A New Financial Modeler Lets CRE Owners Stress Test Their Portfolios For Free
While cities and businesses across the country have reopened, the economic fallout from the coronavirus pandemic is lingering. Commercial real estate owners and investors who have been expecting a quick return to normalcy are still seeing sluggish demand for commercial space, slow foot traffic and tenants that are in dire financial straits.
Even as the recovery continues, owners need to prepare for a host of financial setbacks, whether it is a tenant declaring bankruptcy, a construction project left on hold or a vacancy that lasts longer than anticipated. Owners have to ensure that an unexpected financial bump won’t throw their entire portfolio into chaos.
“This is the time to be realistic about your assumptions,” said Lynn Peters, vice president of global operations at Retransform, which provides business process management technology for the commercial real estate community. “It’s not enough to have a good feeling about a deal, a tenant or a property. You need to have financial models to back up your decisions.”
In order to help CRE owners navigate the recovery, Retransform has launched Valere, a platform that puts owners’ data to use to create financial models and projections. Valere can not only help owners project the most likely financial outcomes, but can also put portfolios of properties through stress tests, simulations that can help owners feel confident about tackling the unexpected.
To build its simulations, Valere can intake data on acquisition costs, development costs, carry costs and debt costs, as well as assumptions about leasing, vacancies and rent.
These sorts of simulations are going to be especially important for owners of retail real estate, whose tenants may still be struggling to make ends meet.
“Say you’re a retail owner with a 10-tenant property centered around a restaurant,” Peters said. “Maybe you already know one of your tenants is not reopening, and you’re worried that the vacancy will negatively impact the foot traffic to your other tenants. What are the assumptions you make about backfilling that space?”
In more predictable times, Peters said, an owner might have projected that it would take six months to find a new tenant. But in the current environment, it could take much longer, and a tenant may demand a higher allowance for tenant improvements. Valere will allow the owner to stress test the property. By adjusting assumptions, the owner can look at the projections for the property if it takes a year, or two years, to fill the space, and see simulations for various tenant improvements budgets.
Valere’s system can also examine cash flow and net operating income to see whether the owner is at risk for triggering debt service covenants or breaching other lender agreements or operating covenants.
Those stress tests can help owners identify the real sources of risk to their portfolio and make a business plan to address them. If the health of the neighboring tenants puts them in jeopardy, the owner can renegotiate the tenants’ leases, perhaps offering concessions or lease abatements to keep them performing.
If foot traffic due to a vacancy is the main issue, Peters said, owners could decide to spend more marketing their vacancy to get it leased faster. Or, if lender covenants could be in peril, owners can renegotiate their financing agreements. Having a dedicated financial modeling system with dozens of ways to toggle assumptions can help make high-pressure decisions.
“When you’re under the gun to approve underwriting for a deal, a homegrown financial model built on a spreadsheet isn’t going to be nimble enough,” Peters said. “You might be deciding whether to make a bid for a new property or make a request to a lender, and you need answers immediately.”
As the Retransform team was designing Valere, Peters was listening to feedback from proptech users, many of whom reported that their financial modeling solution wasn’t granular or detailed enough to capture all the nuances of their properties’ operations.
“If you have a multi-tenant shopping center, you might have one tenant that pays for the insurance, and another that pays for taxes, common-area maintenance and snow removal,” Peters said. “If those tenants go under, that’s a much more significant impact to your NOI than just rent. When you have the ability to drill down into those details, you get a much fuller picture of your portfolio’s financial health.”
While Valere can model the health of single properties, it can also help owners more deeply understand the connections between their various properties and model an entire portfolio. If the property is part of a fund, Valere can model how changes to a single property’s performance will affect returns and growth, letting owners see quickly what their highest-performing properties are, which ones may be best to hold and which may be ripe to sell.
“Whether it’s a new acquisition or having a talk with a lender, Valere can give you the basis to make informed decisions,” Peters said.
This article was produced in collaboration between Retransform and Studio B. Bisnow news staff was not involved in the production of this content.
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