Financial Risk Analysis

[fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” type=”flex”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” border_radius=”” box_shadow=”no” dimension_box_shadow=”” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” margin_top=”” margin_bottom=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ before_text=”” rotation_text=”” highlight_text=”” after_text=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” content_align_medium=”” content_align_small=”” content_align=”left” size=”4″ font_size=”” animated_font_size=”” fusion_font_family_title_font=”” fusion_font_variant_title_font=”” line_height=”” letter_spacing=”” text_shadow=”no” text_shadow_vertical=”” text_shadow_horizontal=”” text_shadow_blur=”0″ text_shadow_color=”” margin_top_medium=”” margin_bottom_medium=”” margin_top_small=”” margin_bottom_small=”” margin_top=”” margin_bottom=”” margin_top_mobile=”” margin_bottom_mobile=”” text_color=”” animated_text_color=”” highlight_color=”” style_type=”default” sep_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]How to assess the financial risks of a real estate company[/fusion_title][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” content_alignment_medium=”” content_alignment_small=”” content_alignment=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” font_size=”” fusion_font_family_text_font=”” fusion_font_variant_text_font=”” line_height=”” letter_spacing=”” text_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]When analyzing the financial risks, analysts from S&P Global, among others, often start with the financial reports that are available from a real estate company. Based on this, it becomes clear how the company is performing in relation to its peers and the general real estate market. There are always a number of things that come up in these analyzes and that investors should take into account.[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” type=”flex”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” border_radius=”” box_shadow=”no” dimension_box_shadow=”” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” margin_top=”” margin_bottom=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ before_text=”” rotation_text=”” highlight_text=”” after_text=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” content_align_medium=”” content_align_small=”” content_align=”left” size=”4″ font_size=”” animated_font_size=”” fusion_font_family_title_font=”” fusion_font_variant_title_font=”” line_height=”” letter_spacing=”” text_shadow=”no” text_shadow_vertical=”” text_shadow_horizontal=”” text_shadow_blur=”0″ text_shadow_color=”” margin_top_medium=”” margin_bottom_medium=”” margin_top_small=”” margin_bottom_small=”” margin_top=”” margin_bottom=”” margin_top_mobile=”” margin_bottom_mobile=”” text_color=”” animated_text_color=”” highlight_color=”” style_type=”default” sep_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Valuation of Assets[/fusion_title][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” content_alignment_medium=”” content_alignment_small=”” content_alignment=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” font_size=”” fusion_font_family_text_font=”” fusion_font_variant_text_font=”” line_height=”” letter_spacing=”” text_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]

As in other sectors, it is sometimes difficult to properly compare real estate companies. The valuation of the property is therefore often used as a basis. Companies that report under IFRS rules often use the mark-to-market / fair-value as a basis in their income statement.

The mark-to-market (MTM) aims to value assets based on current market conditions. When companies use MTM for their assets, the valuation of the property will correspond to the market reality of that moment, although the market can of course be very volatile. In these types of real estate companies, the ratio of debt to assets or debt to capital is a valuable measure of financial leverage.

For real estate companies that use the historical cost basis for the valuation, the standardized depreciation of assets for financial reporting purposes may deviate from market reality. Well-positioned real estate can increase in value over time. Therefore, additional cases are often analyzed, where the accumulated depreciation can be added to equity to create a better picture of actual value.

The difference between GVW and historical costs can be bridged by looking at the stock market value instead of the book value. However, this unit of measure can be strongly influenced by stock market volatility.

Even though a company’s strategy is to develop or acquire real estate and then keep it in its portfolio forever, it remains crucial to regularly monitor the valuation of the assets. Changes in asset valuation can say a lot about:

The popularity of a particular object
To what extent tenants are attracted who pay a competitive or even higher rent
Whether a company is able to raise fresh capital at both real estate and company level

[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” type=”flex”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” box_shadow=”no” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ before_text=”” rotation_text=”” highlight_text=”” after_text=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” content_align_medium=”” content_align_small=”” content_align=”left” size=”4″ font_size=”” animated_font_size=”” fusion_font_family_title_font=”” fusion_font_variant_title_font=”” line_height=”” letter_spacing=”” text_shadow=”no” text_shadow_vertical=”” text_shadow_horizontal=”” text_shadow_blur=”0″ text_shadow_color=”” margin_top_medium=”” margin_bottom_medium=”” margin_top_small=”” margin_bottom_small=”” margin_top=”” margin_bottom=”” margin_top_mobile=”” margin_bottom_mobile=”” text_color=”” animated_text_color=”” highlight_color=”” style_type=”default” sep_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Cash Flow Analysis[/fusion_title][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” content_alignment_medium=”” content_alignment_small=”” content_alignment=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” font_size=”” fusion_font_family_text_font=”” fusion_font_variant_text_font=”” line_height=”” letter_spacing=”” text_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]

The current and future cash flow in relation to the financial liabilities is often a good indicator of the financial risk of a real estate company. The cash flow / leverage ratio is often done on a scale of:

  • Minimal
  • Modest
  • Average
  • Significant
  • Aggressive
  • High leverage

[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” type=”flex”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” box_shadow=”no” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ before_text=”” rotation_text=”” highlight_text=”” after_text=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” content_align_medium=”” content_align_small=”” content_align=”left” size=”4″ font_size=”” animated_font_size=”” fusion_font_family_title_font=”” fusion_font_variant_title_font=”” line_height=”” letter_spacing=”” text_shadow=”no” text_shadow_vertical=”” text_shadow_horizontal=”” text_shadow_blur=”0″ text_shadow_color=”” margin_top_medium=”” margin_bottom_medium=”” margin_top_small=”” margin_bottom_small=”” margin_top=”” margin_bottom=”” margin_top_mobile=”” margin_bottom_mobile=”” text_color=”” animated_text_color=”” highlight_color=”” style_type=”default” sep_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Main Ratios[/fusion_title][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” content_alignment_medium=”” content_alignment_small=”” content_alignment=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” font_size=”” fusion_font_family_text_font=”” fusion_font_variant_text_font=”” line_height=”” letter_spacing=”” text_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]

Three key ratios are used when assessing cash flow against real estate companies’ leverage:

  • Debt / EBITDA
  • EBITDA interest coverage
  • Fixed Income Cover

When a sector is experiencing low volatility, the threshold levels for the ratios to achieve a particular cash flow / leverage are less stringent. It should be noted, however, that the width of the ratio is narrower.

In addition to the main ratios, Funds From Operations (FFO) versus debt can also be analyzed for real estate. In addition, the financial leverage can be included, because it accurately reflects which resources a company has chosen to finance the real estate portfolio.

[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_builder_container hundred_percent=”no” hundred_percent_height=”no” hundred_percent_height_scroll=”no” hundred_percent_height_center_content=”yes” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” status=”published” publish_date=”” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” enable_mobile=”no” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” video_preview_image=”” border_color=”” border_style=”solid” margin_top=”” margin_bottom=”” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” type=”flex”][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ spacing=”” center_content=”no” link=”” target=”_self” min_height=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_image_id=”” background_position=”left top” background_repeat=”no-repeat” hover_type=”none” border_color=”” border_style=”solid” border_position=”all” box_shadow=”no” box_shadow_blur=”0″ box_shadow_spread=”0″ box_shadow_color=”” box_shadow_style=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=”” last=”true” border_sizes_top=”0″ border_sizes_bottom=”0″ border_sizes_left=”0″ border_sizes_right=”0″ first=”true”][fusion_title title_type=”text” rotation_effect=”bounceIn” display_time=”1200″ highlight_effect=”circle” loop_animation=”off” highlight_width=”9″ highlight_top_margin=”0″ before_text=”” rotation_text=”” highlight_text=”” after_text=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” content_align_medium=”” content_align_small=”” content_align=”left” size=”4″ font_size=”” animated_font_size=”” fusion_font_family_title_font=”” fusion_font_variant_title_font=”” line_height=”” letter_spacing=”” text_shadow=”no” text_shadow_vertical=”” text_shadow_horizontal=”” text_shadow_blur=”0″ text_shadow_color=”” margin_top_medium=”” margin_bottom_medium=”” margin_top_small=”” margin_bottom_small=”” margin_top=”” margin_bottom=”” margin_top_mobile=”” margin_bottom_mobile=”” text_color=”” animated_text_color=”” highlight_color=”” style_type=”default” sep_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]Capital Structure[/fusion_title][fusion_text columns=”” column_min_width=”” column_spacing=”” rule_style=”default” rule_size=”” rule_color=”” content_alignment_medium=”” content_alignment_small=”” content_alignment=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” sticky_display=”normal,sticky” class=”” id=”” font_size=”” fusion_font_family_text_font=”” fusion_font_variant_text_font=”” line_height=”” letter_spacing=”” text_color=”” animation_type=”” animation_direction=”left” animation_speed=”0.3″ animation_offset=””]

Four things are analyzed in the capital structure assessment:

  • Currency risk of the debt
  • Maturity of the debt a
  • Interest rate risk of the debt
  • Investments

From this analysis, the assessment of the capital structure can be very positive, positive, neutral, negative or very negative.

Note that real estate companies with very positive credit ratings often have unimpeded access to the capital markets, including financial institutions with which no obligations have been entered into. However, these companies are also subject to the cyclical fluctuations of the real estate market and the attendant shifts in sentiment among bondholders and shareholders, especially in the case of unsecured debt. In most cases, unsecured debt is equated with that of total assets and given the same assessment by analysts.

It is important that investors not only look at the short term, but especially also at the long term. Because real estate companies’ income is mainly based on rent payments from long-term leases, there is in some cases only limited response to unexpectedly increasing costs. A variable interest on the debts can therefore entail an increased risk, because the interest can possibly rise and lead to higher costs.

Therefore, look primarily at the mix of fixed and variable interest rates on loans and measures taken to hedge the interest rate risk, for example by means of swaps. Also take into account the diversity of the lenders and the extent to which a real estate company is dependent on a limited number of financiers.

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Dividend Policy

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In order to test the financial policy of a property policy, the dividend is considered, among other things. Historically, equity investors have been drawn to the stable dividend policy of listed real estate companies.

However, the Covid-19 outbreak has led to a trend reversal for many real estate companies. For the time being, rental income and valuations of real estate also seem to remain under pressure in the medium term, as a result of which some real estate companies are not only overhauling their dividend policy but also committing rights issues.

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Company Policy

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Some real estate companies enter into agreements with third parties for the management of their assets. Sometimes third-party management is even required based on local regulations.

These agreements can be a problem in assessing the creditworthiness of a real estate company. For example, when the remuneration paid by third parties is not geared to the holders of equity and loan capital, or when there appear to be shortcomings in the effectiveness of administrative supervision. For example, there have been examples where the management fee was aimed at driving growth rather than profitability and monitoring finances.

When third-party management is seen as a problem, the management culture can be judged as negative and management and company policies as weak by analysts.

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