A few weeks ago we posted a blog titled Finding areas of resiliency within commercial real estate that discussed how the COVID-19 pandemic is having a varying impact on Commercial Real Estate based on property type, and that the entire asset class should not be seen in the same light or painted with one brush.

In today's blog, we will continue the theme of "finding areas of resilience" but our focus will turn to commercial mortgages.

The search for yield is becoming harder

The challenges investors face in finding attractive risk-adjusted yield intensified as the COVID-19 pandemic suppressed public fixed income yields to all-time lows. In order to source elevated risk-adjusted yields, investors need to look outside the traditional "fixed income box " and into the alternative investment space.

The yield premium available through private credit markets, and commercial mortgages in particular, is currently near historical highs. Though commercial mortgage relative yields remain attractive, not all yield is created equal, and like we discussed in our previous blog, commercial mortgages also should not all be seen in the same light.

As the unprecedented shutdown of businesses across Canada has resulted in a critical stress test of commercial mortgage underwriting and portfolio management, the success of mortgage strategies will ultimately be determined by the resilience of the portfolio’s income.

Finding income resilience during a pandemic

To help highlight opportunities and strategies across the commercial mortgage asset class, the Alternative Investments Team at TD Asset Management Inc. (TDAM) has recently written a paper titled Finding Resilience During a Pandemic: Commercial Mortgages.

The quality of every commercial mortgage begins with the fundamental strength of the real estate securing the loan. This requires a thorough understanding of the property’s income generating capacity and the sensitivity of the income in various market environments. The borrower’s real estate expertise, track record and capacity to weather economic turmoil is also paramount in securing stable income streams for investors. Not only is this important from a financial perspective but it is equally important from a character standpoint. Finally, the loan must be structured to optimally fit with the property and borrower's profile.

Expertise is key in navigating choppy waters

This is where the expertise of TDAM's Alternative Investments Team comes front and centre. By having the mortgage team directly integrated with the commercial real estate team, we believe the TD Greystone Mortgage Fund is afforded market insight unavailable to other lenders, epitomized by the $147M multi-unit residential mortgage underwritten in the heart of the pandemic which is detailed in the written paper. This market insight results in the ability to underwrite commercial real estate with precision and ultimately provides investors exactly what the strategy was built for: stable and consistent income streams.

The COVID-19 pandemic has resulted in a more thorough assessment of commercial real estate borrowers and has reinforced the quality of the relationships within the TD Greystone Mortgage Fund. Thus far this has translated into highly resilient principal and interest payments coming into the portfolio. The income profile of the commercial mortgage strategies is bolstered through optimally structuring loans for the specific property and borrower. Through our real estate expertise, the TD Greystone Mortgage Fund is able to provide efficient approvals, timely funding and customized mortgages that enhance the borrower’s capacity to operate, which is ultimately reciprocated by accretive risk-adjusted income from the borrower and for the portfolio.

The important role your investment manager plays

For alternative investment managers, portfolio construction, asset quality, managing relationships and risk management are critical factors in navigating the current environment. Moreover, as the pandemic persists, there are areas of the market that continue to provide enhanced income stability, capital preservation and income growth potential.

Ultimately, the role of real asset investments within an investor’s total portfolio mix remains steadfast in providing attractive income, lower correlation and improved diversification with other asset classes, translating into higher expected risk-adjusted returns for total investment programs.