Assessing the Pandemic's Damage to Commercial Lessors

As employers shifted to remote and hybrid work arrangements during the pandemic, the commercial real estate industry suffered significant losses. How do risk professionals accurately measure the impact on commercial real estate and attempt to forge a path to recovery? RMA Statement Studies can help.

The recently published 2021 edition of RMA Statement Studies reported the CRE industry’s financial health, including financial ratio benchmark datasets during the pandemic. The annual report includes balance sheet and income statement line items, sorted by peer size, and 22 classical financial ratios, such as debt coverage ratio and operational profitability ratio. RMA gathered and analyzed 3,657 randomized financial statements of which 44.3% were from tax returns submitted to RMA member banks by commercial loan applicants and existing borrowers.

According to the 2021 RMA Statement Studies report, nonresidential lessors’ interest coverage ratio, or the EBIT/Interest ratio, went up 4.4 from 4.2 year-on-year as of March 2021 based on the mid-quartile range compiled by RMA. Also, borrowers and potential borrowers saw an increase in their operating expenses to 49.9% from 47.5% during the same period.

The EBIT/Interest ratio helps lenders gauge borrowers’ operating performance and project earnings while considering their interest expenses. Higher interest coverage ratios are preferred for business analysts and investors.

The data on the second chart shows the mix of operating expenses and profit ratios over three fiscal years available in the latest Statement Studies report. Participating companies had reported reduced operating expenses in March 2020. However, when the pandemic hit, expenses increased again.

For nonresidential lessors, operating expenses may be higher than other industries as they cover fixed costs of building operations, regardless of occupancy. Expenses typically include real estate taxes, interest on debt, and property insurance. For lessors, extended periods of vacancy, or overpaying for a property can cause cash flow issues.

Business evaluators and accounting firms use RMA industry data as a benchmark for their sample datasets. Financial ratios help lenders conduct a comparative analysis on a borrower based on internal datasets.

The need for comparative datasets is growing as many lenders adjust their underlying assumptions on the CRE industry, and each borrower’s performance based on their performance during the pandemic.

RMA has additional solutions for commercial real estate lenders. Looking for a customized solution for CRE stress testing model validation work? Meet our Model Validation team. Want to monitor your CRE loan portfolios and compare them with your peers? Meet our Credit Risk Navigator team.