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Managers Assess Harvey’s Aftermath

Pensions & Investments

Hurricane Harvey and its sister storm, Irma — which is threatening the Southeast Coast — are beginning to shine a light on the risk the increased incidence of extreme weather is posing on investments. The exact toll Harvey will have on investor portfolios — especially in real estate, infrastructure and energy — will not be fully understood for a month or two. Managers are in the process of determining the damage now.

For example, there are more than 1,500 properties with a balance of $19.4 billion in commercial mortgage-backed securities at elevated risk because of the flooding in Texas caused by Harvey, according to an Aug. 30 report by Morningstar Credit Ratings LLC. And close to 5,000 securitized single-borrower, single-family rental properties with a combined value of roughly $832.6 million might be affected by flooding in the Houston area, Morningstar stated Aug. 31.

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While Houston is an important city for real estate investors, real estate investment trusts have less than 15% exposure to properties in Houston, said Jeremy Anagnos, ​ chief investment officer, infrastructure, in the Radnor, Pa., office of CBRE Clarion Securities, which manages listed real estate and infrastructure portfolios.

While the human toll has been horrific, Mr. Anagnos said there has been minimal damage to CBRE Clarion Securities' portfolios, he said.

Most of CBRE Clarion Securities' infrastructure investments in the region are related to energy. In some cases, energy companies closed their refining and petrochemical facilities ahead of the storm as a safety precaution, Mr. Anagnos said, and remained shut down for days after the hurricane made landfall. What's more, a change in Texas regulations means utilities in the region will be able to charge ratepayers more quickly for repair costs after the storm. CBRE Clarion Securities executives expect little impact on these utilities' bottom lines in the third and the fourth quarters because of the regulation change.

However, Mr. Anagnos said it is difficult to determine the full impact on CBRE Clarion Securities' energy infrastructure holdings because the storm could have affected areas miles away from Texas and Louisiana, he said.

"The storm may impact a company that sends energy down to the Gulf to be exported because the (ports) have been disrupted," Mr. Anagnos said. "It impacts on the value chain of the energy market."

But even as managers are in the early days of assessing the impact to their own portfolios, some are looking ahead to improvements they can make.

Refocusing

"Unfortunately, it sometimes takes a tragic dislocation like this to refocus infrastructure asset managers, including in the public sector, on the vulnerabilities of the assets under our care," said Eric Belman, partner, infrastructure, in the New York office of alternative investment manager QIC Ltd. "The sheer scale of Hurricane Harvey's impact on the Gulf Coast will challenge both the durability of critical individual infrastructure and energy assets, and the depth of redundancy for key networks and supply chains in the region. There will be crucial lessons learned about enhancing asset and performance protection, holistically addressing system level vulnerabilities, beyond adhering to codes and standards."

Edward Dittmer, senior vice president and head of credit risk services at Morningstar, said that at least in the real estate lending arena, it is difficult to take lessons learned from a "once-in-a-lifetime storm" like Hurricane Harvey.

"Katrina was not only a storm but the lake overflowed its banks," Mr. Dittmer said, referring to the 2005 hurricane that caused severe damage in New Orleans and coastal Louisiana. "There are impacts that you can't predict. Lenders can't underwrite loans based on a once-in-a-lifetime event. There is no way to lend to protect yourself from the next storm."

In the meantime, "real estate investors have to be patient until we get information on what's happening," Mr. Dittmer said. "Right now Houstonians have bigger concerns."

More expected

Even so, some real estate managers expect their portfolios will continue to be affected by an increase in extreme weather incidents like Harvey in part due to the availability of insurance that encourages real estate development.

"The Harvey-Houston flood story fits a pattern that we expect to see more often," said Jacques Gordon, global head of research and strategy in the Chicago office of real estate manager LaSalle Investment Management. "Population and urban development in the U.S. has grown rapidly in low-lying, flood-prone sections of the Atlantic Coast, the Gulf Coast and along other major waterways all across America. … The federal flood insurance program, FEMA guidelines and the willingness of private insurers to underwrite this flood risk have all played a part in this decadeslong situation."

As long as insurance premiums for flood risk are affordable, real estate investors will believe they are protected, Mr. Gordon said. But this misses the fact that insurance premiums in the region are bound to go up, just as they did after Hurricane Katrina, he added.

"LaSalle's secular trend analysis suggests that situations like Houston are going to be more common — unfortunately — as a consequence of coastal urbanization, underinvestment in stormwater infrastructure, and climate change creating more volatile weather patterns," Mr. Gordon said.

LaSalle executives thoroughly evaluate properties in riskier locations such as in flood plains and earthquake zones during the due diligence process in deciding to make an investment.

"Often times if an asset is rated at a high risk level, we may not pursue the acquisition, or it may not even make it to the investment committee stage," said Matt Schuler, LaSalle spokesman.

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