Giliberto-Levy: Uneven 1Q for Private Commercial Mortgage Loans

Significant variances based on loan maturity, report says.

Private commercial mortgage loans held in investor portfolios turned in a total return of 2.01% for the first quarter, regaining form after the previous quarter’s negative 2.48% return, according to the Giliberto-Levy commercial mortgage performance index.

The index, put together by Richmond, Va.-based investment banking firm John B. Levy & Company, encompasses all the major property types, and gauges investments in private-market real estate debt. Income return on these investments was 1.13% for the quarter, and their capital values appreciated 0.88%, the firm reports.

John B. Levy, president of John B. Levy & Co., noted that the index’s performance was strong compared to investment-grade fixed-income opportunities, and also outperformed the 0.93% total return on commercial mortgage-backed securities.

Michael Giliberto, co-creator of the Giliberto-Levy index, observed that while changes in Treasury yields accounted for part of the performance, this was less of a factor than in the fourth quarter of 2016. Giliberto said, “What was interesting was that yields on Treasury issues with maturities below five years increased, while yields for securities with maturities from five years and up were flat to slightly down.” 

For instance, the yield on the 1-year rose 18 basis points, while the 10-year was down 10 basis points. The moves at the short end were likely influenced by the Federal Reserve’s March rate hike, and its indication of additional tightening coming up this year.

Compared to the end of 2016, credit spreads were essentially flat in January 2017. However, they had tightened up five to 15 basis points by the end of February, based on the company’s measures. The firm did not observe any change for the rest of the quarter.

The result was the gain in the Giliberto-Levy index’s 0.88% price return. While that headline number reflects the performance of the entire index portfolio, there were variances based on loan maturity, considering that the Treasury yields did not move uniformly. For instance, loans that have a remaining term of less than two years saw an average price return of negative 39 basis points. And those loans that had 20 or more years remaining to maturity saw a positive average price return of 249 basis points.

The Giliberto-Levy index tracks senior commercial mortgage loans, with a fixed rate and term, held on the balance sheets of institutional investors such as life insurance companies and pension funds.


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