Principal Increases Mortgage Loans in Property Bet

Principal Financial Group Inc., the seller of life insurance and retirement products, is adding investments in commercial mortgages as part of an increased bet on real estate, the company’s chief financial officer said.

Principal held $10.9 billion of the loans as of June 30, compared with $9.8 billion a year earlier. The proportion of the Des Moines, Iowa-based company’s portfolio that’s invested in commercial mortgages climbed to 16 percent from 14 percent.

“We’re probably getting a higher return than we would be in other markets,” CFO Terry Lillis said today in an interview, citing the risk-adjusted returns of the commercial mortgages.

Principal has a $69 billion portfolio that backs future obligations to customers who’ve purchased life insurance and other coverage. About half of the investments are in corporate bonds, and the company also holds real estate equity, government debt and stocks.

The equity real estate investments rose to about $1.3 billion as of June 30 from $1.2 billion a year earlier. Principal also runs funds that invest in real estate debt and equity for clients. Principal Global Investors managed $21.3 billion of real estate debt and $26.3 of real estate equity as of June 30, according to a document on the company’s website.

Principal is scheduled to discuss investment strategy and provide a business update at an investor day tomorrow. The insurer slipped 0.9 percent to $43.44 at 4:15 p.m. in New York and has rallied 52 percent this year, compared with the 18 percent advance of the Standard & Poor’s 500 Index.

Asset Management

Principal has been bolstering its asset-management unit to add clients and increase fee income, and hired Indraneel Karlekar from Cole Real Estate Investments Inc. to oversee global research at the real estate unit this week. The company is considering expanding real estate investing outside the U.S., Lillis said.

“We’re very much of an expert” in U.S. property, Lillis said. “Taking that expertise in the U.S. into select global markets around the world is also an attractive area for us.”

The average yield on Principal’s commercial mortgages was 5.1 percent in the three months ended June 30, according to the company’s quarterly report. That compares with 4.7 percent in the fixed-maturity portfolio. The yield on real estate holdings was 4.9 percent.

About a third of Principal’s commercial mortgage loans were tied to offices, and a quarter were for retail properties. Based on Principal’s internal ratings, $471 million of the commercial mortgages portfolio has credit risk equivalent to junk debt, the company said.

Two-thirds of the commercial loans had principal balances of less than $10 million, the company said, and the average loan size was $10.9 million.

“We have typically not invested in those trophy buildings that always attract all the attention,” Lillis said.

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