How do you evaluate the financial performance and projections of a CRE property or portfolio?

1 Income statement

An income statement, also known as a profit and loss statement, shows the revenues and expenses of a CRE property or portfolio over a period of time, usually a month, quarter, or year. It helps you assess the operating performance and profitability of the property or portfolio by comparing the income from rents, fees, and other sources with the costs of maintenance, utilities, taxes, and other expenses. The income statement also shows the net operating income (NOI), which is the income before interest, depreciation, and taxes, and the cash flow after debt service (CFADS), which is the income after paying interest and principal on any loans.

2 Balance sheet

A balance sheet, also known as a statement of financial position, shows the assets, liabilities, and equity of a CRE property or portfolio at a point in time, usually the end of a period. It helps you evaluate the financial health and solvency of the property or portfolio by comparing the value of the land, buildings, equipment, and other assets with the amount of debt, leases, and other obligations. The balance sheet also shows the equity, which is the difference between the assets and liabilities, and the loan-to-value (LTV) ratio, which is the percentage of debt to the value of the property or portfolio.

3 Cash flow statement

A cash flow statement, also known as a statement of cash flows, shows the sources and uses of cash for a CRE property or portfolio over a period of time, usually a month, quarter, or year. It helps you understand how the property or portfolio generates and spends cash from operating, investing, and financing activities. The cash flow statement also shows the cash flow from operations (CFO), which is the cash generated from rents, fees, and other income minus the cash paid for expenses, taxes, and interest, and the cash flow from investing (CFI), which is the cash spent or received from buying or selling assets, making improvements, or receiving dividends.

4 Capitalization rate

A capitalization rate, also known as a cap rate, is a ratio that measures the rate of return on a CRE property or portfolio based on its NOI and value. It helps you compare the profitability and risk of different properties or portfolios by dividing the NOI by the value or purchase price. The higher the cap rate, the higher the return and the lower the value. The lower the cap rate, the lower the return and the higher the value. The cap rate also reflects the market conditions and expectations of future income and growth.

5 Discounted cash flow

A discounted cash flow (DCF) is a method that projects the future cash flows of a CRE property or portfolio and discounts them to their present value using a discount rate. It helps you estimate the intrinsic value and potential return of the property or portfolio by considering the expected income, expenses, growth, and exit value over a period of time, usually 5 to 10 years. The discount rate reflects the opportunity cost and risk of investing in the property or portfolio. The higher the discount rate, the lower the present value. The lower the discount rate, the higher the present value.

6 Sensitivity analysis

A sensitivity analysis is a technique that tests how the value and return of a CRE property or portfolio change under different scenarios and assumptions. It helps you evaluate the uncertainty and risk of the property or portfolio by varying the inputs and outputs of the financial models, such as the NOI, cap rate, discount rate, growth rate, occupancy rate, rent level, expense ratio, exit value, and so on. The sensitivity analysis also shows the best-case, worst-case, and base-case scenarios and their impact on the value and return of the property or portfolio.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?