Life Companies’ Commercial Mortgage Returns Signal Stabilizing Values
Commercial mortgage investments held by life insurance companies posted a positive 1.22% total return in the fourth quarter of 2020, a slight decrease from the positive 1.71 return realized in the third quarter, according to the latest Trepp LifeComps report. Even as Q4 returns came in slightly lower, the volatility in valuations caused by the pandemic appears to have receded, with returns having stabilized for the second consecutive quarter.
Income contributed 1.01%, and appreciation added 0.21% in Q4. While interest rates remain near record lows, Trepp sees signs pointing to lenders remaining cautiously optimistic about where the market is heading.
Credit concerns remain evident among lenders but not as concerning as we have seen in previous quarters. The overall delinquency rate decreased from 0.06% in Q3 to 0.04% in Q4. Lender deferrals and forbearance are down in Q4 with only $24 million in interest capitalized than Q3, where there was $33 million in capitalized interest.
Cumulative charge-offs on existing loans decreased by a net of $3.1 million to $16.7 million after an increase of $1.5 for office properties and reversals of prior charge-offs of $4.5M on retail properties. The specific reserves for the portfolio increased $342k to $148M, or 0.098% of ending book value.
On a rolling four-quarter basis, income contributed 4.16% while appreciation added 2.42% for a total return of 6.58%. Treasury yields see a slight uptick; the yield on the 10-year Treasury bumps up to 93bps, a new high since Q4 2019 at 192 basis points.
Of the four major property types, multifamily properties remain strong. Performing best over 12 months with a total return of 8.06%, followed by industrial at 7.54%, and office at 6.45%. Lodging, though, posted negative returns on both a quarterly and 12-month
There are approximately 8,000 active loans in the LifeComps Index, with an aggregate principal balance of $151 billion. The weighted average duration is 5.28.
Trepp’s LifeComps Commercial Mortgage Loan Index is derived from mortgage loan cash flow and performance data which has been collected quarterly from participating life insurance companies since 1966.
For comments, questions or concerns, please contact Paul Bubny
- ◦Financing
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