7.04%, and retail at 4.14%.
There are approximately 8,000 active loans in Trepp’s LifeComps Index, with an aggregate principal balance of $152 billion. The weighted average duration is 5.19 years.
