Life Insurance Commercial Mortgage Return Index Surges

Commercial mortgage investments held by life insurance companies posted a 4.58 percent total return in the second quarter, a major reversal from the first quarter’s negative 1 percent return, said Trepp LLC, New York.

The change between the first quarter and the second represented the second-largest swing in the past 94 quarters, the Trepp LifeComps Commercial Mortgage Index report said.

“While the surge in returns was not necessarily unexpected, the magnitude of the recovery was a bit surprising,” said Trepp Head of Data Consortia Initiatives Russell Hughes. “The exposure of LifeComps mortgages to the two hardest-hit sectors varies, with the exposure to lodging being low, but the retail exposure being material.”

Of the four major property types, multifamily properties performed best over 12 months with a 7.3 percent total return, followed by industrial at 6.6 percent and office at 6.03 percent.

Income contributed 1.05 percent and price added 3.52 percent in the second quarter, with the strong price appreciation reflecting both decreasing credit concerns and a persistent low-interest-rate environment, Hughes said.

On a rolling four-quarter basis, income contributed 4.37 percent while price added 2.02 percent for a 6.39 percent total return, Trepp said. Treasury yields declined in all but one quarter since third-quarter 2019, which helped fuel price gains; the yield on the 10-year Treasury ended the second quarter at a record low 66 basis points, down 2.39 percent since third-quarter 2019.

Credit concerns still exist, with more than 120 loans with payment deferrals and more than $31 million in interest payments being capitalized, the report said. But decreased credit uncertainty combined with the sustained low-interest-rate environment resulted in a “major rebound of loan valuations,” Trepp said. Additionally, specific reserves increased 13 percent, but delinquencies and charge-offs remain very low, especially given the current market conditions, clocking in at 0.06 percent and 0.004 percent, respectively.

Nearly 7,600 active loans comprise Trepp’s LifeComps Index with an aggregate principal balance at nearly $150 billion. The weighted average duration is 5.37 and the average reported loan-to-value ratio is 50 percent.