Portfolio Management

Risk Reporting for Equity Investors in Commercial Real Estate

Risk Integrated has extended its well proven Specialized Finance System (SFS) to include equity risk metrics for commercial real estate. Over the last 16 years the SFS has been developed primarily to provide credit risk metrics such as probability of default and stress-loss for commercial mortgages using cashflow simulation. The credit metrics are based on the cashflows to the loans whereas the equity metrics are the “residual” cashflows to the property owners and include the effects of leveraging, interest rate swaps and currency effects for multi-currency portfolios.

For equity investors the SFS produces familiar metrics such as the internal rate of return and cash on cash return, in both the base-case and across thousands of possible market and tenant scenarios. The figures below illustrate the IRR for a deal without and with leverage.

Returns without Leverage

Returns with Leverage

The links below give the complete reports for the deals without and with leverage, and include the credit report on the debt for the leveraging loan.

Equity Report for Unleveraged Property Investment

Equity Report for Leveraged Property Investment

Credit Report for the Leveraging Loan

Dr. Chris Marrison
CEO, Risk Integrated

March 6th, 2018|

Dissecting CRE Loan Risks - Lease, Tenant, Interest Rate and Refinancing Risk

This paper discusses an approach for dissecting CRE Loan Risks -- determining the relative contributions of lease risk, tenant risk, interest rate risk and refinancing risk for CRE assets. The approach applies to both individual loans and portfolios. The paper also discusses potential risk mitigation strategies based on this information.
Risk models typically give single numbers for the probability of default and loss given default. More advanced models also provide the annual risk profile, identifying spikes in the risk associated with the structure of the deal or portfolio. With cashflow simulation we can go a step further and cut apart the causes of risk, e.g., into lease risk, tenant default risk, interest rate risk and refinancing risk. This identification of the risk sources provides lenders with valuable information as to how they can mitigate the risks, rather than just accept the risk grade.
This analysis is used at two levels: for individual deals and for complete loan portfolios.

Individual report example

Portfolio report example

Examples of these reports can be downloaded with this article below.
Risks to an individual deal
This individual deal report shows that there is a spike in lease risk in 2017, and then there is ongoing moderate risk due to tenant default and finally a large refinancing risk. If this deal was under consideration for credit approval, the risk may be mitigated by for example changing the amortization rate. If the asset was already in the portfolio there are fewer options for changing the loan terms but it may still be possible to add a swap for example to reduce the risk of a poor exit yield if interest rates rise. If there is no obvious way to change [...]

May 26th, 2015|

Beyond Regulation: Using Risk Measurement in Profitably Growing the Commercial Mortgage Business

All Publications >> Portfolio Management

March 6th, 2013|

Risk Integrated Adds New Suite of MIS Reporting Tools

All Publications >> Portfolio Management

Risk Integrated announced today that it has added new functionality to its system for commercial real estate risk measurement. Its Specialized Finance System has been extended with a new suite of reporting tools to create an enterprise-level Management Information System.

November 9th, 2009|

Protecting Commercial Real Estate Portfolios

All Publications >> Portfolio Management

In a recent article in Mortgage Risk magazine, Chris Marrison advocates cashflow simulation as the best solution for measuring risk across a commercial real estate portfolio. He points out the inherent limitations of the other main approaches such as a Value-at-Risk framework, standard cashflow modelling, and scorecards.

February 6th, 2008|

How to Prepare for a Crash

All Publications >> Portfolio Management

Historically a downturn in retail real estate has been echoed five quarters later in the commercial property market. In a recent technical article appearing in Institutional Investor's Real Estate Finance & Investment, Risk Integrated's CEO discusses methods to measure and restructure risk in a CRE portfolio.

November 9th, 2007|

Basel II and the Sub-Prime Blow?

All Publications >> Basel Capital | Capital Management | Portfolio Management

Peter Andresén weighs the positive impact Basel II risk management procedures, already in place in most European banks, will have on their commercial real estate lending books. The Mortgage Finance Gazette features his discussion in their October 2007 issue.

October 18th, 2007|

Concerns about Concentration Risk in CRE Portfolios

All Publications >> Portfolio Management

Community banks traditionally have shunned formal risk management systems, preferring to rely on their experience, intuition and deep community relationships. But in the new era of commercial real estate lending, federal regulators are pressuring even the smallest banks to upgrade their portfolio analysis capabilities to avoid the pitfalls of past downturns. In an online news article entitled Small Banks, Big Risks on National Real Estate Investor's site, Risk Integrated's CEO, Chris Marrison, raises concerns about concentration risk in the CRE portfolios at small and medium-sized institutions.

February 1st, 2007|