Aflac Exec Assesses Recession in Office Building

Aflac Exec Assesses Recession in Office Building

Max Brodin, the insurance company’s chief financial officer, believes that deflation reduces prices by up to 60%.

An Aflac executive told securities analysts last week that the decline in the office market has reduced prices for typical buildings by 25% to 40%, and by as much as 60% in some cases.

“Commercial real estate markets are going through their worst cycle in decades,” Max Broden, Aflac’s chief financial officer, said during a conference call.

He compared the current recession to the Great Recession of 2007-2009, noting that prices fell by about 35% to 40% at that time.

What does it mean: This recession will hurt funds with large investments in office buildings. It can help clients who want to invest in office buildings.

Context: Many employers who sent their employees to work from home during the COVID-19 pandemic still have employees working away from the office.

The actual occupancy rate for office buildings in major US cities is only about 50%, according to Kastle, a company that manages building entry systems.

On the other hand, interest rates have risen rapidly, meaning that payments on new mortgages will be higher than payments on old mortgages.

Only half of the U.S. office buildings with loans scheduled to mature in 2024 appear to be able to afford refinancing, according to Bob Verchota, a Fitch Ratings analyst who spoke at a Fitch Ratings conference in October.

Aflac: Aflac is a Columbus, Georgia-based company known for writing casualty and supplemental health insurance in the United States and selling cancer and medical insurance in Japan.

It announced net profits of $1.6 billion for the third quarter, including $5 billion in revenues and $111 billion in assets. It has invested $13 billion in commercial mortgages and other loans.

Financial manager’s point of view: Brodin said Aflac has about $1 billion worth of commercial mortgage loans on its watch list, and about two-thirds of the properties behind the loans are in foreclosure proceedings.

The company acquired two buildings and wrote down their value by $53 million, adding $34 million to reserves to account for potential problems with other buildings.

“We do not believe the current distressed market is indicative of the true intrinsic economic value of the underlying properties currently undergoing foreclosure,” Broden said.

Aflac has the resources to take over the buildings and manage them until the recession ends, and believes that will maximize the recovery, he said.

Aflac has invested most of its portfolio in fixed-rate bonds. Total adjusted net investment income increased 13% in the third quarter compared to the same quarter a year earlier.

Credit: Pain

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