Whether that happens remains to be seen, and it depends on many factors, including if there are investment alternatives available to these companies. CMBS, namely, has always been a top choice --and for some firms it remains so even in the current market. GlobeSt.com spoke with Todd Everett, managing director and head of Real Estate Fixed Income for Principal Real Estate Investors, which invests for Principal Life, about how the firm is investing its own portfolio. His answer? More of the company's investable cash flow is going into CMBS this year.
GlobeSt.com: Why CMBS? Why now?
Everett: We are putting more investable cash flow into CMBS because we do see a good relative value. We are finding products on the secondary markets that are available at yields that are very attractive. This year, for instance, we can acquire AA CMBS and junior AAA tranches at yields in excess of 9%.
GlobeSt.com: What is your investment case or rationale behind this decision?
Everett: Spreads in the CMBS market have widened based more on technical factors than the underlying fundamentals. If you looked at how you expect investments to perform on a risk adjusted basis, the spreads offered provide a premium relative to other alternative investments with similar risk. In other words, that premium has been created by an imbalance in supply and demand and the CMBX indices, where hedge funds have shorted. Volatility in that index, in fact, has done a lot to increase volatility in cash CMBS spreads.
GlobeSt.com: How else are portfolios changing this year? I mean for life insurers in general.
Everett: Most are entering 2008 with plans that are likely similar to past years but with the knowledge that they are able to target higher quality loans and investments—LTVs of 65% or less, for instance.
GlobeSt.com: The industry average is around 65% for typical years, isn't it? I am wondering how great of a change this really is.
Everett: The difference is this year some are doing 60% LTVs and fewer are above 70%. But you are right, investment strategies compared to pre-credit crunch are not dramatically off base. We can expect most firms to up some in quality with some companies allocating more to this sector because of more high quality opportunities.
GlobeSt.com: You'll still be maintaining a normal year of commercial loan production, though, even as you put more cash into CMBS?
Everett: Yes.
GlobeSt.com: Like the whole loan sector, you must have your pick of CMBS investments to choose from, even on the secondary markets.
Everett: Yes, there is definitely more supply than demand right now.
GlobeSt.com: How long do you think that will last?
Everett: That is hard to predict; I think the imbalance will improve as the year progresses but it is difficult to say when we will see a material decline (in the imbalance).
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
